Saturday, 6 December 2014

Does the (US) Phillips Curve work in leisure & hospitality?

The US employment data released yesterday are worthy of a short post. The bare bones of the report are that a strong monthly increase in employment and a modest acceleration in wage growth (321,000 jobs, wage growth from 2% to 2.1%, unemployment rate steady at 5.8%) have prompted excited headlines like the FT's... (US Heads for best jobs growth since 1999). The growth rate of employment has picked up from an above-trend 1.95% annual rate to a whopping 1.99% rate. That doesn't really answer anyone's questions about whether falling unemployment will drive wage growth up, or whether the US is going to return to less pathetic rates of productivity growth any time soon for that matter but with some cracking (i.e., low) CPI and PCE inflation likely to turn  up shortly, real incomes are rising in time for Christmas; and a 2% growth rate in unemployment will underpin GDP growth nicely above that in the coming months.

All of this you can read all about to your heart's content elsewhere. What I've been spending more time on is the make-up of the labour market, which has continued to see the strongest employment growth in the lowest-paid sectors, and some of the weakest in the highest-paid sectors. But one thing that was striking in the November data was a further acceleration in wage growth for the lowest-paid of all the sectors - leisure and hospitality. This is a sector where wages average $14.10 per hour, compared to $24.66 for all workers and over $30 in mining, finance and information. But over the last year, wage growth has picked up to 3.75% at this end of the spectrum. I've plotted wage growth in leisure and hospitality, along with overall wage growth and (inverted) the unemployment rate, in the chart below.

The picture tells a simple enough story. The lowest-paid workers in the US saw their pay levels fall in the aftermath of the recession, suffering far worse than the average. And their wage growth (let alone their wage levels) lagged until late last year. But as the unemployment rate has gone on falling, they have started to see pay rises. The Phillips curve for the overall US economy still looks pretty useless - wage growth trending sideways, while unemployment falls - but tightness in the labour market may finally be turning into more cash at the bottom end of the scale. And since those are the people who spend the largest share of any additional income (because they need to), the impact on demand may be greater.

The main causes of weak real wage growth over the last decade (technology, globalisation) would also suggest that a sector where out-sourcing jobs and replacing them with robots are both difficult, should see wages respond to falling supply of workers. So this pattern does nothing to allay longer-term concerns that the policy response to weak demand caused by weak real wage growth, itself due to major structural forces, is ineffective: An orgy of monetary accommodation has sent up asset prices (which do very little to address falling real incomes for low-income families), helped increase the profit share of GDP at the expense of the wage share and fuelled bubble-like pricing in commodities and currencies, many of which are now deflating.

However, for all those long-term, concerns, I can't think of any reason not to cheer on a boost in wage growth for the lowest-paid sector of the (US) economy at last, even if we need to see this filter up to sectors with higher wage rates before it is reflected in faster average wage growth.

Sunday, 23 November 2014

Basic maths and a big headache

A three-hour train journey to see my daughter en route to bothering clients in Scotland tomorrow leaves me with time to write, though less access to data than I need to fully explain my point. Still,  I'm grateful to Matthew Boesler (@boes_ on twitter)  for drawing my attention to the presentation on the US economy by David Altig, the Atlanta Fed's Director of Research, which he gave at Georgia State University's Economic Forecasting Conference this week (Link).

The amount and quality of research that comes out the Fed's regional offices is incredible. The whole presentation is worth looking at but I've been playing with slide 15, which shows US employment growth since June 2009 in various sectors of the economy and compares it to the wage level. It's not a surprise that the majority of the employment growth has been in lower-paid work and this is something that is as true in the UK as it is in the US. Spend much time reading Brinjolfsson and McAfee and you'll end up convinced this is a trend which can persist.

I started playing with the data behind the chart on Friday and look forward to hours of fun doing so in the next week or two.  For a really simple exercise, I looked at wage growth across the different sectors. Overall, US hourly earnings growth in October was running at 2.0% y/y, and the average hourly wage was USD 24.57, pretty close to the $24.96 earned in manufacturing, the sector with the fastest employment growth since 2009 and 4th of the 8 sectors in the chart.

At the extremes, wage growth in 'information', the top sector on this list, is 3.3%, and the wage growth in the lowest-earning sector is 3.6%. Both higher than the average. Not every sector is seeing higher than average wage growth, but they could be. The average growth of wages in the two mentioned sectors is 3.15%, a good bit lower than in either of them, simply because of one year's change in relative employment between the two sectors.

