Analysis: Income stasis lit fuse for political rocket

Wed Jul 20, 2016 7:41am EDT
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By Mike Dolan

LONDON (Reuters) - Slow growth leaving swathes of the population with no real income gains for another 10 years will foster more disaffection that just bakes in political volatility and economic stagnation.

That looks like an impossibly gloomy prognosis and self-feeding spiral. But it's one already reflected in global debt markets that have sunk long-term interest rates close to zero for many decades to come.

A simultaneous rise of stock markets to or near record highs is more puzzling, especially as global investment funds have cut equity holdings in July to below benchmarks for the first time in four years, a Bank of America Merrill Lynch survey showed.

But stocks are holding up by default in a world where the alternatives are negative-yielding cash and bonds, and where successive policy stimulus packages just stave off recession.

There's little doubt that economic policymakers, having fretted about inequality for years, now grasp the upshot of such uneven growth. And they see electoral dynamite.

Failure to stoke faster and more pervasive recoveries since a systemic financial collapse eight years ago has already lit a fuse of discontentment. And the consequences of more of the same, let alone another downturn, mean all levers will be tried.

In his first speech since Britain voted to leave the European Union, Bank of England Chief Economist Andrew Haldane said last week that the central bank should ease aggressively regardless of doubts about the effectiveness of more easy money.

"I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison," he said.   Continued...

Shoppers cross 34th Street the day after Christmas in the Manhattan borough of New York December 26, 2015.     REUTERS/Carlo Allegri