Wondering whether perhaps it’s time to go back to fundamentals like a good old Value Investor or shall we call it Vintage Economics!
In short, QE and lower interest rates have not worked to drive real economic growth or job creation. Also, the intended, though unspoken of, devaluation of the Euro (through lower interest rates) has hardly budged exports. So what now?! Think one way is to look at where the money has gone and ensure it does not stagnate and gets shifted to where it is actually being churned and used to create basic value. This could be at SME or Corporate levels but primarily SME as corporate bond issue is at record levels so largely no shortage of, cheap, cash there.
Excess liquidity and lower interest rates seem to have been primarily effective in driving up share prices to (early) bubble levels. Additionally, the platform intended to funnel liquidity to the market through lending i.e. banks have used it to shore up their balance sheets i.e. decided to comfortably hoard cash and wait for a better day (or decade). I can see six immediate avenues to reverse some of these effects. Most of them are ones I used to principally oppose but time has a way of making anything make sense under the right circumstances. Some are still controversial and none of the ideas are completely new but bringing them all together would have a massive impact on shifting cash.
1) Financial Transaction Tax: Only on large ticket transactions and not on consumer transactions of course. Basically a tax on transfer of bonds, shares and derivates between financial institutions. A few exceptions such as investment banking fund raising would apply to not discourage real economy activity. Basically discourage pure financial trading.
2) Capital Gains Tax: Not a proponent of this one long term but perhaps a temporary measure for a few years could go someway to deflate prices and more importantly make shares less attractive place to store cash. It can be brought on slowly and removed slowly too to avoid market shocks. This one is likely more effective to curb asset prices and make alternative investments or spend more attractive. The tax could/should be regressive by taxing short term owners more than long term owners. As someone once said ‘Shareholders should be share-holders and not share-traders’. Am sure somebody will complain about market liquidity here but *shrug*
3) Wealth Tax: Ok ok a sensitive one but probably needs to be increased for amounts above EUR 1-2m. The tax should be linked to real returns and not fictitious one though similar to what The Netherlands has just introduced. This encourages spend which should drive inflation (we need it..) and grow demand and thus businesses and jobs.
4) Negative interest rates: This has already started but not sufficiently to encourage banks to lend. Further materially decreasing rates given by central banks to banks deeper in negative territory could bridge the risk gap and stimulate lending.
5) Borrowing to invest: counter intuitive but many countries now have huge ability to borrow and at almost zero rates. Germany for example should be investing heavily in infrastructure, education and technology and it doesn’t all need to be in Germany. Borrowing and building or expanding infrastructure across Europe would help everybody even if done at a profit. Some laws may need to be massaged here but its soothing the economy back into heath.
6) Tax charitable donations: OMG yes I said it. Intended here are only large scale ‘donations’ to own managed charities. Although commendable, it short circuits the system where those who make it big thanks to the collective infrastructure and effort (and it is all statistics regardless of how smart anybody thinks they are) should to some extent funnel funds back into the collective rather than only to projects decided upon by personal preferences. Also, charitable work outside the geography where the funds originate from should attract a (small) tax. This is to encourage charity at home at this critical time and feed the goose to lay golden eggs for future generations. Lastly, see point 3 above for those who decide not to give at all 😉
There is so much more to do to create the right environment for real economy growth from high quality yet free education to immigration policy (more not less usually just more customised to each country’s actual needs) and from cheaper day care (through tax breaks) to allow better participation to less regulation etc. Above is by no means exhaustive or fully worked out..just some food for thought. Was in the mood for writing!
Guest Writer
Khaldoun Shehadeh is a seasoned Investments & Senior Finance Professional with 13+ years’ experience throughout Europe and Africa.
He provides a proven track record of achievements in Investments, Banking, and Logistics industries with a strong reputation for integrity. He offers solid financial knowledge and skills in Emerging Markets and is adept at working within corporate and start-up environments.