There's one immediate conclusion: Even as the overall US economy approaches full employment, that may cause more wage growth only in the (lower-paid) sectors where the labour shortages will be felt first and even then only if the effect is not simply a return of discouraged workers to the labour force.

What I really need to time to do, is to replicate these figures in the UK. Mark Carney, Governor of the Bank of England, sounded confident about a pick-up in wage growth in the press conference after the release of the latest Inflation Report. The bank expects a pick-up to around 3%, and I can only assume that they are hearing positive noises from their Agents. But if that 3% figure reflects the belief that each sector will see a 3% increase in wages, while the make-up of the labour force changes, the actual number could still be a fair bit lower. So I'll note the optimism and reserve judgement....

The implications for fiscal policy are even more disturbing. If the shift in the make-up of employment drags average wage growth below the average of each sector, it wreaks even more havoc to income tax receipts. More people are paying less tax. And the trend is not about to change. I'll leave those with a political agenda to draw their own conclusions, while I focus on what this means for inflation, interest rates and the pound...

Saturday, 11 October 2014

Hopelessly over-optimistic....

Where do you think trend growth is for the US economy in the years ahead? Maybe that's not a question you ask yourself much but as another IMF World Economic Forecast is published and the great and good meet and greet each other in Washington, it's a question I would love to answer. After all, it's a key input into global growth, global interest rate trends and asset prices. And I fear the answer is  - slower than most economists appear to believe.
The picture below, shows how the consensus forecast for US real GDP growth collated by Bloomberg has shifted over time. The darker blue line on the left-hand side shows how the consensus forecast for 2011 growth was around 3% in early 2010, but fell sharply in mid-2011 as it become clear the eventual outcome would be somewhere between 1 1/2 and 2%. Back in early 2010, the consensus forecast for 2012 was even more optimistic, flirting with 3 1/2% but sadly, this too was gradually revised lower in 2011. And the 2013 forecast started life at just above 3% but ended below 2%. And the 2014 forecast, back in early 2012, was above 3% but we now know that too, is too optimistic. The pattern is obvious - a tale of dashed hope and disappointment. You won't be surprised to see that at this point the 2015 and 2016 forecasts are around 3%. And yes, in case you wondered, the IMF's forecast for  2015 is 3.1%.

A friend told me hat he thought this optimism was admirable and a feature of  human nature as opposed to evidence of massive failure by economic forecasters. And I caught an echo in this response to the England football teams 5-0 win over might San Marino from the Daily Telegraph.....

"For 21 second-half minutes at Wembley on Thursday night, the statisticians who follow the England team were left scrambling for the record books. The half-time introduction of Alex Oxlade-Chamberlain for Jordan Henderson had swollen the number of Arsenal players on the pitch to five and it was soon confirmed that you had to go back to the days of Herbert Chapman in the 1930s for when the club were last responsible for half of England’s outfield all follows a definite trend in the composition of the previous two World Cup-winning squads. The Spanish in 2010 had seven players from Barcelona and five from Real Madrid while Germany’s triumphant squad from Brazil comprised seven from Bayern Munich and four from Borussia Dortmund". 

Now, I'm as patriotic as the next English football-watcher, but putting such a positive spin on a win against  a team from a country smaller than Islington with the help of 5 playrs from a club lying 8th in the Premiership is a bit too much, even for me... 

Anyway, back to the US economy....The good news for next year, is that the 2015 forecast is holding up better than in previous years. By this time in 2013, the 2014 forecast was slipping as the effects of a massive jump in bond yields (far greater than we have seen this summer) took its toll on emerging markets and then US housing. And we'll never know how much of the 2014 disappointment was due to the awful weather at the start of the year.

But away from where we should pitch the 2015 forecast, what the chart really prompts me to do is to question where 'trend' GDP growth is heading in the US. This tendency to forecast growth at 3% next year, the year after and for ever represents a very rose-tinted view of the US outlook. Economists will quickly assert that after a deep recession a few years of 'above-trend' growth can reasonably be expected but as the unemployment rate falls below 6%, that story has a shortening shelf-life. And the 3%-plus forecasts all assume trend growth is somewhere above 2%. Which may be much too optimistic. The next two charts both worry me in this regard.

