Dear ALL,
Yes I know it's Fed day, but this Steen's Chronicle is about the next 10 years, not the next 10 hours. The political spectrum is under attack and so is the social contract, this is my attempt to make sense of Trump, Marie Le Pen, the Far Left and the Far Right and clue for you: It does make perfect sense, just not in traditional models terms J
Enjoy,
Steen
Steen Jakobsen: The Social Contract is broken
How do we explain Trump's rise, the risk of Brexit, that Marie Le Pen stands a good chance of becoming France next President and the political world where all incumbents gets knocked off their stool?
Simple, Dr. Watson! It is the social contracts, which is not only being broken but also being tossed out! The political elite is losing their hair trying to analyse why someone like Trump, a four time bankrupt, immoral, swearing self-promoting candidate can win the GOP election.
The point is – it has NOTHING to do with Trump's policy (or lack of it) but all to do with he is Anti-establishment. We need not fear that US is turning towards Trumps policies, but the political elite needs to recognize that voters are turning away from the "social contract" and its elitist political judgement.
The social contract is the political theory behind all of today's societies. An actual or hypothetical compact or agreement between the ruled and their rules, defining the rights and duties of each. This theory goes all the way back to the Greek Sophists, social-contract theories had their greatest currency in the 17th and 18th centuries with such names as: Jean-Jacques Rousseau, Thomas Hobbes, Jock Locke and in modern times John Rawl.
Source:
http://www.iep.utm.edu/soc-cont/
http://global.britannica.com/topic/social-contract
The point is the social contract; society as we know it is done with being orderly and accepting the never-ending "emergency status" – one can only deal with so much emergencies in one's lifetime!
Now the voters globally want anything but… establishment – that is why Hillary Clinton cannot win the US election – she is the definition of "class and elitist". Trump on the other hand- in so far away from being a politician, he is chaos in a world of order, and that is what the US voters want.
Economically this makes perfect sense and has been a long time coming. The employee compensation to GDP is the lowest ever in history – EVER!
Meanwhile corporate profit is the highest EVER in history:
No wonder the "employees" and the middle class wants change. The change is also inevitable for other reasons:
The corporate profit in contingent on the "employees" of the world to have enough after tax earnings to buy the goods of the "profit makers"… in other words we have through this cycle under-paid the middle class and Main Street, while over-supporting the banking and profit generation.
ECB action last week was yet another failed attempt to "help" – it was nothing but another handout to the banks and will do little to stimulate end demand from consumers and business'.
ECB and policy makers seems to fail to understand simple economics: Inflation comes from velocity of money; velocity of money is in its most simple form driven by LOAN DEMAND, not loan supply!
Make sure to incentivize investors and consumers to spend or invest and loan demand goes up – supporting banks will do nothing to inflation or growth, but will make the social contract even more likely to break. It does not work and it's presently counterproductive for both banks and the goal of normalisation.
Finally and here I am glad to re-introduce my Bermuda Triangle of Economics (Link) theory, which still is failing to get me the Nobel Prize in economics by the way J
The monetary policy action is designed to cater to, help, the 20% of the economy, which already have access to credit: The banks and the stock market listed companies. This at the expense of the 80% - the SME- small and medium sized companies, which get less than 5% of the credit and 0% of political capital, meanwhile the 20% - "Wall Street" gets 95% of credit and 100% of the political capital.
Problem? The 20%, which get 95% and 100%, creates less than 10% of all new jobs and productivity, but the 80%, which get 5% and 0%, creates 90% of all new jobs and 100% of all new productivity!
No wonder we live in an economic model with no social movement and profit expansion of companies generated not by productivity but by buy-back programs, and lack of CAPEX investment (Not doing CAPEX ironically "improves bottom line" of companies in first 3-5 years..)
Both the social contract = Main Street, and the business model is broken and at the same time! My theory and let me remind you I am a Libertarian economist, is that:
2016 is all about rebalancing the economy away from 'Wall Street' towards 'Main Street'. For the economic growth and productivity to increase, we need to see Wall Street underperform and for Main Street to improve and being paid more.
Furthermore, companies needs urgently to start investing in productivity and capital goods, something they have largely ignore for almost a decade now.
This is why social contract is broken and will continue to penalise the political elite which remains certain that "logic prevails" in the end. Yes, logic is prevailing but not the way pollster, spin-doctors and other thinks, but from bottom up.
Government, which can borrow at ZERO percent need to project infrastructure investment in large scale – how can infrastructure ever be negative over time…...
Companies needs to stop maximizing cash flow and maximize profit over TIME, not quarter by quarter but through investment in people, re-education, better productivity, faster internet and more big data.
The breakdown of the social contract is and was predictable in historic perspective. The good news is the end of pretend-and-extend is not going to be a new war – but a much needed paradigm shift away from a social contract based on fear and emergency measures.
No one can be survive being afraid 24/7/365 – as the social contract ends a new and more focused agenda will come through. It will be noisy and the political spectrum will get "worse" before it improves, but it's a much needed expansion of the spectrum away from the "everyone in the middle" political landscape, where being a safe pair of hands was more important than ambitions, high aspirations and dreams.
I have seen a dramatic change in almost every country I have visited over the last six months and let me report this:
Main Street is improving; they want and need goals that are more ambitious. The microstructure of any economy is working hard and will work harder. What we need is an end of central bankers being "rock stars" – of politicians selling "emergency measures".
The world is just fine – it need a little help from infrastructure and capex investments but in overall terms the world is more balanced and more ready for change than ever before in this crisis. We may have reached the low in political ambitions, investments, capex, employment, inflation and growth, but it is up and up from here.
Change is good and a new social contract should be seen for what it is: The end of planned economics which we adopted ever since the Berlin Wall came down. (Ironically)
What does it mean for markets and politics?
Brexit is more likely to happen than not. The average voters in the UK is not going vote based on facts but on his ability to lift the middle finger (in the case of UK the two middle fingers) to the elite.
In the US, it is not about Trump but about how no one wants the established political elite . Anything but the elitists. I doubt Ms Clinton has any chance of winning the White House. She is so "old world" vis-à-vis the social contract.
Across all countries the far left and far right will do better – not because of their programs, but because they are far away from the middle. A full political spectrum is by the way an improvement; maybe finally we can try to differentiate on subject and matters rather than positioning?
Market will not like this and as stated the price for this transition is that 'Wall Street' will need to do worse, partly because of transfer of income to "Main Street" and partly due to need for increase in CAPEX, but… this is a good story – the alternative is more of same emergency nonsense we have lived with in the last eight year.
The King is dead, long live the King.
Safe travels,
Steen Jakobsen
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