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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