This first one shows my preferred way of looking at the monthly jobs report - as the annual growth rate of non-farm payrolls. Employment growth is running at 1.9% per annum and has steady for the last three years. GDP growth meanwhile has been growing at a disappointing rate - disappointing for those who keep on thinking it should be above 3%, at any rate. The green line, on the right-hand axis, shows the difference, smoothed over three years and just under 1/2%. This is an over-simplification of productivity growth but does get away from the nonsense that I am currently reducing my productivity by 'working' outside 'work hours'. Since 1960 US GDP growth has averaged 3.1% and employment growth 1.8%. So this is a very disappointing period for GDP growth relative to a rather normal period for job creation. The general view of trend GDP growth being above 2% assumes that productivity will magically revert to the long-term average. And you can see that productivity is cyclical, because employers hoard workers in recessions and then are slow to hire - usually. But in this cycle productivity is weakening years after the recession, which makes alarm bells ring. 

Trend growth, in the longer run, is a function of where we think full employment is, what we think productivity is, and how fast the labour force is growing. The final chart shows the US labour force, growing gradually more slowly of late. The second line is the 3-year average growth rate, currently just under 1/2%. That line has been trending lower since the late 1970s. The US Bureau for Labor Statistics writes a about longer-term trends and at the end of last year they produced this piece whose opening summary reads... 

"Labor force projections to 2022: the labor force participation rate continues to fall: Because of the decreasing labor force participation rate of youths and the prime age group, the overall labor force participation rate is expected to decline. The participation rates of older workers are projected to increase, but remain significantly lower than those of the prime age group. A combination of a slower growth of the civilian noninstitutional population and falling participation rates will lower labor force growth to a projected 0.5 percent annually."

So labour force growth has averaged 0.5% in the last three years and the BLS thinks it will do so the next decade, give or take. The gap between employment growth and GDP has been 1.3% since 1960 but 0.5% since 2011. There's room for GDP to 'do better' as the remaining slack in the labour market is used up. After that, trend growth is probably between 1% on a bearish view that the recent past is a sign of the 'new normal' times to come, and 1.8% on the optimistic view that we will return to the long-run average. You're welcome to you own guess, but I reckon hoping that 'trend' US GDP growth is above 2% is wishful thinking. As is believing that beating San Marino tells us anything about England's chances of winning a major football tournament in the next decade or two. 

Sunday, 29 June 2014

Brexit - not an option, even for a fool

The UK appears to be sliding slowly but surely towards an exit from the European Union. Maybe appearances are deceiving, but the UK's vision of Europe - which really boils down to the single market - and the needs of the Euro Zone economies, are increasingly hard to reconcile. I'll no doubt write a lot about this in the day job over the next year, but economically, for the UK to leave Europe is even worse than for Scotland to leave the UK. The Euro is a currency invented to serve a purpose for which it is no longer really needed, but it can't be un-invented and the European Union needs to be aligned around the need to keep it alive. The march towards Federalism is unstoppable and unless the single currency is ditched, it's necessary. There is dwindling political will within Europe to carve out a space for the UK to co-exist, in the Union and out of the currency and the leadership of the UK is woefully lacking in the political skill to gain any support for its position. And so, here we are, slip-sliding further into the periphery of the continent.

This, by Michael Ignatief in the FT does a good job of capturing how I feel about 'country'. I didn't spend much of my childhood in the UK and although Les Alluets Le Roi is closer to London than Carlisle is, anything 'English' had to be imported. So my mother stocked up with Marmite, Golden Syrup, mango pickle and porridge to the bemusement of her French friends, while I embraced a romanticised view of England fuelled by Enid Blyton, CS Forester, PG Wodehouse, Kipling and Roy of the Rovers, made by Airfix. But while I might have been a starry-eyed patriot in the playground in the 1960s, it took very little time before I was also 'European'. The only regret is that the range of places you could get to on a train in Europe in the 70's and 80's was so pathetically small compared to what anyone with time to spare can do now. Hop on the overnight train to Berlin and catch one in the morning to Warsaw. No visas, no hassle. Of course air travel has made it all easier, even if it's less romantic, but if you're 21 and have time on your hands there's a world of places, ideas and people to see, read and meet, just on your doorstep.

Unfortunately, that's just not what Europe as a political entity is about now. I was in favour of a single currency in the 1990s because the ERM was ludicrously flawed and because I'd learnt as a student that there was a cost to dividing my allowance between francs, guilders, marks and pounds. And it's equally clear that once there is a single currency, then along with a single central bank there needs to be closer fiscal union.

