Quantitative easing has rigged the market, boosting company profits

We can't go on like this...

In the history of industrial relations the clash between workers and management has always come down to: "How can we be paid more for less work?". This applies to both sides of the employment divide. The Tolpuddle Martyrs, the first union members, were created out of a strike to prevent a pay cut and ever since then all industrial disputes have had at their heart wages and hours worked.

Karl Marx recognized the conflict and condensed it into the "‘Exploitation Rate" which essentially asks the question: ‘How many hours a day does it take for capitalism to make a profit?’ The more hours a day that a capitalist extracts from each worker in excess of what is needed to cover the cost of production, the greater the Exploitation Rate. Capitalists seek to maximize it, workers seek to minimize it.

At least conceptually the Exploitation Rate is a useful way to frame your thoughts around the relationship between capital and labour. But also it’s actually possible to get an idea how it has changed over time especially since the onset of the recent financial crisis. Using averages of hours worked, people employed and the profits made by US companies as a whole you can get a handle on the time at which, on each working day, on average, America begins to make a profit. In 2006 it was about 12:30pm. But since then it has dropped to about 11:45am which might not sound like very much but in the context of the working day it is an 8 per cent increase in the Exploitation Rate.

This effect has allowed American companies to start pumping out profits even in the midst of one of the worse recessions that the Western world has ever seen – the stock market has risen by over 90 per cent since its 2009 trough, while real wages have increased by only about 1.5 per cent. Workers now work longer and for less and the divisions between capital and labour have increased.

We have a terrible tendency to believe that everything in economics reverts back to some kind of historic norm. This isn’t surprising given that our experience confirms this; all recessions are mere blips and normal service can be expected to resume after a brief period of time and we return to a path of enduring and rising prosperity. But something has changed in our economies; the nature of employment is fragile – underemployment through increased part-time working, zero-hour contracts and no-pay internships have fundamentally reduced the bargaining power of labour. Rising pay isn’t going to be the thing that starts to reduce the Exploitation Rate.

So, if the Exploitation Rate is going to decline again, the only thing left is an increase in company costs. Western economies (particularly the US and UK) have benefited from ultra-low interest rates since 2008. Long-term borrowing costs have been kept low by the use of unconventional monetary policies like quantitative easing (QE). The markets have, effectively, been rigged in favour of stock owners and corporate bond borrowers and to the disadvantage of savers who receive a fixed income from the bond markets. It’s another factor that has increased the Exploitation Rate as interest payments haven’t eaten into profits.

But this is set to change. The UK has stopped its QE program and the US is seeking an exit strategy from their Gargantuan pump-priming policy. So if there is a threat to company profits, and by extension the stock markets going forwards, it comes from the right-sizing of bond yields and not from the pay demands of workers.

To reinforce this, the shock decision by Larry Summers to withdraw as a candidate for the top slot at the Federal Reserve caused bond yields to fall, the US dollar to weaken and stock markets to rally. Summers had been associated with stopping the process of QE earlier than his rival, the current deputy chair Janet Yellen. The episode only serves to reinforce the idea that we have a set of asset classes hopelessly dependent on the continuation of a policy that serves no purpose other than to perpetuate a collective desire to avoid reality. If I was Larry Summers I’d be pretty happy right now – at least I won’t now go down in history as the guy who bust the stock market.

Source: Bloomberg

Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

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As the strangers approach the bed, I wonder if this could be a moment of great gentleness

I don’t know what to do. In my old T-shirt and M&S pants, I don’t know what to do.

It’s 1.13am on an autumn morning some time towards the end of the 20th century and I’m awake in a vast hotel bed in a small town in the east of England. The mysterious east, with its horizons that seem to stretch further than they should be allowed to stretch by law. I can’t sleep. My asthma is bad and I’m wheezing. The clock I bought for £3 many years earlier ticks my life away with its long, slow music. The street light outside makes the room glow and shimmer.

I can hear footsteps coming down the corridor – some returning drunks, I guess, wrecked on the reef of a night on the town. I gaze at the ceiling, waiting for the footsteps to pass.

They don’t pass. They stop outside my door. I can hear whispering and suppressed laughter. My clock ticks. I hear a key card being presented, then withdrawn. The door opens slowly, creaking like a door on a Radio 4 play might. The whispering susurrates like leaves on a tree.

It’s an odd intrusion, this, as though somebody is clambering into your shirt, taking their time. A hotel room is your space, your personal kingdom. I’ve thrown my socks on the floor and my toothbrush is almost bald in the bathroom even though there’s a new one in my bag because I thought I would be alone in my intimacy.

Two figures enter. A man and a woman make their way towards the bed. In the half-dark, I can recognise the man as the one who checked me in earlier. He says, “It’s all right, there’s nobody in here,” and the woman laughs like he has just told her a joke.

This is a moment. I feel like I’m in a film. It’s not like being burgled because this isn’t my house and I’m sure they don’t mean me any harm. In fact, they mean each other the opposite.

Surely they can hear my clock dripping seconds? Surely they can hear me wheezing?

They approach, closer and closer, towards the bed. The room isn’t huge but it seems to be taking them ages to cross it. I don’t know what to do. In my old T-shirt and M&S pants, I don’t know what to do. I should speak. I should say with authority, “Hey! What do you think you’re doing?” But I don’t.

I could just lie here, as still as a book, and let them get in. It could be a moment of great gentleness, a moment between strangers. I would be like a chubby, wheezing Yorkshire pillow between them. I could be a metaphor for something timeless and unspoken.

They get closer. The woman reaches her hand across the bed and she touches the man’s hand in a gesture of tenderness so fragile that it almost makes me sob.

I sit up and shout, “Bugger off!” and they turn and run, almost knocking my clock from the bedside table. The door crashes shut shakily and the room seems to reverberate.

This article first appeared in the 12 January 2017 issue of the New Statesman, Putin's revenge