Inequality will bring the next financial crisis

Dr. Norman Bailey

It doesn't grab headlines like refugees and war, but growing global inequality poses the worst threat to economic and political stability.

Just when you think things couldn't get worse, they do.

As chaos, civil war and anarchy spread across the Middle East; as Europe is subject to the most massive Muslim invasion since the siege of Vienna by the Ottoman Turks in 1683; as the West idiotically facilitates Iranian nuclear weapons plans and enhances Iranian resources to support terrorism, commodity prices continue to plummet and the IMF and the World Bank reduce their estimates of world growth, another economic and financial crisis threatens to engulf the world, less than ten years after the previous one.

Only this time the event will not be limited to the economic and financial spheres, but will spill over into the social and political arenas as well. In recent days a series of publications have been issued and largely ignored because of the more spectacular events outlined in the previous paragraph. But the medium- and long-term effects of the impending economic upheaval will be even more serious.

In the August 12th issue of The Jerusalem Post, Peter Georgescu, the chairman of Young and Rubicam, one of the largest advertising firms in the world, published an article in which he appealed to his fellow billionaires to pay attention to the ever-increasing inequalities of wealth in the world and do something about it. He points to the likely eventual results of this monumental inequality--either widespread political and social unrest or revolution, or ever-more increasing dependence on the part of the majority of the population on public handouts, or both. Unfortunately he offers no meaningful solution.

In the internet magazine The Globalist, Uwe Bott points out that the rules of the market which have traditionally governed economic events have lost much of their validity and certainly of their predictive power. Demand is weak and, as a result, the prices of primary commodities are declining rapidly and massive governmental intervention in the market has had little or no effect in reversing these deflationary tendencies, leading to weak labor markets, which is exacerbated by the rapid advance of automation, robotization and 3-D printing.

Finally the highly-respected Bank for International Settlements in Basel, the central bank for the national central banks, has issued a report detailing the gigantic increase in the stock of public and private debt in the world. Among the many negative results of this phenomenon is the inability of the principal central banks to raise interest rates, since such a move would automatically increase the debt service burden; thus locking in the disincentives to real savings and investment caused by very low interest rates,

All these factors together form a perfect storm of negative variables, which taken together weaken the economic structure and exacerbate the social and political polarization which characterizes the contemporary world.

What can be done? The ownership of productive capital must be distributed more widely, through such mechanisms as employee stock ownership plans, cooperatives and community investment trusts. Despite the dangers outlined above, interest rates must begin to be raised by small increments to begin the process of rebalancing with as little disruption as possible. Finally, if robotization and 3-D printing along with other cutting-edge technologies are going to dominate the economic future, and they obviously are, then emphasis should be placed on being the inventors and suppliers of such equipment, not the buyers.

There are many lessons here for Israel In some of these areas Israel is in an excellent position, particularly high-tech invention and supply, but more must be done urgently to promote more widespread ownership of productive capital and the central bank should begin the process of very gradual interest rate adjustments.

There is no time to lose. The political class must stop playing games (as with the natural gas plan) and start to seriously address the multiple challenges to the economy, along with the more obvious political, military and security threats.

Norman A. Bailey, Ph.D., is Adjunct Professor of Economic Statecraft at The Institute of World Politics, Washington, DC, and teaches at the Center for National Security Studies and Geostrategy, University of Haifa.

Published by Globes [online], Israel business news - www.globes-online.com - on September 17, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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