The single currency is no longer necessary. I can already use an app on my phone to buy coffee in New York at an exchange rate that is so much better than I am ever offered by a bureau de change, that I could scream. There's only a cartel or two standing in the way of fair exchange rates for using ATMs and credit cards internationally, and at that point the benefits from a single currency are suddenly much reduced for most people. The inflation, competitive devaluation and volatility of the 1970s can be avoided without currency union. But back in the early days of the ERM, no one realised that technology would do any of things it has and here is Europe, with the Euro and with the need to focus its political energy on building much sounder economic foundations on which to support it. Even if anyone in Brussels wishes that they had never invented the Euro, they don't want to go back and doing so would be devastating. So onwards it must be and the Federalists must win. And as they win, so the anti-Federalists in the UK moan.

And it is a shame, because I don't want to choose between a Federal Europe and an isolated, irrelevant economically-challenged England. I don't want either of these things. I want to do what I'm doing tomorrow morning - get on a plane, fly to Athens and sit in a bar discussing the world with people whose perspective is different from mine and from whom I can't fail to learn a great deal. But for what it's worth, if I can't have a single market with free movement of goods, capital, people and ideas, I'll vote for Europe, however I have to take it.

Sunday, 22 June 2014

If a coffee shop can charge honest exchange rates, why can't everyone?

I wrote a post to this blog last autumn with the picture on the right in it, as we were warned of an imminent storm. So I thought I'd upload the same picture today. The beech tree in the middle of the right-hand photo was 'taken out' by a tree which fell from the left.

Anyway, so much for trees! 

I flew back from New York to London yesterday, to be greeted by the best weather of 2014. On the flight back I sat next to an American who, having been sent over  for a 6-month stint four years ago, is finally about to go back to the US for good. He told me how much he had enjoyed London as a place to bring up a young family - far more green space that New York, for starters. And we both agreed that if you earn your living in finance, Europe's is the time zone to be in.  

Language, time zone, the appeal of the city itself to the international traveller/worker, critical mass of talented people to hire: These are all reasons why London can maintain its position as a dominant centre of global finance, if the country wants to. Whether there's the will to promote London as a pre-eminent global city or as a centre of global finance, is a different question. 

Firstly, it's important to think about what being a pre-eminent financial centre actually means, in the new world order. Certainly, the UK should not aspire to resurrect a situation where its major banks are so big that a financial crisis can bankrupt the UK.  Resting the global finical system on the shoulders of the retail deposit-taking banks of a country as small as the UK is dangerously daft. So, making London the global hub for trade in money, needs to be engineered differently.  But the second issue is that if countries don't make the most of of their competitive advantages, they are doomed to live in the economic slow lane. 

I'd offer a few thoughts on the make-up of global finance in the years to come. Firstly, banks are becoming less important for lending. They are going to be dull, heavily-regulated deposit-takers which look after our money and use it to make safe, low-margin loans. The job of the financial industry will, more and more, be to match those who need access to money with those who have money to invest. That's something that the City used to be good at, before Big Bang. Secondly, money is going to go on moving around the world. If interest rates are going to be lower, on average, than they used to be (as suggested by the IMF, Fed Governors, of MPC members for that matter), then anyone saving for a pension will continue to have to take more risk to get the returns they want/expect/need for retirement. More money will be invested in  more exciting, but more volatile markets than UK Gilts, German Bunds or US Treasuries. Not just in the short-term but as long as the 'neutral' level of rates is lower than the 'trend' growth rate of the major economies. And finally, the trend towards globalisation hasn't stopped, and won't soon. Banking may become more balkanised where such lending as a UK bank undertakes, for example, is much more concentrated on the UK, but consumers can and will go on buying goods and service internationally. 

A centre for global non-bank finance; a centre of savings and asset management; a centre for cross-border trade finance, for insurance, for international law and accountancy. These are industries which, surely, London should be nurturing even as the size and risk profile of the banking system is realigned with the reality the UK's size. And if not, then we'd better come up with other industries which can compete internationally on a sufficient scale to create the jobs of the future, and start nurturing them. 

The challenge, is that these industries are changing incredibly fast, all the time. I haven't updated my Starbucks Index this week, because the price of coffee in New York hasn't changed, even if the price of beans has risen. But I did pay for a cup of coffee using an app on my phone, which automatically charged me in sterling. The Starbucks GBP/USD exchange rate last Friday was 1.7020, which to all intents and purposes is the same rate that an FX trading firm would charge its very best and biggest customers. It's a vastly better rate than you'll get if you change pounds for dollars at a bureau de change in Heathrow this morning, that's for sure. I haven't asked Starbucks about their FX charging policy, but I'm guessing they make enough margin a capuccinno to be more interested in selling as many of them as possible, than on fleecing global wandering caffeine  addicts on FX. But if Starbucks understands that getting me to buy coffee in their stores is what matters, how long will it take credit card companies, hotel chains, car rental firms and others to figure it out, too? At some point, even banks are going to work out that the exchange rates they charge in ATMs annoy their customers. 

