By Gary Stevenson
In 2008, I started a job predicting interest rates and the strength of the world’s largest economies. In the thirteen years since then, financial markets, economists, and global central banks, predicted a recovery for both interest rates and the economy in every single year from 2009 to 2020.
Despite these twelve consecutive years of predicted recovery, now, in 2021, interest rates all over the world, much like the global economy, remain at emergency levels. This was true even before the onset of the Covid-19 economic crisis.
So why have economic forecasts, as well as the recovery of economies, been so disappointing since the 2008 crisis? I have devoted the last twelve years of my life to figuring this out.
The logic behind these optimistic predictions has been as follows:
The economic collapse of 2008, as well as the prolonged “Great Recession” that has followed it, were both what economists would call “demand crises”. That means that, at their core, they are caused by society, as a whole, not spending enough money. When people don’t spend enough money, businesses can’t sell their products, and they respond by closing down, shrinking, or stopping hiring. That pushes up unemployment and pushes down wages, leaving people with even less money to spend, making the problem worse.
Modern economics is well familiar with this kind of problem, and has two broad solutions which can be used. The first, often referred to as “fiscal stimulus”, refers to the government boosting spending and employment directly, either by giving money to people, or large scale spending and investment projects. The second, often called “monetary policy”, refers to making large amounts of low interest rate loans, via the banking system, in the hope that companies and individuals will use the cheap loans to increase their own spending and investment.
After the 2008 crisis, at first, both of these policies were used in large amounts. Soon afterwards, however, with the election of an austerity-focused government in the UK, and the emergence of the sovereign debt crisis in Europe, direct spending from many governments was cut back, and “monetary policy” was left to take centre stage, with increasingly larger and larger amounts of money lent, rather than spent, into the economy via the financial system.
Despite cutbacks in government spending across the world, financial markets, central bankers and economists continued to predict that these aggressive “monetary policy” interventions, such as zero or even negative interest rates, and “quantitative easing” would be enough to kick start the economy. The fact that these supposedly temporary measures are still in place today, shows that they were wrong.
So why didn’t this policy work, and why were economists still predicting a recovery as recently as early 2020, before the Covid crisis hit?
Inequality is the missing link
These were the questions about which I obsessed in 2010 and 2011.
At that time, I was an interest rates trader at Citibank in London. My job was to predict when interest rates would recover, and I had witnessed markets incorrectly predict a recovery for the previous three years. I was also, at that time, still living in my family home, a small terraced house squeezed in between a railway track and a disused factory in Ilford, East London.
I had studied Economics at the London School of Economics, and I knew that economic theory suggested that the huge amount of cheap loans being lent out by the Bank of England should stimulate the economy. But I could not see any trace of a meaningful effect on the people who grew up with me in this working-class corner of East London.
At the same time, I was working on an enormous trading floor, in a glittering skyscraper in Canary Wharf. I was immersed in financial markets, which had been rocketing despite the despondent economy, and was working shoulder to shoulder with millionaires, who got richer each day that financial markets rose.
It started to become apparent to me that “monetary policy” had an achilles heel. No matter how much money global central banks poured into the economy, cheap loans were only available to the rich. Not only that, but the rich were not spending the money – they were using it to buy assets, such as stocks and property, which did nothing to boost the economy. Inequality was the missing link. Unless the money was channeled to ordinary and poorer working families, rather than just the wealthy, it would never boost the economy, only asset prices.
My conclusion from this was inescapable, but depressing – since inequality was at the heart of the crisis, but was not being addressed, the economic crisis would be interminable: wages would stay low forever, and new money would constantly be pushed, via wealthier individuals, into stock and house prices. The economy would never get a boost. Upon realising this, in 2011, I started to bet that there would be no end to the economic recession. By the end of that year, I was Citibank’s most profitable trader in the world.
This is a bleak economic forecast, and I believe it is true. But it also provides profound opportunity for improvement and change. Our current tools have not been working to boost the economy, but that is only because we have been failing to address this key issue. Richer people tend to save their money, whereas ordinary working families spend almost everything they make. When too much wealth accumulates in the hands of very wealthy families, it causes problems of underspending in society, and oversaving, pushing down wages and interest rate and crushing the economy, whilst simultaneously making housing unaffordable and pushing stock markets up. All of these problems can be resolved, and both the economy and collective wellbeing can be improved enormously, if we only start treating wealth inequality as a serious issue and policy goal.
I have personally made millions by betting that failing to tackle wealth inequality will keep our economy in a slump forever. I firmly believe that wealth, well paid work, and good quality, secure housing could be a realistic possibility for all if we deal with wealth inequality as a society.
The only realistic path to reduced wealth inequality is a serious change to the way that we tax the super rich. Reducing wealth inequality is not about increasing tax on hard working, well paid workers and professionals. These people may be relatively high income, but they generally do not hold huge amounts of wealth. Billionaires and multi-millionaires, increasingly sitting on large amounts of inherited, family wealth, do not earn their incomes from working and, as a result, do not pay income taxes. Instead, they pay other, lower taxes, which are often completely avoidable. If we allow this situation to continue, it is inevitable that wealth inequality will increase, and our economic and societal problems will get worse. We must amend the tax system so that the richest pay higher rates of tax than the rest of us, not lower rates than their cleaners, as they often do now.
It will not be an easy task, undoubtedly. The super rich have the best tax lawyers and often the ability to amplify their voice in the media. They will proclaim that leaving them untaxed is essential for the economy. I have made a career and a fortune by betting that isn’t true.
A prosperous, dignified future can be available to all of us. But only if we fix wealth inequality.
Photo by Simran Singh Mohan