It would be nice to think that, with Brexit being concluded early next year and President Trump leaving office, investors will be free to worry less about politics and focus instead upon what we are more comfortable with, such as valuations, earnings and the near-term economic weather. Sadly, though, this is not the case. There is increasing evidence that one of the most important issues in politics – inequality – also matters for investors. And this evidence comes not from radical economists but from the heart of the financial establishment.
A simple fact gives us a clue here. The Bank of England’s Michael Kumhoff points out that the two greatest financial crises in recent western history – those of 1929-31 and 2008-09 – both followed big rises in inequality. By contrast, the egalitarian post-war period was notable for a lack of crises in the west. Is this really a coincidence?
Maybe not. “Higher inequality is associated with greater financial risks” conclude a team of International Monetary Fund (IMF) economists in a recent paper. And Pascal Paul at the San Francisco Fed has found that inequality along with weak productivity growth are “robust predictors of crises.”