Dear Financial Voice Reader,
The British PM on returning from Australia’s G20 meeting commented on how we are on the brink of another economic disaster. So are we really? The stock markets continue soaring. Why? Whenever data is better than our expectation, then prices rise. Companies make better profits than we expect, so their announcements lead to higher prices.
Why are our expectations so low? Well comments such as those of the PM, perversely lead to lower expectations, and therefore higher share prices on any good news. The markets are just that perverse. That’s odd. But that’s how the market work.
Doubtless the PM wanted the markets to hold back and be cautious, his comments will have the exact opposite effect.
What is my take on the markets? Yes we have huge debts around the world. But when interest rates are so low, debt actually doesn’t matter. It is free money.
Companies continue generating profits, this is partly because their wage bills are not rising and we are all working longer and harder for less money. Of course this is not good. It is unbalanced. Shareholders, the capitalists make money, whilst the wage earner is screwed.
Things are unbalanced. This is why some inflation is good – it ensures salary rises. Wages actually need to rise to increase tax take.
What all this means, as it always has, is that if you have capital then own assets, like a home, or shares, and prefer it to being an in income earner. Life has always been like that, and even more so at the moment with the markets.
The PM of course didn’t realise this is what he was alluding to when he spoke. The answer to the injustices of low wages is not some Marxist solution – but it is to support a shift in balance between company profits going to the shareholders as dividends, and more going to staff as wages – this maybe schemes to encourage greater spending with the company in which people work if it is a consumer company.
Were unions more powerful, they would have made the case for higher salaries. Political leadership is sadly not likely to lead to higher wages. But higher wages do mean more tax take. The only people to suffer in the short term would be the shareholders as company profits would drop.
But that is what the PM wanted and was saying…that given the state of the global economy, share prices should not be as high as they are. What he really was saying is salaries should be higher – but that’s a very Labour message!