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Political landmine

The Jackson Hole Symposium for central bankers told us what we already knew: Federal Reserve officials are ready to begin reducing their monthly asset purchase program. What’s more surprising is the paper prepared for the event, which concludes that income inequality—not a demographic shift—is responsible for low interest rates. That doesn’t sound like a bombshell until you add the context that perpetually low interest rates are driving asset inflation. That’s a huge political landmine; it suggests governments could have been asleep at the wheel, or even, complicit in a cycle of wealth predation.

If that sounds like a leap of logic, let's look at the sequence of steps we used to arrive at our conclusion. Firstly, it’s important to understand that wealthy persons spend a smaller portion of their income than the average. This is called the marginal propensity to spend. What isn’t spent is saved, whether in savings, deposits or share purchases, representing investment and not expenditure. If we then recall that the wealth gap between the average person and the wealthy has been widening for decades—this is well established through numerous measures including the GINI Index—we can imagine the proportion of investment capital is growing. The problem here is it’s not only growing, but accelerating versus the constellation of investable assets, which leads to rapid and persistent asset price appreciation (inflation).

Bottom line: The real issue is the consequence to the average earner. If you consider that the proportion of income accruing to the average person is falling at the same time that asset prices are rising—and this dynamic isn’t going to improve and probably will get worse—you’ll see that’s a huge problem. The Fed’s paper suggests that we can’t blame demographic changes—ageing of the working population and a larger proportion of elderly retired—but must lay the fault directly at the feet of a policy failure, and that’s even worse. The message coming from an ostensibly apolitical body like the Fed is the proverbial ‘nail in the coffin’ on the argument. Importantly, it opens the door to a variety of tax policy debates and ironically sets asset prices as a measure of both our economic success and policy failure.​​​​​​​

The week ahead


Sterling has continued to notch higher against the Dollar as risk-on sentiment builds after Friday’s Jackson Hole Symposium. Minimal UK data due out this week could see this trend continue, with all eyes once again on the US as Non-Farm Payrolls data falls into the crosshairs. The UK’s Coronavirus travel list continues to expand, with seven more countries being added to the green list yesterday, including Finland and Denmark. However, amber and red-category countries are still weighing on the travel industry. Many countries are still under watch and could potentially be moved to the amber list soon, placing further strain on the travel sector.

  • The British Retail Consortium Shop Price Index y/y is scheduled for release on Wednesday, with the previous reading coming in at -1.2%.
  • The final Manufacturing Purchasing Managers’ Index is expected to remain unchanged at 60.1 for the month of August.
  • The final Services PMI is also due out at the end of the week and is expected to print at 55.5 to finish a quiet week for data in the UK.


The Euro gained ground on the US Dollar last week thanks to a sell-off in the major reserve currency. Consumer prices in the bloc have continued to jump, with a 3.0% rise in August after a 2.2% increase in July. Germany, the EU’s largest economy, reported an inflation rate of 3.4% in August, its highest level since the Global Financial Crisis in 2008. This adds some stakes for the European Central Bank's meeting on September 9th, raising the question of whether policymakers may begin to reconsider their stance on tapering with the council currently somewhat divided. Minutes from the previous meeting suggested some members were wary that the bank could be underestimating the risks of higher-than-expected inflation.

  • French Consumer Spending m/m fell 2.2% in July compared with 0.3% in the previous month.
  • The German final Manufacturing PMI is due to be released on Wednesday and is expected to remain stable at 62.7 for August.
  • German Bundesbank President Jens Weidmann speaks on Wednesday at a virtual symposium.
  • Spanish Unemployment Change will be released on Thursday, having read -197.8K in July.


The US Dollar Index has fallen to two-week lows following a sell-off after the most recent Jackson Hole Symposium. The meeting was something of a non-event with markets anticipating a Ben Bernanke style announcement from Federal Reserve Chairman Jerome Powell, but finding there was little to no new information. Non-Farm Payrolls this Friday could create some urgency for the Fed, with the next policy meeting scheduled for September 21st-22nd; robust employment is the final criteria needed to be met for the Fed to begin tapering. The Unemployment Rate is forecast to fall yet again, marking a near 1.5% decline since the start of the year.

  • ADP Non-Farm Employment Change is to be released on Wednesday, with analysts expecting 620k in August following a reading of 330K in July.
  • The ISM Manufacturing PMI is projected to print marginally lower this month at 58.5 versus 59.5 last month. Meanwhile, the ISM Services PMI is due out on Friday and is also expected to read lower at 61.9 vs 64.1 in July.
  • Federal Open Market Committee member Raphael Bostic is due to speak this Wednesday and Thursday.
  • Non-Farm Payrolls are the focus of markets this week, with a total of 750K jobs to be added in August compared with 943k in July. The Unemployment Rate is forecast to continue improving with expectations of a reading of 5.2% in August following 5.4% for July.


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