The question then is, what will it be? I have just been reading a book by a number of futurists and it was remarkably timid, with a lot of conditional subjunctives and a bit of wishful thinking. Superficially, we should do better with the clues out there. Or can we? Are there too many unknowns? Is any part of the future impossible to predict with any reliability? Certainly, around here the professionals seem to make predictions on a par with the way I make them, that is, most of them are rubbish. About three years ago, economists were recommending New Zealand invest a lot more in tourism. OK, Covid 19 could be regarded as a Black Swan Event, but as soon as the virus struck, economists were advising that there would be unemployment of at least 11% by now, even with strong government financial support for the flailing industries. Accordingly, the Reserve Bank brought interest rates way down and began a major program of quantitative easing. The latest unemployment figures here are 4.5%, and thanks to floods of low interest money house prices have got out of control. Of course, the Reserve Bank will no doubt claim credit for the low unemployment (in part because anyone who can be of use at house building is employed) and ignore the house prices. So, what next? As usual, I have no idea.
Between 2008 and 2020, it appears the Federal Reserve, the European Central Bank, the Bank of Japan and the People’s Bank of China have been printing $1 trillion per year, and using this to buy government bonds. The governments have pushed the money into society with extremely low interest rates to encourage industries to employ more people and bring new things to market. Do you see this happening? No? So what will happen? Surely, if you keep pumping air into a tyre, eventually something will give. Quantitative easing has currently reached about 30% of various nations annual GDP, that is, 30% more than was needed to run the economies previously, yet they continue with greater enthusiasm.
So what has happened? The reserve banks buy bonds from commercial banks, who then have managers that have to do something with the money. They lend to the wealthy and more to the rich to buy assets. Thus suppose you have an asset that yields 6% per annum. You use that as collateral to borrow money at 2%, or maybe even at 1% interest and buy another asset yielding 6%. Now you are starting to make more money and since you got rich by doing this sort of thing, you know what you are doing. As long as you make good investments and have fixed interest contracts, you cannot lose, leaving aside a massive disaster, and even then you will be in a better place than most others. The lesser wealthy either buy smaller assets, or stock. The net result is an overall increase in prices of these assets. If the asset is a house, the rent gets raised to accommodate the increased price. Those who sell or do not wish to buy assets put the money into banks or bonds, where it sits out of circulation, thus keeping the working money supply down. The extreme is when huge amounts of money are secreted away in tax havens.
So the poor get poorer because they have to rent, and their income has stayed the same because there is allegedly no inflation. Why is there no inflation? Because asset prices, housing, etc, do not count in most inflation indices. They do not count because it makes the establishment look so much more in control if they ignore these minor problems. Accordingly, the poor have to buy fewer consumables. That is why there is a shortage of productive investment: sales are static or, with this virus, are going down. The poor have less money, they buy less, hence industries do not expand. In fact, industries tend to contract. Last year, our national airline let go a third of its workforce. Quite high-earning people end up chasing much lower-paid jobs. They also suspended the purchase of new aircraft, so that is less income somewhere else. In such times, it is the higher salaried people let go unless they are essential, so we see even more hollowing of the middle class. The future is coming, but it is less clear from the financial point of view what it will hold. All that money effectively doing nothing is both a potential crisis and an enormous opportunity. Anyone who can think of an original way to capture some of that could become seriously rich.