18 September 2015

We ignore Corbynomics at our peril


We may all have to bone-up on Jerrynomics. The victory of Jeremy Corbyn will immeasurably change the left’s political argument, arming it with a new and highly credible agenda (to the many millions of disenfranchised): People’s QE, more wealth redistribution, no Trident, no HS2, attacks on poverty, reverse privatisations, bank nationalisation and possibly Brexit.

Dismiss this threat at your peril, it just worked in Scotland. Leaders from the left like Harold Wilson and Tony Benn have stolen the agenda before. Customer satisfaction levels with the State-run NHS far exceed our collective frustrations with privatised gas and telecom utilities. Even Auntie Beeb seems secretly loved in the shires. Leftish economic thinking, ultimately rooted in Marx, and claims its credentials from Keynes. These are no idle, fly-by-night thinkers. Admittedly, they talk more about distribution and spending, than the practicalities of production, but their compelling one-liners muscle-out otherwise thin arguments. Marxist political economy has appeal, but it is a macro-story extrapolated from the micro-successes and failures of Manchester, where Engels, Marx’s great collaborator and inspiration, ran the Ermen and Engels family engineering business. High among the great insights of Marx’ Das Kapital stands the immiserisation of working people whose misfortunes are tied to the endless cycle of capital accumulation. Fifty years on and polarised by the 1930s Depression, Keynes provided a decent answer to these economic slumps by agitating policy-makers to ‘spend, spend, spend’. His rhetoric has inevitable appeal to younger generations today, eager to work and climb on to the ever-steepening housing ladder. This story never caught on in Soviet Russia, but it resonated a decade ago in China. What was missing in the analysis then as now was an understanding of human nature.

Spending someone else’s money is always easier. China has fast found this out. Just take a look at how quickly the Chinese economic miracle – itself largely built on cheap American credit – is unravelling, as highlighted in the US$140 billion flight of net financial flows in August alone. Capitalism works, but with warts. China has struggled to integrate a capitalist distribution system within a socialist command economy, suffering the high costs of poor decision-making and widespread corruption as money is dished out to regional favourites. Soviet-type economies were always brilliant at corralling resources into the industrial machine, but less good at controlling the quality of the products that came out of the other end. The 1980s Soviet Union sported an abundance of capital, but their failure to engage marketplace innovation made for clunking and technologically obsolete goods. Today, economists rail against China’s whopping debt problems, but what is truly strangling the Chinese economy is an unwillingness of the Central Committee to fuel further waves of cronyism by spending even more of the People’s QE to lift activity. Enough may finally be enough?

All this will come into focus next year. Two forces will shape the 2016 agenda: the sharpish left-right division of American Election year politics, probably played out against the escalating odds of a US 2016 economic recession. Latest American economic data is flaky. The strong dollar has taken its toll and many of America’s most successful companies are (or were) big sellers of product to China. Second, there are high odds of a devaluation of the Chinese RMB currency itself that will unleash further waves of deflation towards Britain, Europe and the US. As the dole queues start once again to lengthen, Jerrynomics could easily exploit a growing discontent. Never say never.

Michael J. Howell is Managing Director of CrossBorder Capital, a London-based financial research company that advises key investors Worldwide. Prior to founding CrossBorder in 1996, Michael was Research Head at Barings and Research Director at Salomon Brothers. He can be contacted via liquidity.com.