Blain’s Morning Porridge – March 21^st 2024: Interest Rates and Stick-flation hide the critical issue – Equality and Wages.

“The wealth produced by the workers does not belong to the workers. It belongs to the owners of the raw materials, machines, tools, and money, which enable them to buy the labour-power of the working class. The working class gets back only a tiny part of the entire mass of products produced by it.”

The unaffordability of housing and rents is a warning the West is heading for a Crisis of Inequality. While the rich get richer on booming markets, workers increasingly struggle with debt, taxes and accommodation – something has to give.  

Markets are in a delighted tizz this morning on the back of yesterday’s FOMC when the Fed (sort-of) confirmed (cet par) three interest rate cuts totalling 75 basis to 4.5% by year end. Yey! It’s a far smaller ease than expected earlier this year, but hey-ho, Jerome Powell says the economy is “performing well”, so off we go to the races as stock markets pile on their joy, surging to new records. Nothing to worry about as Central Banks show their command of Normalised Interest Rates, and Stickflation – the new, new reality of inflation remaining stubbornly higher than central banks say they are targeting.

(Stickflation: long-term difficult to slow real inflation, as we are continuing to witness in services, rents, wages and a host of still double digit increases in goods from olive oil, vinyl records (back in the CPI calculation), vet bills and a host of other things.. these costs are proving “sticky”.)

Markets may be on a tear, but …. they obscure a brutal crisis coming our way.

To illustrate: UK rents are rising at 9% per annum. The average monthly rent in London is now £2035. The average London Salary (Statista) is £44,370, or £2,880 per month after tax. Go figure.

Something is darkly wrong with the western economies. Over the last 15 years we’ve seen progressive unbalancing in the relationship between workers, capital and owners. The shared economic benefits of stronger, wealthier nations no longer accrue equally across the economy. Workers are relatively poorer and under greater pressure today than at point since the post-war economic boom that gave my generation our label – Boomers. My kids are millennials and Gen-Z – their expectations and hopes are tragically different to what I embraced 40 years ago.

The problem is equality.

Over the last 15 years of ultra-low-interest rates and QE, the owners of capital have become richer, while the earnings have of workers stalled. That reality has not yet sunk into markets. Low interest rates did not fuel the building of new economically productive plant that would have fuelled the productivity gains necessary to raise worker wages. Productivity has stalled across the west – yet the owners of capital have seen their wealth explode.

Instead, what QE did was fuel massive and highly speculative inflation across financial assets – stocks, shares and bonds – which accrued directly to the owners of capital, the tiny 1% at the very apex of society. They didn’t borrow money so their firm could build new factories to pay their employees more – they raised debt to fund stock-buybacks pushing up their wealth while wages flatlined.

The compact between workers and owners that enabled the success of market capitalism is breaking down. The cadres intent on undermining democracy and capitalism in Moscow and Beijing will be absolutely delighted.. Capitalism is eating itself.. exactly as Karl Marx predicted.

The inequality between workers and capital is metastasizing into a massive economic crisis – and we appear to be walking into it blind.

The first part of the crisis is that workers no longer figure in the calculus of business.

Have you heard of Gabrielle Dawson?  She is a 28-year-old American who moved across the USA at her own expense to take a job in a strange new city for CBS News. Just 3 months later she was fired, told on a zoom call by an HR drone: “unfortunately.. restructuring has resulted in your role being impacted.” Left uprooted and penniless in a new town far from friends and family she was just another statistic till she posted her sacking on social media and it went viral.

“Restructuring has resulted in your role being impacted” is a phrase millions of young workers across the West have become inured to. It sums up just how little they matter to the owners of capital. Twice in my career I’ve been sacked – and I hid my shame. Gen-Z wear it as badge of rebellion. They will not let callous HR corporate drones diminish them as disposable corporate resources – they are people.

And why is the stock market at an all-time high? Because the owners of capital believe AI will lead to massive productivity gains allowing them to sack more workers – slashing their costs and increasing the returns into their wallets. AI is fuelling the market’s value, on the basis it’s going to reduce millions more workers to penury? That can’t be good.

Across the West it’s the bottom 60% of society that are suffering most – their discretionary earnings have crashed on the back of inflation (always a tax on the poor), credit card debt, paying off student loans, the unavailability of shelter, and the fear of sacking.

Here in the UK young workers are asking the ultimate question that could wreck capitalism: Why bother working?

Half a million Gen-X and Z workers between 16-34 are out the workforce with “health issues”, a much higher proportion than in any cohort of older workers. De facto many of these workers have given up – wondering why they should struggle on with inflation, rising rents (because none of them can realistically get on the housing ladder), and the increases in taxes, energy costs, and transport – working for firms that care nothing for them. It has left them utterly disillusioned with what modern society can offer.

Many Morning Porridge readers will be furious  – why are we letting these work-shy parasites get away with it…? Get real – this is a crisis of our making. These people – because people they are – are the future, and we are not offering them one.

We have brought this on ourselves. While right-wing governments fritter on about “trickle-down economics”, and cutting taxes to encourage the wealthy to invest – they acquire. The top percentile in the UK are doing exceedingly well. Their pensions have leapt in value, their savings have been boosted by the 15 year stock and bond rally since 2009, their luxury homes have gone stratospheric, and inflation has barely dented them. They control the narrative and expect, nay demand, the next Labour Government to be better Tories than the Tories and repair broken UK without overly taxing their wealth.

Everyone else has been screwed.

Listening to Radio 4 in a traffic jam y’day I heard a report of how the UK is now desperately short of teachers. That is no surprise.

After paying substantial fees to gain a degree and then additional  teacher training, the starting salary of a Maths teacher will be above £30,000, which is actually higher than for teachers in other disciplines. The average salary of experienced Maths teachers in the UK is currently £36,300. It rises to around £44,000 for a highly qualified Head of Maths. If a teacher survives into their late 40s-early 50s they may become a headteacher, where salaries rise to around £65,000, but in some cases exceed £100,000.

Today, a £100k salary after 25 years on the frontline of teaching will allow a teacher to buy a small family home – the average house price in the UK is now £299k – but not anywhere with a hundred miles of London where the average price of a property is £735,864, and detached houses cost in excess of £1.25 million.

For London Teachers to stand any chance of getting on the housing ladder, with the attendant wealth and social stability that brings, their salaries would need to rise by a factor of around 10 times. And even that would only further inflate London house prices, pushing them further out of sight of most educators.

The facts are; after 15 years of Government and 14 Housing ministers, London and the rest of the UK is chronically short of residential property for its key workers. Not only can’t workers afford to buy houses, but rents are also out of reach. As private landlords exit the market, the only buyers are the already wealthy. Where will the workers live?

There is revolution in the air…

Out of time, and somewhat concerned about out future..

Bill Blain

Strategist – Author of the Morning Porridge

Wind Shift Capital