In his latest UK200Group blog post, Jonathan Russell of member firm ReesRussell, discusses the current Western political landscape, and it's potential impact on the economy.
We all potentially use the expression I’m alright Jack when someone seems to be putting themselves first at the expense of others, but writing this having just listened to Donald Trump’s speech following Secretary Clinton’s acknowledgement of defeat, it makes me wonder about the current Western political landscape. We have had Brexit and now, as Donald Trump said, Brexit plus plus plus but is there any commonality.
I would suggest that we are seeing a political shift or as one commentator on Radio 4 said ‘the death of Western Democracy’. We are in for an interesting time, not just with Brexit but also with the USA where from 20th January 2017 we will have a President who is by style an Autocrat, we can hope a beneficial one, and a Republican at the same time as having both Houses controlled by the Republicans.
So why are we where we are? I am not judging whether either of these political surprises were good or bad, and what might be the causes. If you have read any of my earlier comments you will be aware that I have questioned both the Western commitment to democracy and capitalism and whether they might be fundamentally flawed.
If you have ever read or studied the concepts put forward by Dr Daniel Kahneman in Thinking, fast and slow, you may well already be familiar with some of the base traits of the mind. Let me take you through a few steps in a thought process:-
1. Capitalism is based upon a principle of one person providing something to another person and making a profit on the transaction. That something might be labour or goods. There might be several steps in the process with someone making a margin at each point.
a. The nature of this business model is that it is usually the people with the most leverage (in today’s world usually the richest) who make the most mark up. Ergo the rich get richer. The exception (that proves the rule?) is the person who has a unique skill or invention/idea.
b. There have been examples over the years when the profit margin becomes ‘artificial’ - people selling things on which may not exist or have really had nothing added to them in the steps – such as the South Sea Bubble or the more recent banking crisis.
2. People can make more profit if the amount of money in the system increases – credit. The idea of borrowing has been around for millennia but you could only borrow what someone else already owned – so the money lender of old had money and lent it. The idea of credit came up over a period of time – so the blacksmith would shoe the plough horse knowing the farmer would pay him when the harvest was sold. The banking industry however came up with the idea of lending something which did not exist – this puts more money into the system which means more people can make more profit.
3. As a result of credit we end up with a scenario that we can make a profit without actually contributing any benefit. This reflects in a state of mind which is that every year I will be better off than I was last year even if I don’t get a better job or work harder. If the Nation’s economy is growing, then to a degree this follows, but go back the first point about the rich getting richer. If the growth is fast enough everybody moves up the scale, but if it doesn’t we tend to have a situation where the rich continue to benefit but at the expense of those lower down the chain – the average is still growth but it can be that the ones in the bottom half are actually going backwards.
4. Across the Western World for the past 10 years growth has been slower than the World average and therefore people have been squeezed in the West more so those in the bottom half than the top half.
5. The emerging economies have grown rapidly but again much of the World growth has been on credit and as the World reaches its credit limit growth has to slow – especially in those that were growing fastest.
So where does this leave democracy? In simple terms take a small partnership – so long as the profits are rolling in and all the partners are doing well no-one questions who might be making the partnership the most money because individually they are OK. But if the profits start slowing down they look at someone to blame because they individually don’t want to suffer – if not addressed the partnership usually fails.
So across the Western World we have had almost 10 years where the average person has been squeezed and initially it was a pain that people understood they would have to endure but they didn’t think it would be this long, and there is no obvious end in sight and they feel its time they started doing better – so someone must be to blame. If it was a company they’d be blaming the bosses/shareholders because they’re still doing Ok aren’t they but in a Democratic Country they blame the ‘ruling elite’.
With Brexit the ruling elite was the EU Bureaucrats and the rules they had imposed, especially about free movement of labour – they were taking our jobs!, so the blame was focused and the vote was to get rid of the elite. We now see the same in the USA – again the mass of voters are being squeezed and they want someone to blame – so the Make America Great slogan appeals – the cause and the intent might be flawed but it doesn’t matter. The voters know that the existing status quo has not worked so let’s try the alternative.
So I return to me thinking, fast and slow – we end up with the fast thought process taking over. Logically we know the ‘establishment’ is right but we reach a point where the basis is unfair so we react by doing what too many would seem illogical. We leap into the unknown because we are sick and tired of the known and maybe the unknown will be better.
The markets will not like it as they do not like the unknown – they’d rather have a bleak certainty than an uncertainty, but in a democratic society the electorate can sometimes bite back and say I don’t like the certain future, so let’s take the chance.
I suspect the German and French politicians are equally worried about their upcoming elections.
Back to Blogs