As predicted, the political jostling around the ‘Devo-max’ proposal has already started with the prospect of Scotland-only voting being matched with England-only voting, which means 40 disenfranchised Labour MPs in Westminster.Thankfully, these are not market sensitive issues at the moment but this will run and run through to the election next year.
Lost in all the Scottish media scrum over the weekend was a G20 finance ministers and central bank governors meeting in Cairns, Australia.
There was a statement made by the US Treasury secretary following that meeting where he urged eurozone countries to ‘boost demand’ in order to reduce unemployment and avoid deflation.
He went on to articulate that this required short-term measures and longer term structural changes and expressed concern about political tensions which may cause delays on pushing through urgent policies.
Our own Scottish jousting will give us a taste of what it would be like within the European huddle where the political power struggle dominates the priorities of the individual.
While it is very easy for the US (and the UK) to look at Europe and offer homemade solutions now that their economies are growing again, it is somewhat disingenuous to ignore the imbalances within their own recoveries.
Nowhere is this more in evidence than with the lack of wage growth.
The ‘average’ worker feels poorer due to inflation eating away at his discretionary spending power even though the two respective economies are now larger than before the credit crisis.
Talk of interest rate rises still appears premature in this environment.
What is becoming evident in the post-QE era is that all that liquidity has boosted risk asset prices such as equities, fixed interest and property without making any real difference to the real economy or the man in the street.
This has produced a two-speed economy with those who hold the risk assets feeling significantly wealthier whilst those who rely on earnings for their spending are feeling poorer.
Performance of developed market indices over 6yrs
Source: FE Analytics
This raises the risk of further asset price bubbles going forward.
The flotation of Alibaba this week, at the top of range, for what is a Chinese eBay/Amazon lookalike does bring back memories of shoddy due diligence in an era of easy money and profligate risk-taking from investors with excess liquidity.
Time will tell as to whether history is repeating itself.
This investment market feel-good environment could not be more of a contrast with the lot of the average worker who is facing ever rising bills and static wages as the purchasing power still very much sits with the employer and not the employee.
Arguably, it was exactly this type of liquidity-induced recovery with ‘emergency’ interest rates of 1 per cent for a year under Alan Greenspan that brought about the credit bubble in the first place.
This followed a desire to avoid recession following the technology bubble implosion of 2000 to 2003.
The US is correct in giving advice to Europe that it needs to boost demand, but without enriching the average consumer, this is hard to deliver.
Increased business investment has been important in the US and UK, thereby creating jobs but not high-paying ones, hence the muted recoveries and lack of competition in the wages market.
The gap between the haves and have-nots is being defined by those with assets for income and those with jobs for income – the former is artificial wealth creation while the latter is what really matters for longer term stable prosperity.
Guy Stephens is a director at Rowan Dartington Signature. The views expressed are his own.