Saturday, 17 May 2014

Stumbling around in the dark....

What a wonderful day for a cup final! I spent part of this week in Paris, which was basking in the kind of spring sunshine that helped build its reputation. Shame about the dog mess, the taxi drivers and most of all, the lack of economic recovery, but that's for another day.

Back here in the UK, the FTSE has enjoyed it highest weekly close since 1999. Joy at the UK's spectacular recovery, a vote of confidence in the Chancellor's economic management, or a vote for the M&A boom? I'm no wiser about the outlook for equity markets than I am about anything else but the picture below is my small take on this. The FTSE peaked in 1999 shortly before the US Federal Reserve's main interest rate was increased for the last time in the boom. The FTSE reached its low as US rates were tumbling in 2002 and reached its 2007 high after the last of the US central bank's rate hikes in that cycle. And yup, UK equity markets have been rallying since US interest rates got to their current near-zero level in 2009. So, if you think that rising share prices are a 'good thing' and you want to thank someone, I reckon you should send a postcard to Ben Bernanke and Janet Yellen, rather than Mark Carney or George Osborne.

The same, by the way, is probably true of UK house prices.  Part of the UK house price 'problem' is that London's become a global city and house (or flat) building is lagging way behind the migration into the city. Sure, there's a problem with a handful of billionaires who have decided to buy Mayfair in a game of monopoly for the super-rich. But the attention the press pay those folks is far greater than they deserve. Just as the focus on the 'wrong kind' of immigrant is greater than it deserves. Most of the people who arrive in London, whether from the suburbs of London or the suburbs of Paris, Milan or Budapest are young, educated and hungry for success. And the reason they pay too much to buy or rent somewhere to live, is not because a few properties are empty but because there aren't enough of them.

But the second reason they pay too much is that the cost of money is too low. Not just low in the UK, but low everywhere where the US Federal Reserve's influence is felt. And that's where the similarity with share prices is greatest. Low global interest rates push investors into shares rates than government bonds. They encourage large companies to borrow cheap money to buy back their equity, or to buy their competitors in the name of efficiency. And when share prices lose touch with the economy, it is only temporary, because a company can only ever be worth the discounted value of future dividends. If there are more people who want to live in London than there are rooms for them, prices can stay high for a long time. But no-one is that desperate to win the shares of any company if it doesn't make much money.  

In recent weeks however, the cost of money has been coming back down. This time last year, American central bankers started to warn that it was only a mater of time before they stopped pumping ever more money into the economy by buying government bonds. And only a matter of time after that before they started to push interest rates up. That warning caused a huge re-think by people involved in markets about where interest rates would be, not in the next few months but in the next few years. A year ago today, an American bank could borrow or lend money for one year, starting in 5 years' time, at a rate of 2 1/2%. That is roughly the same as saying that the best guess of the financial markets in five years' time, the Federal Reserve would have increased its interest rates to about 2%. Too low. Collectively, markets had a rethink and by September that 1-year interest rate starting in 5 years was priced at 4.2%. So the new best guess was that the Fed would raise rates over 5 years to around 4%.

That was a better guess. Right or wrong, time will tell. But from the central bank's perspective this was healthy. Everyone had woken up to the fact that we wouldn't really have such low rates for ever. Markets cooled and in some cases fell. But recently, egged-on by low inflation and a lack of wage growth, central bankers have been downplaying the risk of interest rates going up soon, or far. And so, here we are, pricing in 1 year rates in 5 years' time at 3.4%. So we thought rates would be 2% in 5 years's time, re-thought and decided the answer was 4% and now we think it's a touch above 3%.  Investors, borrowers and lenders are stumbling around in the dark because they don't understand how central bankers decide the level of interest rates any more.

Markets need guidance. I thought the Federal Reserve did a good job last summer. I think they're in danger of undoing their good work. We were in the dark and we thought the Fed was showing leadership. But now, we're stumbling again.

As we stumble, two things happen. The first is that investors drive the price of houses, shares and all sorts of assets up. To levels which will be unsustainable when interest rates finally go up. And the second is that we treat all assets as being the same, so that I can dram pretty pictures of all sorts of asset prices, and they look eerily similar.

