As we all know, 2020 has been a rather strange and unconventional year. The coronavirus pandemic is mostly to blame of course. It's hard to imagine the sight of a mask in public being considered anything but 'normal' these days. But it wasn't too long ago that it was a strange sight. And I'm not sure anyone had even heard the phrase 'social distancing' before the start of this year either. Yet it's now part of our common lexicon.
But apart from these new 'pandemic management' norms, one of the largest changes we have seen across the economy (and society) has been the influx of government stimulus. The levels of money that the state and federal governments have injected into the economy over this year have been astronomical.
It had made the famous '$900 cheques' of the global financial crisis-era seem like pocket change. Think about it. JobKeeper at $1,500 a fortnight (since reduced) for anyone who couldn't work due to the pandemic, a doubling of 'the dole' (aka JobSeeker), rolling stimulus cheques to pensioners and other welfare recipients… all of this would have been inconceivable just last year.
And yet here we are.
Money: From the many to the few
But actions have consequences. And one of the consequences of this stimulus is a massive increase in money circulating through the economy. According to reporting in the Australian Financial Review (AFR) yesterday, we can put a number on this extra money sloshing around. The AFR reports that the Australian money supply has increased by 12.3% in the 12 months to October 2020. That 'supply' is of 'broad money', which, according to the AFR, includes " just about every form of money in an economy, including currency, deposits, securities [shares] and bonds".
In terms of just cold hard cash, the number is even higher – a 19% increase over the same period.
So we should all be feeling 12-20% richer, right?
Well, the AFR also reports that this massive increase in money is disproportionately flowing to a relatively small group of people. This problem was not caused by the pandemic, but it was exacerbated by it.
Labour vs capital
The AFR quotes Australia and New Zealand Banking GrpLtd (ASX: ANZ) chief economist Richard Yetsenga on this matter:
A pre-COVID problem was not just the existence of historically slow economic growth in many economies but how that growth was distributed… Superstar firms, technology companies, some natural resource companies and even some of the super-rich have been winners from the global growth of the last 10–20 years.
But median wages in many economies have not increased the way we might have expected and certainly not in a way that was consistent with historical experience.
Here Mr Yetsenga is referring to the gap between the share of national income that labour (wage and salaries) receives compared to capital (invested money). This gap has reportedly been widening for decades.
According to the AFR, the 'labour share' was more than 60% of the national income in the early 1980s. Today, it is closer to 50%. Conversely, the 'capital' share of national income has gone from just over 20% to more than 35% over the same period. Boiled down, this essentially means wages have stayed flat in real terms, while 'capital', like shares and property, have gone up. Most people earn wages and salaries. Far fewer own shares and houses.
As discussed earlier, the AFR supposes this effect has been accelerated in 2020. This has no doubt been helped by stubbornly-high housing prices across the country (coming after a decade of massive growth). As well as surging stock markets, both here and abroad (especially in the United States). Record low interest rates, as well as new quantitative easing (QE) programs, have likely exacerbated this situation further.
Actions have consequences indeed.