Sustainability Of Global Capitalism | Blogs

Dear readers, we have had to live a uniquely complex world of multiple problems and interactions; and therefore, difficult to understand and organize conceptually.

Today many people are shocked because the President of the first nation in the world, United States of America (USA), decided to start a trade war (a fight for future world hegemony) with an emerging power like China. Others look, with no good eyes, the so-called nationalisms and protectionisms that come from the United Kingdom (BREXIT) and the USA; things that were considered already surpassed and believed to have been left in the past. I do not know if they are equally worried when the European parliament and in the countries of old Europe the nationalist court parties have advanced in their positions in the legislative bodies.

Another issue is what happened in Chile, where a country that seemed to live a phase of its economic-social development, as an example of the achievements made by a neo-liberal economy model in an emerging country, "overnight" On October 18, everything changed substantially, and a social outburst came.

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I think that what happened in Chile is not something that can only happen to the southern country; but, that it is a process that takes place in a society where the evolution of its life style is perceived truncated not only for its middle class; but, that it is a general feeling in the town (in this case Chilean), that does not want to return to the state that was experienced before October 18, 2019.

This same feeling is found today in the protests in France; and it can arise in any other country as they grow economically and their citizens are more aware that their expectations will not be met and that the political-economic-social organization model is no longer enough.

In this blog I also have to focus and move forward in the reflection on issues that have been treated worldwide and that have to do with investment.

The high volatility and uncertainty that we have experienced during the year 2019, largely due to the struggle of world hegemony between the USA and China, does not seem to yield in the markets due to factors that bring trade war negotiations and factors that underlie the economic cycle; making the prospects for 2020 regarding financial capital markets find, in these elements mentioned above, a backdrop. Thus, the recent bullish escalation of December that has been achieved on Wall Street with trading volumes below its average of three months and one month, does not necessarily confirm a trend in the US equity market.

Some wonder if the economic cycle in the USA will continue to extend 2020 or not, or if what will come will be only a slowdown, or a recession will occur in the short term. In our opinion, there is a greater probability of observing a slowdown in the USA and not a recession for this year 2020, what we do consider should be taken into account is that today these questions are accompanied by a structure somewhat different from the previous crises.

In the so-called developed economies of the West, an important relationship is observed between the economic cycle and the stock market cycle. In this context, top-down analysis results in a valuable tool; But today, things have changed, and more than being located on the macroeconomic level, the approach can give way to a microeconomic treatment related to economic growth.

Indeed, within this context, in November 2018, two important articles appeared in the English magazine The Economist that focused on the sustainability of capitalism itself. These referred to the implication of inequality in the distribution of income in economic growth; that is to say, the reduction in the share of income from sources of work in total income compared to greater growth in profits and the concentration of production and services in a few corporations at the level of the world economy by industry.

In recent years, two microeconomic processes have been experienced; on the one hand, the reduction of the participation of labor income in the total income of the economy that contrasts with increasing profits and dividends of corporations; on the other hand, a greater concentration in few corporations of production and services. The transcendent of these processes are the adverse effects that these have for economic growth, since they lead to a reduction in the productivity of the labor factor and affect innovation, weakening the main engine for economic growth in capitalism that is innovation ( Joseph Schumpeter) and the role of human capital and its productivity (Theory of Endogenous Growth).

This process can be better understood if we consider two additional elements that come from the concepts of classical economics (Ricardo and Marx):

The valuation of capital, which in terms of the market is expressed in the price of the share, requires that the rate of return of the company increase above that expected to add an extraordinary profit (abnormal profit) to the corporation.
To continue with its accumulation process, capitalism requires that the rate of return grow at a rate, given a period of time, so as to allow the investment to be recovered; otherwise, it will be in economic loss.

Facing the structure mentioned in the paragraphs written above; Some states have reacted by closing their borders to protect the workforce of their own nationals, thus preventing productivity from lowering what could happen due to migration. Nationalist right-wing parties have been improving their participation among voters, promising protection to their middle class and / or working class. In Europe, anti-trust proceedings against Silicon Valley companies began. In France, strikes in defense of retirement pensions have become relevant, because workers, including the middle classes, avoid falling into impoverishment for their old age.

Up to now the improvements, in the quality of the rate of return have been achieved; on the one hand, reducing corporate taxes, which was applied in Trump's USA with the purpose of repatriating capital to the USA; on the other hand, to technological development, such as the use of robots within the operating processes of companies, which reduces costs and replaces labor, making the participation of labor income within total income be reduced and the costs of Labor remain stable, do not increase. The latter is clearly perceived in the US macroeconomic data.

This situation means that inflationary pressure due to expectations of higher wages and salaries does not become a factor for the rise in the monetary policy interest rate. The reduction of income from remuneration within total income also leads to a weakening demand from private consumption, which causes the world economy to experience a cycle with low inflationary pressure, and corporate profits to be realized. due to increased concentration in industry, mergers and corporate acquisitions.

But this process of growth with lower participation of labor income means that productivity falls and the innovation necessary for economic growth is conditioned to this situation.

The extension of the economic and stock market cycle today are presented within this context that underlies the economic reality of the Convergence Club.

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