Free market, social mobility and inequality

Governments now have been given the mission to encourage the process of social mobility and reduce the social inequality, so when it comes to social mobility or inequality issues, people cry for more government intervention and social welfare policies. However, does that mean a free market can do nothing to improve social mobility and equality but worsen the issues?

A free market can do several things to improve social mobility and equality. Firstly, sometimes government intervention can increase the inequality. For example, many people criticize that since the 2008 financial crisis, many government market saving policies have benefited the big financial institutions, companies and rich shareholders much greater than the ordinary people and increased the social inequality and made the big companies even bigger. Without government intervention, these policies would not exist in the first place. Secondly, a free market encourages more competitions among all types of markets, including financial markets and labour markets. Everything depends on quality, price and demanders' preferences, when governments stay out of economic activities. Companies and individuals only need to obey laws and regulations, they do not need to collect more information from governments. If governments intervene in the markets, big companies and rich people are easier to collect information from governments than others, and the information could make significant differences in terms of making decisions on economic activities. Thirdly, increased competition can speed up skillful workers' promotion speed disregarding their background and other irrelevant characteristics. This is helpful to improve social mobility.

These are how a free market system could improve social mobility and equality; however, a free market system can worsen social immobility and inequality, which I will talk about tomorrow.

A mixed report on the US employment

The report on the US employment in October has been released and there is some positive news and some negative news.

The positive news is that the US wage growth accelerated in October at the fastest rate since 2009 and the unemployment rate stayed as low as 4.9%, which could be considered as a "zero unemployment rate", because it is the companies' interest to leave some people unemployed in the labour market in order to maintain their employees' incentives and it is also the current employees' interest to keep their wages higher than when it is at the market equilibrium.

The negative news is that the number of people who first time register for unemployment benefit increased in October. It could imply an increase in the youth unemployment and furthermore it may imply a structural change in the US economy that often a structural change can lead to an increase in the structural unemployment.

When we combine the good news and the bad news together, I come to this conclusion that there is a structural shifting taking place in the US economy. The labour market is able to supply labours with the required skills for the new industries or sectors of the economy; however, the workers from the being replaced sector do not have the matched skills to look for new jobs in the new sectors, this can cause a difficult problem in the US economy.

How is the UK's future now?

Today (November 3rd) adds some uncertainties in the UK's future that the British High Court has ruled that the parliament must vote on whether the UK can start the process of leaving the EU. Some people may view this a positive element to the markets, as the current British financial markets and the sterling price have been deeply influenced the possibility of a hard Brexit suggested by the current UK Prime Minister, May. Although the UK government is appealing and another hearing is expected to take place next month, I do not think the possibility of the High Court's changing its decision is high.

There are other options for May to pull Britain out of the EU, for example, she can convince the MPs to vote in favor of Brexit, or call for an early general election. Therefore, May can still find a way to get around the problem of the High Court ruling, eventually the probability of Brexit is still very high and I think that it will happen, though we may consider the probability is lowered by the High Court ruling.

However, although I still believe Brexit will eventually happen, as the parliament now has been given the right to vote on this issue and the politicians are more likely to be influenced by the lobbyists as they require funding for their election campaigns; therefore, the government's focus on this issue may become more favorable towards the large businesses and banks that the trade deal with the EU will definitely become the top priority and the time schedule could become less important.

Therefore, I think that May's timetable for leaving the EU will be delayed by this High Court decision.

Can the market force still work when there is no homogenous product existing in the market

When you walk into any shop, do you have a feeling that there are merely too many options that make you make shopping decisions more difficult. Moreover, even when many products belong to the same category, they have many differences in terms of their appearances, qualities, prices, functions that these differences almost make them seem like very different products; therefore, they are no longer comparable to each other and they are not homogenous products. In one market, we usually assume all products supplied in the market are homogenous products, now this assumption is no longer realistic in our real life in many sectors. When this assumption misses, we need to consider the market has now been split into many small markets, which have their own customers who have some loyalty but are still likely to leave to another market.