So, here we are with a  14-year high in the FTSE. We've also got a the recovery of the Brazilian real, also at it strongest levels since last summer just in time for the World Cup. That picture's below. If you do get the chance to go to Brazil you can experience at first hand what such a strong currency does to the cost of coffee, or beer, or any of the other things football-watchers need to buy.

And it's not just the Brazilian real. The Indian rupee picture looks similar.  Completely different underlying economic story.  And political uncertainty removed. But the way the real and rupee are tracking each other speaks of a world where investors are once again simply looking for yield, rather than differentiating between these different economic stories. And that's a very unhealthy consequence of central banks which don't just leave markets wandering around in the dark, but give the impression that's what they're doing, too.

Enjoy it while it lasts...

Tuesday, 29 April 2014

The Economics of Inequality

The Economics of Inequality is a book written by A B Atkinson and published in 1983. There's a copy on a bookshelf somewhere round here - bought when it was new and I was supposed to be studying economics (because it's easier to buy books than read them properly). I can't seem to lay my hands on it at the moment - the books I can find are a (perhaps sad) reflection on the bits of economics I spend more time with. From where I'm sitting I can see Glyn Davies' History of Money, Nicholas Mayhew's Sterling, Victor Argy's The Postwar International Money Crisis, Kindleberger's Exorbitant Privilege,  Keynes' General Theory and even This Time is Different. But almost all I can remember of Mr Atkinson's seminal work is that it is utterly unlike Thomas Piketty's Capital in the 21st Century - and not just because 'Capital' is on my iPad,  rather than in paper form.

This isn't a review of Capital  - there are plenty, written by far smarter people than me. The Economist's website has a series of analyses. Michael Bird at City A.M has collated a host of reviews. But what interests me is the way in which Mr Piketty has captured the Zeitgeist and tapped into the biggest topic in economics today. When I 'studied' economics in the early 1980s Milton Friedman was the rock star economist of the day. The weekly release of US money supply data on Thursday afternoons was a major market event. And there was an accompanying backlash against the policies of the Thatcher era (we held hands for jobs across the country, or in my case, Highbury Fields). Winding the clock forwards, the rock stars three years ago were Carmen Reinhart and Ken Rogoff, who were, too looking at huge macroeconomic issues in the wake of the great financial crisis. In short, it was all very macro.

Inequality is the biggest economic legacy of the Great Recession and the policies that western governments and central banks have chosen to escape it. Fiscal austerity and low interest rates accompanied by central bank asset purchases have been the chosen policies of the UK, US, Europe and Japan, albeit to varying degrees. The biggest winners have been those who own assets whose prices have risen as a result (directly or indirectly) of central bankers' actions. The biggest losers are those who are asset poor, and reliant on the state. The outcome is greater economic inequality and you'd have to be blind not to see it.

It's against this backdrop that Mr Piketty has published this work. To be clear, this is not a new theme for Mr Piketty - Wealth redistribution was the topic of his Phd thesis, 20 years ago (Ph.d at 22!!) and since Capital looks at 300-years worth of data to conclude that as long as the rate of return  on capital is higher than the growth rate of the economy, wealth will flow to the owners of capital unchecked, it's partly co-incidence that he's published his latest book now. But, the reaction to it is very much a reflection of the fact that this is a theory whose time has come. Money is cheap but severely rationed (Apple is likely to issue billions of dollars in debt to help move a vast cash pile around the world). So rich companies, countries and individuals can borrow very cheaply to invest, while the rest can't borrow at all. Young Londoners can only dream of owning homes, while the 'buy-to-let' market earns better returns than leaving money idling in a bank.

What is disturbing about Mr Piketty's analysis is not his proposed cures (taxation of capital and assets, which even he accepts won't happen in the way he would like), as much as the idea that inequality is built into our economic system. I read a piece by Simon Kuper about apartheid over the weekend, and it struck a small chord with the debate about inequality. His observation of South African apartheid is that it meant that an individual's life path was largely determined before birth, and he describes inequality as the new apartheid. Inequality of economic outcomes would be less disturbing if they were the result of choice (did you go to school or play hooky, did you save or waste your money?), innate talent or even chance. But  in Mr Piketty's world, the rich get richer until the masses rise up and revolt or until the state reacts. Even for people with liberal economic views in which the market is considered a 'good thing', the idea of an economic system where the odds are that heavily stacked against those who don't start out with a trust fund, is pretty unattractive.

If you have time to read the book, do so. If you don't, be prepared for the debate about inequality to rage on. And if you don't understand why this kind of inequality is a bad thing - they're coming to get you!