Scottish financier and former global capital markets specialist Angus Macpherson — speaking in a personal capacity — delivered an eloquent introduction and explanation which calmed nerves despite the turmoil in the capital markets. Moreover, the miracle of globalisation sowed seeds of today’s income challenges.

The Business Dealmaker’s Breakfast seminar at the Royal Society of Edinburgh, met amid a frenzy of proposed tariffs by US President Donald Trump, particularly against China, which threaten to unravel the long-standing order of global trade.

“He [Trump] has still raised tariffs on every country in the world irrespective of whether he had a free trade agreement and he has outright declared war on China in terms of trade. That is obviously a very significant move, particularly given the benefits of globalisation when China represents roughly 33 per cent of world manufacturing,” he said.

China produces 45 per cent of global penicillin use in the United States, and 90 per cent of the ibuprofen.

However, Mr Macpherson said it was worth stepping back from the ‘noise’ and trying to focus on the bigger defining issues. He stated these issues were shaping geopolitical decisions that were being made in the United States, China and the rest of the world.

“I think like a lot of people in this room my career has been entirely built on the fall of the Berlin Wall,” he said, before giving an excellent account of the state of the global economy.

Angus worked briefly in American politics during the second administration of President Ronald Reagan. He was then based out in Asia for a decade working for Merrill Lynch between 1995 and 2004, latterly as head of their capital markets businesses.

“This was the period when globalisation really took off. It was about attracting international capital into markets which had previously not been able to access it. It was an extraordinary period. American hegemony and the almost universal acceptance of free markets and the principles of free trade lifted over a billion people out of abject poverty in a 15 year period.”

He said this was an extraordinary achievement and global trade and enterprise allowed countries to develop. Previously, many of these countries had been blocked from doing this.

“It also created formidable dis-inflationary forces that essentially broke the cycle of boom and bust in developed western markets, which had been exemplified by the Laffer curve.”

The Laffer curve is an economic theory that illustrated the relationship between tax rates and government tax revenues. It suggests a trade-off between growth and inflation.

“Lower inflation led to a more stable, lower cost of capital. There is a very direct relationship between inflation and interest rates.”

The global reduction in instability resulted in the compression of capital costs. This not only increased asset prices but it allowed a longer investment horizon, which was the vital fuel for investment in technology. This technology revolution in turn delivered another dis-inflationary boost for markets as productivity improved.

“This essentially was the miracle of globalisation,” he explained.

But there were unattractive consequences alongside such global advances. The miracle of globalisation sowed seeds of today’s income challenges. Mr Macpherson raised three examples of this.

“If you have a very rapid expansion in wealth there is a rapid expansion in consumption. The consequence was a massive acceleration in greenhouse gas emissions and a real sustainability issue,” he points out.

Significant increases in the wealth of consumers, not only the United States, but in China and India, meant global sustainability was out of the control despite the miracle of globalisation.

“But how do you balance the argument to people who have literally been on incomes of $100 a year and turn around by bringing up the drawbridge and saying, ‘No, you may not have a gas powered or coal fired powered station to power your industrialisation?”

Global trade, mass migration and technology was also destroying the pricing power of labour in the West. In 2012, a paper was published by Lakner-Milanovic for the World Bank, entitled: Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession. It has become known for its elephant graph. However, when global income was plotted, it showed a growth in the body of the elephant, and then a massive increase in the wealth of the very rich or ‘global elite’, as the trunk rose, while it highlighted a huge dip in the income of the unskilled, semi-skilled and middle classes in the West.

“The middle and lower income blue collar worker had seen no real benefit in their wages at all in 20 years, and that has persisted.”

AN ADUNDANCE OF CHEAP CREDIT

Low stable interest rates – the ability to flush the market with liquidity without the consequences of inflation – fuelled an explosion of cheap debt and this papered over the cracks for consumers who had not seen their incomes move. Mortgage payments had come down, and buy now, pay later became the norm.

