Submitted by Michael Every of Rabobank
A black hole has appeared before our eyes: it’s now arriving 31 October, Halloween of all days, as the new departure date for the UK from the EU – provided the UK is on its best behaviour in the meantime and joins in the European spirit by sending its share of anti-EU populist radicals to the EU parliament on 23 May. That date appears a compromise between what I have referred to already several times this week, a German desire to kick the can, and a French desire to kick the British. On balance, one has to say it’s France 1, Germany 0, UK -1.
Why? Six and a half months sounds a long time, but it isn’t in UK political terms. We are stuck with PM May’s “leadership” given she can’t be challenged until December, even though half her party no longer recognise her authority; we have the same hopelessly divided UK parliament; the same hopelessly divided Labour party; the same hated withdrawal agreement; six months is enough time for a general election, but the Tories would not vote for Xmas and allow one in the current febrile political atmosphere; and for those hoping for a compromise between the Tories and Labour to bridge the gap on a new Brexit approach, six months is not enough time to conceive, plan, and hold a referendum. In short, this is a can-kicking exercise that doesn’t actually kick the can very far or in a very useful direction. Indeed, the French are still muttering about Hard Brexit, with the UK Telegraph reporting an Elysee source saying this is their assumed default option, and the UK are in the background also working 24-hours a day on preparing for one. Has GBP noticed at all? No, as an extension was priced in. However, the underlying dynamic does not appear quite so well represented at close to 1.31.
A black hole also looms before the ECB’s eyes: Japanification. As our ECB team note, a very minimalist policy statement yesterday was followed by a press conference in which Mr. Draghi didn’t volunteer much new information – though he did promise to use all instruments if necessary (while I am relying on the world’s smallest violin vis-à-vis their GDP and inflation forecasts). Specifically, TLTRO-3 details will be announced in the coming months, but Draghi suggested that pricing may still be at a discount to MRO (i.e. negative rates for the time being). Draghi didn’t give specifics regarding tiered deposit rates, but the ECB is looking at potential side effects of negative rates and the need for any mitigation. However, implicitly he confirmed the market’s dovish interpretation of his recent comments on mitigating such side effects. See here for more on that front.
A black hole is right in front of the Fed’s eyes: a recession. Except they can’t see it. As our Fed-watcher extraordinaire Philip Marey notes here, the minutes of the FOMC meeting on March 19-20 show that muted inflationary pressures and downside risks to the economic outlook made the Committee remove all hikes for 2019 from the dot plot. However, the Fed still thinks that the US economy is in a good place regardless(!) In contrast, we expect the US economy to slide into recession in the summer of 2020 and the Fed to cut rates in 2020, after remaining on hold in 2019. (At which point the world’s smallest violin will again be making an appearance.) 10-year yields sub 2.50% even as oil prices look perkier seem to agree?
And likely explaining both Brexit and the ECB’s and Fed’s muddle, a black hole has appeared for the developed world’s middle-class, says a new OECD report. It argues “Governments need to do more to support middle-class households who are struggling to maintain their economic weight and lifestyles as their stagnating incomes fail to keep up with the rising costs of housing and education.” Indeed, the middle class is shown to have shrunk in most OECD countries as it has become more difficult for younger generations to make it there: while almost 70% of baby boomers were part of middle-income households in their twenties, only 60% of millennials are today. Moreover, except for a few countries, middle incomes are barely higher today than they were ten years ago, increasing by just 0.3% per year, a third less than the average income of the richest 10%. More than 1 in 5 middle-income households spend more than they earn and over-indebtedness is higher for them than for both low-income and high-income households. In addition, labour market prospects have become increasingly uncertain: 1 in 6 middle-income workers are in jobs that are at high risk of automation, compared to 1 in 5 low-income and 1 in 10 high-income workers. “Today the middle class looks increasingly like a boat in rocky waters,” says the OECD Secretary-General. “Governments must listen to people’s concerns and protect and promote middle class living standards. This will help drive inclusive and sustainable growth and create a more cohesive and stable social fabric.”
Please explain to slow learners like yours-truly how this rallying cry sits alongside OECD policy prescriptions like austerity, massive house-price, education, and health-care inflation, outsourcing, free trade, free-movement wage competition, and tech disruption? That’s right: it isn’t. So the OECD now says “to help the middle class, a comprehensive action plan is needed...Governments should improve access to high-quality public services and ensure better social protection coverage…policies should encourage the supply of affordable housing. Targeted grants, financial support for loans and tax relief for home buyers would help lower middle-income households…mortgage relief would help overburdened households get back on track. As temporary or unstable jobs - often offering lower wages and job security - increasingly replace traditional middle-class jobs, more investment is needed in vocational education and training...Social insurance and collective bargaining coverage for non-standard workers, such as part-time or temporary employees or self-employed, should be extended. Finally, to foster fairness of the socio-economic system, policies need to consider shifting the tax burden from labour income to income from capital and capital gains, property and inheritance, as well as making income taxes more progressive and fair.”
That’s right, folks. The rich man’s club of the OECD wants higher taxes on capital; higher taxes on the rich; stronger unions; more public spending; mortgage relief; more affordable housing; and better social services. A complete reversal of the socio-economic policies of the last 40 years. All they have to do now is work out that this is not compatible with central-bank asset-price inflation, which makes housing unaffordable, and with free trade, which makes higher state spending unaffordable and higher wages uncompetitive. Either that, or the OECD will have to embrace Modern Monetary Theory. Pick your black hole – or wait for populists to pick it for you, because when the middle-class goes, everything goes.