Ray Dalio – John Mauldin Conversation, Part 6

By John Mauldin



Here are some links to help you wrap it all together.



No Easy Solutions
Dear Ray,





A Radical Restructuring of the Economy

and Tax Code

  • No income tax below $50,000,








Seriously… I really want to know.

A Brief Commercial

New York, Maine, and Montana
Your getting ready to step up analyst,

John Mauldin
Chairman, Mauldin Economics

Psychology of wealth: Do rich people deserve to be rich?

Although inequality is growing in many western countries, concern about it is not

Rhymer Rigby

Increasingly we are less likely to meet people in neighbourhoods who are not like us © Getty

Here’s a topical question. Do rich people deserve to be rich? If so, how rich?

You might think this is worth asking because concern about inequality is growing everywhere.

But actually, this is not true. Although inequality is growing in many western countries, concern about it is not. In fact, according to new research by Jonathan Mijs, a sociologist at the International Inequalities Institute at the London School of Economics, inequality and belief in meritocracy may go hand in hand. The more unequal a society, the more likely people are to believe the rich have earned it.

Such thinking is hardly new. “Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires,” is a quote popularly attributed to John Steinbeck, the author of The Grapes of Wrath.

This is probably an oversimplification of what Steinbeck actually said. But it is often cited as a reason for the persistence of the American Dream. The poor are OK with enormous inequality, the thinking goes, because they believe — or hope — that one day they will be rich too.

Mijs suggests there are other factors at work here also. One is the extent to which people have self-segregated in the past few decades. We increasingly spend time with our own economic kind in places ranging from neighbourhoods to workplaces (education has been a key driver here), meaning we are less likely to meet people who are not like us.

Thus, if we are rich, our idea of a poor person may simply be someone further down the social strata who may one day earn what we do. If we are poor this may mean that we are unaware of the structural barriers that prevent us from climbing the ladder.

Meanwhile, thanks in part to the cult of Silicon Valley entrepreneurs, we now see businesspeople treated like athletes. You’re either a superstar or a nobody and the super-rich deserve it because they are the brilliant innovators our economy relies upon. Without them we would all be poorer.

But would we really? In his 2018 book Winners Take All: The Elite Charade of Changing the World, Anand Giridharadas writes: “A successful society is a progress machine. It takes in the raw material of innovations and produces broad human advancement. America’s machine is broken.” The fruits of recent change, he adds, have been largely captured by the very fortunate — in a way that would not have occurred 30 years ago. So perhaps, without them, we would all be a bit better off.

One place where the problem of inequality is arguably at its starkest is chief executive pay. In the US, the ratio of chief executive to average worker pay has risen from about 30 times to more than 300 times, according to the Economic Policy Institute, a Washington DC think-tank.

This raises several questions. First, does what the individual is being paid reflect what they bring to the table? Or are they simply in a position where they marshal the efforts of others? Is corporate endeavour about superstars or group effort? Is Tim Cook worth the $136m he took home in 2017?

The mutability of the notion of being paid what you are worth is also illustrated by national differentials. According to Willis Towers Watson, a consultancy, median chief executive compensation in large companies in 2016 was around $1.2m in Japan, compared with $11.7m in the US and $5.3m in the UK. As chief executives often argue that theirs is a global market for talent, it is hard to see why a Japanese boss “deserves” a 10th the pay of their American counterpart.

This is before we even look at inherited wealth and advantage. According to the OECD, a child born into a poor UK family would take five generations to get to the average income.

Conversely, the UK’s top tier shows that many of its members haven’t had far to climb. Here, the idea of pure meritocracy is sometimes held up as an ideal. But really? As the coiner of the word warned, an effect of meritocracy can be to make those at the top think they deserve it.

In Capital in the Twenty-First Century, Thomas Piketty says the way these factors work together can create the worst of all worlds for those who are neither top income earners nor top successors: “They are poor and they are depicted as dumb and undeserving.” Referring to the French Revolution, which was partly driven by inequality, he notes tartly that “at least, nobody was trying to depict Ancien Régime inequality as fair”.

So does this mean western societies are nearing a breaking point? Pointing to the CIA’s World Factbook, Mijs argues: “You only have to look at Latin American countries to see how much further inequality can go.”

The US Economy’s Strange Decade

Weak productivity growth helps to explain the continued robust rates of job creation in the United States, as well as workers’ sluggish wage gains. If left unresolved, the productivity malaise will ensure that the current expansion remains uniquely unbalanced and unhealthy.

Larry Hatheway


ZURICH – The current US economic expansion is extraordinary. Not only does it rival the longest on post-war record, but, unlike previous periods of sustained growth, it has not unleashed much inflation. Corporate profits have soared to unprecedented levels. And economic inequality in the United States is at its most extreme in a half-century.

Each of these unique features is paradoxically linked to another oddity: despite a mostly lackluster expansion since 2009, the US unemployment rate has fallen significantly further than would have been predicted by GDP growth alone. But perhaps the defining aspect of this strange decade-long expansion, and the one that helps to explain its main anomalies, is weak productivity growth.

Consider, first, the jobs phenomenon. Using a simple model relating unemployment to GDP growth – similar to Okun’s Law – indicates that the jobless rate has fallen by half a percentage point more per year during this expansion than history would have suggested. Since 2014, the rate of US employment growth has exceeded what GDP growth would have predicted by nearly one million jobs per year.

Even as unemployment has fallen to historic lows, job creation remains more than double the rate of increase of the labor force. Firms are hiring strongly despite tepid growth, a dwindling pool of productive workers, and troubling political and policy uncertainty. The soft May jobs report, alone, does not change the decade-long phenomenon of robust employment growth.

