The Euthanasia of the Rentier: Will bankers follow miners into the dustbin of history?

The Euthanasia of the Rentier: Will bankers follow miners into the dustbin of history?

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The past thirty years have been bad for workers but good for capitalists. This may be about to change. Low bond yields suggest that capital isn’t as valuable as bankers have become accustomed. Since interest is the price of money the fact that rates are barely above zero tells us the supply of money far exceeds demand.  Ever since Nixon closed the gold window in 1971, global monetary reserves have skyrocketed, limited only by bankers’ willingness to lend.  When their passion for money creation cooled with the financial crisis, central bankers took their place, pouring trillions into the system through the purchase of previously speculative bonds. All that money sloshing around hasn’t sparked wage and goods inflation but it certainly has goosed house and share prices.

Too much money is not necessarily a bad thing.  Our problem, rather, is a lack of demand for investment.  Today, the aggregate desire to save far exceeds the desire to invest.  Even microscopic interest rates cannot balance the two.  To stimulate investment and repress savings, rates would actually have to be negative, which is why even the loosest monetary policy in human memory is not enough to overcome our secular stagnation. 

Part of the problem, of course, is insufficient consumer demand.  If you can’t sell all the widgets in your store, you certainly aren’t going to borrow millions to build another widget factory. This is a cyclical problem which could be solved should the economy ever pick up.  But we have a deeper, secular problem not so easily overcome: capital has become too productive. 

We all know that technology has made labour more productive and so many workers redundant.   It used to take dozens of men to unload a ship. Today one or two can do the same job, faster, more efficiently, with less pilfering.  What is not yet as obvious is that technology is doing the same for capital. Mini steel mills require considerably less start up capital than the behemoths of the mid 20th century. You can produce a feature film today with camera and editing equipment that cost under £7,000.  When JP Morgan created US Steel, it took billions of dollars and huge capital investment in big factories filled with cutting edge technology.   Facebook started with a few servers and a rented house.

Modern financial markets were born with the railroads.  Before, businessmen wanting to expand their business generally invested retained profits or found friends and relatives to buy into their firm.  Railroads were too voracious of capital for any group of friends to be able to fund by themselves so private bond markets emerged to funnel societal savings into productive investment.  Railroads were the dotcoms of the 19th century and many bondholders lost their shirts but the infrastructure they built transformed the planet for the better. 19th and 20th century technologies were capital intensive.  21st century technologies are not. That is why financial markets are no longer doing the job they were designed to do.

According to finance textbooks, capital markets exist to mobilize household savings in order to fund corporate investment. No more.  For over 30 years, through stock buybacks and dividends.  US equity markets have actually shipped money in the other direction. Corporate profits are returned to shareholders, to fund high-end consumption rather than retained and invested in research and development or expansion. Corporations don’t need to borrow to invest, they are sitting on piles of cash that they can’t find any reason to use.

In the 1970s, the miners were arguably the mightiest force in Britain.  Back then, a union card was a guaranteed pass into the middle class, maybe even better.   A union cameraman made more money than most stockbrokers. A decade later, miners were irrelevant.  Politics and legal changes certainly played a role in their calamitous ride into the dustbin of history but probably more fundamental was economics. Their labour was no longer needed.  Inexorable productivity increases, combined with globalization, meant that the supply of labour increased while demand for it did not keep pace. Thus the stagnant wages since Reagan and Thatcher. Productivity gains are beneficial to the economy as a whole, but not necessarily to the laid off worker.  The same process is now attacking capital.  Thus the low yields for safe investments. We can borrow cheaply because capital is plentiful while demand for it is not.

The defeat of capital may not be as swift as the collapse of labour.  Capital still has a firm grip on politicians, media and the levers of power.  Nonetheless, low yields and low interest rates suggest the marginal utility of capital is heading inexorably down and it is hard to see that changing.  All the cultural and political power in the world cannot not trump the deeper economic reality.  The labour movement learned that in the 1980s.  Low yields are a harbinger of bad times for capital.  Rentiers will have to struggle to avoid euthanasia.  If 1979 marks the turning of the tide for labour, 2008 may do the same for capital.


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It would help if you limited your comments to your sphere of knowledge. Miners would have been offended if they had been called "middle class": they were working class and proud of the fact that they *earned* their wages by hard work. Membership of certain unions in the 1970s virtually guaranteed a middle-class income (in certain cases whether or not they worked for it) but that did not make them middle class.
As to the minimal nominal, and negative real, interest rates, have you paused to consider the effects of the flood of paper money resulting from the QE programmes in the USA and UK? This utterly distorts the supply/demand balance. Also IPOs in the USA raised $59 billion last year. The primary fundraising market still relies to a large extent on investment out of personal savings. Secondly, the share buy backs in the USA were partly funded by debt, which was funded by household savings: it is invalid to look at equity issues in one country isolated from net debts of the corporations and markets in the rest of the world. Thirdly, companies should pay out dividends - that is the justification for issuing shares in the first place.

It is an interesting observation that capital is going the way of labour in the 1970's but I think it is more likely a swing back and forth between the two. For completeness, and if I remember my economics 101, the debate should look at the big three; land; labour & capital. My belief is that the key, but usually ignored but unique characteristic of land is its permanence - you can't move it. It's no coincidence that estate agents in France are called "immobilier". Right now it seems that value is pumping into land and the property on it, as the supply by definition is fixed whereas the supply of capital is overwhelming. Not surprisingly land is rising in capital terms. However, as the demographics swing and the population ages, the demand for able bodied youth is also likely to soar. The shortage of labour will likely see its price rise versus capital too.So those old baby boomers had better watch out; they will have to unload their property and rentier assets for cash in order to pay the relatively fewer young hands that they will need to look after them. I doubt the young will be bothered to get out of bed for less than a few hundred quid a day to look after ageing boomers - quite right too and good luck to them, it's about time the young kicked off against the have it all boomers.
(Full disclosure- I am an ageing boomer myself. Long property; long stocks and rapidly reducing labour.)

Is it really the case that society has little need for the capital that is floating around to be invested? Or is it that they are not willing to invest in what is needed?

Changing to a low carbon energy infrastructure, just for one example, will require massive investment, but investors have decided that there are better profits to be made in speculation and financial "innovations". Especially since they can count on governments to guarantee these type of investments when they inevitably fail. Financial "innovation" has profited at the cost of real innovation, and proper regulation of financial markets would force investors to stop speculating and invest in developments of real value.

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Institutional fund or Warren Buffett? Who would be your investment role model? -