Now the good market becomes like a political election. Different firms are like representing different parties. They start with some supporters and have their particular reputations. Their supporters are more likely to continue their support for their firms; however, once their companies start to change their reputations, they may reconsider their support and some of them may choose to leave to supporting a different firm. However, when the time progresses, these companies tend to become more similar to each other, as they notice that some characteristics of the product can bring in more customers, they start to add these more popular characteristics to their products, then their products are becoming more homogenous over time.

Therefore, if these companies do not try to compete with each other and just put effort to maintain their current customers, then the market will become an oligopolistic market with a lack of competition and every company can have a relatively good earning. However, shareholders love growth, this forces companies to compete with each other, during the competition, their products are becoming more homogenous, then the level of competition becomes close to the level in a perfectly competitive market.

Exchange rate and global trading

Exchange rates and global trading have a very close correlation that when a country's currency is depreciating, the country's trade account can be improved, as the country's exports become cheaper and foreign imports become more expensive. Without other force intervention, there could be an equilibrium where a country's trade account and currency price are stable.

However, there are always many other forces that are trying to intervene and influence the forex market. The government may want to influence its currency price in order to improve its trade account; moreover, the government may sometimes want to increase its currency price under some situations, for example, the current Chinese government wants to maintain its currency value, though some institutions think the RMB has already been overestimated.

Under such circumstance, it actually creates a lot more uncertainties and transaction costs for many businesses that are doing international business.

Should investors stay bullish on European bonds?

I always think the change of government bond price is not just a matter of financial markets, but also sends signals about the macroeconomic performance, especially government bonds can well refer one government's budget condition and the market confidence about its economy and its world importance.

JPMorgan sends a message to its investors that the investors should stay bullish on European bonds. Recently there has been a big sell off swing in the market. Some investors may follow and sell off their holdings, this has dragged down the bond prices. The fall in bond prices is usually caused by several reasons. Firstly, the market risk premium decreases, then investors may start to prefer securities with higher risk and higher returns, therefore the bonds, especially the low yield bonds become much less popular then the prices will fall for certain. Secondly, when the market expects a high inflation in the future, as the return rates of bonds are usually set as nominal rates, the real returns of bonds become lower.

The current market believes the inflation rate in Europe could rise sharply in the near future, then selling off bonds becomes a rational choice. However, JPMorgan believes that the market risk premium stays the same, so keep holding bonds is the best alternative to all other investment options.

At the moment, I think that people should only stay bullish on inflation-related government bond, this is relatively more certain than other securities including other types of government bonds. Negative interest rates, poor productivity, depreciating currency prices can all contribute to an increase in inflation; however, these facts can also contribute an economic unrest, which leads to relatively poor returns of many securities. Therefore, under such circumstance, only inflation-related government bonds can handle such complex situation well, maybe gold is another safe choice.

Is there a thing called "social responsibility"?

The primary goal of a company is to maximize the profits of their shareholders and currently the public generally agree that a company should also take some social responsibility, which sometimes could violate the interest of the company's shareholders. Under a fully free market, the social responsibility should not become a company's goal or burden, as all a company needs to focus is to maximize its profits.

Some of these social responsibilities are hiring a relatively big number of workers in order to provide more jobs to the society, using greener energy and processes of production, which can have higher costs and many other things.  Therefore, the cost of production will definitely increase and the productivity will decrease. Maybe this is part of the reason why some countries have poor productivity. In terms of environmental issues, when the public is influenced by the environmental problems caused by a company, I believe the prices of this company's products will be dragged down as the customers realize the utilities of the products are actually lower than their previous expectations and the cost of productions will increase as some of its workers may get sick due to the environmental problem. Such things will force companies to deal with this kind of problems, not such environmental problems but also many other issues.

However, if there is no such thing called "social responsibility", then there could be one problem that every individual is making decisions based on their individual matters, and when something happens to the entire nation or the entire world, each individual is so separated with others that it will take quite a lot of time to reunite people together and deal with a large scale problem, sometimes it can be too late. This is a danger without the sense of social responsibility.