“These were all symptoms of the abundance of very, very cheap credit.”

In economic terms, every positive such as the miracle of globalisation always has some form of negative, he says.

Turning to the labour markets in developed nations, Angus Macpherson suggested there were two tiers. Firstly, the globally competitive tier with asset owners doing well helped by quantitative easing which has increased the value of assets with cheap interest rates.

“Wealth has been created on a prodigious scale. However, you’ve then got the people who are not globally competitive, and here there is a really sharp division. Those who have had the protection of some form of unionisation, professional bodies, any form of regulation which impedes international competition.”

He pointed out that some dock workers in the United States were earning more than $100,00 a year, while dock workers in China were paid substantially less. Then, in the logistics sector, there are the non-unionised angry people in ‘fulfilment’ working for the likes of Amazon, who do not earn what a dock worker in the US gets. They all have a vote.

TRUMP KNOWN AS ‘COMRADE TRUMP’

“Intelligent people often tell me that Donald Trump is stupid. And I’m simply not prepared to accept that is the case. You do not win the most competitive race in the world twice as an outsider – and in the first case massively underspending your competitor – if you are stupid.”

There is a difference being not being stupid and being right all the time.

“The problem with Trump, as someone put it really well, is he’s right 50 per cent of the time. The trouble is we don’t know which 50 per cent. I think there’s an element of truth in that.”

“The most potent force in Western democratic politics is the frustration of the blue colour worker in the United States and in developed markets. Addressing that frustration may be bad economics, but it is very good politics for the likes of President Trump.”

He said the underlying themes of all of this discontent needs to be understood and addressed. He raised a laugh when he explained that some Chinese friends did not regard Trump as a Western capitalist but rather he was being dubbed as Comrade Trump and were referring to his economic policies as Socialism with American Characteristics

“We may have stepped back from the brink and not blown up the US bond market overnight. But it does not mean that the political environment driving this has come to an end. Act One, Scene One, may have been completed but, in my view at least, this play is still going on!”

The victims of the miracle of globalisation are the most potent force in western electoral politics at the moment and they all have a vote.

He said the implications of a post free trade world are acute and there will be no dis-inflationary tailwind supressing volatility of interest rates. Interest rates will be higher and less surpluses will be generated, and the cost of capital is going to rise. He believes the competition for capital will be more intense with the costs higher because there is more risk involved.

“We are also going to have to compete for investment. We have to make ourselves much more attractive.”

THE SCOTTISH INVESTMENT PANEL

Speaking about the Scottish Government’s investor panel, which he chaired, he said there were too many regulations and impediments in the way of investment.

“I think the time when we can afford the luxury of doing this is beginning to run out.”

He said in 1945, the Atomic Bomb was dropped on Japan. This was a military project which brought the end of the Second World War. In 1947, Windscale in Cumbria was conceived and the first phase of commercial nuclear power came into being in 1951. He says the deployment from a military to a civil sense in six years is ‘mind boggling’. Compared to the Lower Thames Crossing, a long-running planning cause célèbre and an example of ‘death by consultation’, which adds costs and delay to infrastructure projects.

Finally, he said financing the just transition in Scotland to net zero remains an economic challenge, but there is a definite feeling of a softening of priority in western markets. By contrast, China is 27 per cent of global emissions, partly because it is still industrialising, partly because we have exported much of our manufacturing there.

One of the great international policy successes has been the building of a consensus on climate change, and China is estimated to have reduced its greenhouse gas emissions by 3 per cent last year. He says we need to continue to focus on this reduction in emissions even if there is an aggressive trade confrontation.

“We’ve got to avoid frying the planet. It remains an imperative for everyone,” he concluded.

Citation

Lakner,Christoph; Milanovic,Branko L.. Global income distribution : from the fall of the Berlin Wall to the great recession (English). Policy Research working paper ; no. WPS 6719 Washington, DC: World Bank Group. http://documents.worldbank.org/curated/en/914431468162277879