Stock markets around the world climbed this week in the wake of the announcement of the discovery of a working Covid-19 vaccine. The S&P500 reached a record high for the third time this year, outpacing gains made in February and March respectively.
In Japan, the Nikkei 225 also hit its highest levels since the crash of the 1990s, and while the FTSE100 has remained slightly more muted on the back of both the UK’s poor pandemic response and mounting concerns about a trade deal with the EU, it still reached its highest level since June.
On the face of it, the strong performance of stock markets is hard to explain. Even if a set of vaccines can be successfully rolled out by the end of the first quarter of 2021, there remains a lot that stands in the way of a strong recovery after that. Unless governments around the world introduce swift and effective stimulus programmes, it is highly likely that employment, incomes and investment will all remain subdued for at least the remainder of the year.
In fact, the superficial strong performance of the stock market tells us very little about what is going on in the real economy. As I wrote in Tribune earlier this year, extremely loose monetary policy – low interest rates and asset purchases by central banks (otherwise known as quantitative easing) – has sent investors ‘reaching for yield’: desperately seeking out profitable investment opportunities in a low interest rate environment.
My most recent book The Corona Crash argues that providing an almost unlimited amount of cheap money during a recession while failing to use fiscal policy to create viable new investment opportunities (e.g., through public funding of research into and development of green technologies), is simply driving wealth inequality, volatility and market concentration. Newly created central bank money has joined other sources of capital (like savings and bank lending) to form a ‘wall of money’ that is increasingly divorced from the real economy.
Rising market concentration is a particularly worrying trend in an era already marked by extraordinary levels of monopoly power. Cheap money has allowed large companies to increase share prices through buybacks and mergers and acquisitions – rather than by undertaking risky, productivity-boosting and jobs-creating investments. The result has been the toxic combination of rising inequality and stagnant productivity that has been characteristic of the post-2008 period.
Crises – like the one we’re going through now – exacerbate these processes. Large firms with the resources (and political connections) necessary to survive downturns gain huge amounts of investment, while small firms go under. Meanwhile, lower income households often remain stuck with very high interest rates on their unsecured borrowing. In the housing market, first time buyers are finding themselves facing deposit requirements of nearly 25% of the value of the home.
The macroeconomic conditions created by a seemingly endless stream of easy money were made abundantly clear on Monday, when $40 billion worth of mergers and acquisitions activity was agreed in a single day. M&A tends to come in waves, as companies take advantage of propitious economic conditions to buy up their rivals and consolidate their economic power. The most recent wave in the US, which took place between 2017 and 2018, left behind an astonishing level of monopoly power. This one could deliver market concentration on a level not seen since the 1920s.
Raising interest rates and ending quantitative easing wouldn’t solve any of these problems – in fact, it would probably exacerbate them. Higher interest rates would hit less well-off borrowers much more than poorer ones, and the end of QE could drive a panic that might lead to a double dip recession, affecting employment and incomes in the real economy.
But this catch-22 just goes to show how important it is to prioritise transforming the structures of the economy as we move from the immediate emergency of the pandemic to what is likely to be a long, slow and weak recovery. Because while the recovery might not end the decade-long trend of disappointing rates of wage and productivity growth, it will probably continue to benefit the top 1%.
In the recent issue of Tribune, I’ve written about the economic policies that, if introduced during the recovery, could make the difference between a repeat of the post-2008 lost decade and an equitable, green recovery – ranging from a green stimulus programme, to a four day week, to a debt write-off for the Global South.
As has become abundantly obvious from the dire lack of policy output from the current Labour leadership, campaigning for these policies is going to be extremely difficult. But the recent NEC elections showed that the Left can still have an impact within the party if we’re unified and organised.
Poll after poll has shown that almost no one wants to go back to the economic system that we had before the pandemic hit. Even the Tories have picked up the leftish slogan of ‘build back better’. There is a remarkable degree of unity in society as to the policies that will be required to recover from this crisis. But socialists realise that it’s not enough to hope for a better world – together, we have to fight for it.