As I look at the market and go, “My God, please….,” I am so glad I sold some stocks yesterday. Now, there is really nothing to do, but go to the beach till things quieten down, which could be a few months, or even a couple of years.
What is critical is that, as they struggle to hold things together, financial authorities in every country not even consider policies that could bring succor to financial assets—interest rates should stop falling, which means that, in time, they will start to go up. Instead, the focus should be on growth, period.
In August last year, I had written about what seemed like an obvious solution. With asset prices insane—a single painting, albeit by Leonardo d Vinci, sold for $450 million in November 2017—and trillions of dollars of debt earning negative interest rates, it was loudly obvious that there was far too much capital in the world; and the reason there was so much capital was because since time immemorial capital, treated as a precious princess, was not taxed at any kind of reasonable level. Now, this didn’t create much of a problem till the 1980s when the opening up of capital markets saw an explosion in the amount of capital, reflected in the value of capital assets and, as I said, huge amounts of capital being invested below zero.
Clearly, there was something wrong, but rather than treating this “sickness” the financial policymakers just assumed it would go away in time, when growth picked up, when pigs grew wings and flew snorting over the world.
The obvious solution was/is to tax the value of capital assets and eliminate all—direct and indirect—taxes on labour (i.e., salaries, consulting fees, corporate profits, etc). This would have the delicious impact of turbocharging growth, which nobody would disagree we need, and see the value of capital assets come down, which, on reflection, most people would agree is a good thing—real estate prices, for instance, would become more “real”. Inflation would reappear and monetary policy would start to work again.
Far from recognising the problem, the central banks remained focused—counterproductively—on preventing any decline in asset prices. Far from taking the punchbowl away as the party got too hot, they spiked the punch—and the party rocked on.Till, of course, something happened. As it happens, it was the corona virus, but if it hadn’t been that, something else would have provided the trigger. The balloon had just got way too big.
Unfortunately, with markets down 25% and counting, it may be difficult for policymakers to even think about taxing capital. However, it is still the correct solution. Likely as not, and unfortunately, it would be difficult to cut income-based taxes to zero, which would be ideal, but with some balancing arithmetic, we could come up with a system that promoted growth, and saw the value of capital assets stagnate or even fall somewhat further. Let us recognise, for instance, that the value of real estate and other illiquid assets hasn’t really taken any kind of a hit yet.
With individuals and corporates (relatively) flush with funds since they would be paying zero tax, demand would increase both for basic goods, which would be great for growth, and, indeed, for assets, who’s prices would now be more affordable. Thus, there would be some kind of floor under asset prices.
Of course, this solution would be politically very difficult to push. But, if you think about it, it is really quite sensible. Indeed, there have been pushes from candidates for the US Democratic nomination (Bernie Sanders and Elizabeth Warren) to tax wealth, but they made is sound like a “soak the rich” punishment. While what I am proposing would, indeed, “soak the rich”, the approach is totally non-political. If, at some point in the future, we found that inflation was raging because growth had gotten too strong—what a problem to have—the approach could simply reverse, taxes on labour-based income could be raised, and on capital-based income could be brought down. As it happens, this process would also address—slowly—the increasing inequality in the world.
But, all this is for later, after the trauma is over. For now, I am off to Goa on Sunday.
The author is CEO, Mecklai Financial. Views are personal