One plausible explanation is that firms are substituting cheap labor for expensive capital. The share of total worker compensation in US national income has fallen steadily this century, reaching a low of 60% in late 2014, before edging back to its current level of 62%. Yet that is still three full percentage points below its average level between 1965 and 2000.

On the other hand, returns on capital are exceptionally high. Since 2010, the share of corporate profits in GDP has reached average levels that are unrivaled in the post-war era. One might think, therefore, that firms would prefer to invest in high-returning capital rather than in labor. But that is not the case. The average annual rate of non-residential gross fixed capital formation since 2009 has been 5.3%, more or less the same as it was in the expansions of the early 2000s and the 1980s, and well below the rate in the investment-led boom of the late 1990s.

Why is cheap labor so abundant? Perhaps workers are willing to sacrifice higher wages in return for job security. That’s understandable, given the painful memories of the 2008-2009 recession. Wage demands may be restrained by fears of losing jobs to China, Mexico, or machines. Yet a rising “quits rate,” which is now back to levels seen prior to the financial crisis, suggests that workers are perhaps less excessively cautious than they once were.

Another factor is declining union membership. In the early 1980s, nearly one-quarter of the US labor force was unionized. Today, that figure has fallen to about one-tenth. Non-union workers earn, on average, about 20% less than their unionized counterparts. A less unionized labor force works more cheaply and, perhaps, more flexibly, making it more attractive for companies to hire.

But the most important factor behind sluggish wage growth is probably weak productivity growth. Average labor productivity in the US (and in most other advanced economies) has slumped in the past decade. Despite the explosive growth in information technology, the average worker is not becoming more productive.

If output per hour worked is not rising much, then the number of hours worked must increase to ensure adequate provision of goods and services. This is why US job creation remains robust, despite pedestrian GDP growth.

In addition, firms cannot raise wages by more than the increase in the marginal product of labor. Low productivity growth therefore explains sluggish wage increases. It also makes firms less willing to invest. The resulting capital discipline contributes to high returns on capital, which underpin soaring profits and yawning income inequality.

US policymakers must try to ensure that the benefits of growth are more equally distributed. Populist proposals from both ends of the political spectrum, such as calls for protectionism or a universal basic income, are unlikely to do the trick. Such measures would simply result in Americans fighting over shares of a shrinking pie.

Rather, the key is to raise average levels of productivity. For a variety of reasons, including the current political and social backlash against capitalism, the US cannot address its productivity challenge solely with 1980s-style deregulation, lower taxes, and less government. Economic efficiency will have to be augmented by improvements to energy and transport infrastructure, along with better access to quality education, worker training, and health care.

America’s growth over the past decade has been unique in many ways. But if its productivity malaise is allowed to persist, the expansion will remain uniquely unbalanced and unhealthy.

Larry Hatheway is Group Head of Investment Solutions and Group Chief Economist at GAM.

Hong Kong, Taiwan and the hope for a better China  

There is no reason why an ethnic Chinese society cannot also be a democracy

Gideon Rachman















Darker horizon

China’s growth is the slowest in nearly three decades: get used to it

The trade war with America hurts, but the government is wary of stimulus

CHINA’S ECONOMY is slowing, again. After a good start to the year annual growth slipped to 6.2% in the second quarter, the country’s weakest expansion in nearly three decades. But that is hardly cause for panic. For an economy now worth nearly $14trn, such a growth rate is impressive. As the trade war with America hurts exporters, it also underlines the extent to which China’s economy is now fuelled by domestic demand. The question for the coming months is whether that domestic strength will remain sufficient to offset the trade turmoil.

The export picture has clearly taken a turn for the worse. Last year, when America’s president, Donald Trump, first levied tariffs on China, the country still managed to increase its exports by 10%. This year Chinese exports have all but stopped growing.

Moreover, the fight with America is getting more serious. In May Mr Trump ratcheted up tariffs on Chinese goods, and he has threatened to hit it with yet more duties if trade negotiators fail to resolve an impasse in the talks. The uncertainty is already taking a toll: foreign companies have started to shift more operations away from China.

So far China has looked rather well insulated from all these troubles. Activity actually accelerated towards the end of the second quarter. Investment in factories, roads and other fixed assets increased 6.3% in June compared with a year earlier, up from 4.3% in May. Retail sales also were robust, rising 9.8% in June compared with a year earlier, up from a year-on-year increase of 8.6% in May.

Yet there are doubts about how long this resilience will last. Some of the apparent strength is transient. Car sales, which have been in the doldrums for a couple of years, surged in June to double-digit growth, pushing up retail sales more broadly. But that was largely because dealers had slashed prices to run down inventories before tough new emission standards were imposed in July. The property sector, a bellwether for the economy, also seems set to soften.

The government, anticipating a slower patch, has started to spend more on infrastructure, a tried-and-tested method in China for revving up growth. Having tightened its purse strings for a couple of years, in recent months it has made it easier for municipal officials to raise funds for building railways and highways.

But there are limits as to how far it will go. China’s president, Xi Jinping, has declared that containing financial risks is a matter of national security. The odds of another giant stimulus, routine in the past whenever growth slowed, are much lower this time around. And in any case the government has less money to work with, having already racked up so much debt over the past decade.

It also wants to conserve its limited fiscal firepower in case the trade war turns uglier. In the meantime, get used to headlines about Chinese growth dipping to its lowest in nearly three decades: they are likely to appear again in three months and, again, three months after that.