Money for nothing is why we’re screwed

The expectation that every investment must automatically offer enormous returns has bent global economic policy round its fingers. But guaranteed returns are why the West is in so much trouble.

There is a comment that has been stuck in my head all week. I read it in Mark Smith's column on Monday. If you want to know why the Western World is in crisis, it is a good starting point. It explains that our economic model is designed in a way that will inevitably fail the vast majority of people. And then fail full stop.

The column was about the disgrace of the Egyptian Halls. This Alexander 'Greek' Thompson masterpiece has lain empty and deteriorating for 17 years under the same owner. To my mind the owner should have been parted with his property a long time ago. I don't see how kidnapping an A-listed building which is of international significance and allowing it to deteriorate is permitted.

The owner wishes to make a plea for himself – not his fault, bureaucracy, the market... All he wants, he says, is “a fair return on my investment”. And there it is, the comment that has stuck in my head all week.

It is the disparity between what he seems to see and what I can see. From my perspective he has utterly failed. He bought an asset which he failed to use. If you're looking at this commercially he failed to generate any economic return from the asset. If you're looking at it culturally he failed to protect this masterpiece for the future. If you're looking at it socially it makes Union Street an even sadder sight than it needs to be.

I can see no interpretation of the last 17 years which doesn't summarise as 'failure'. And that is my question – what exactly is a fair return on failure?

In my head he should be facing compulsory purchase at current market value which is, arguably, very little indeed. What he has done is demonstrate how poor a commercial investment this building is. He thinks he should be rewarded for this; I think we should follow his lesson and understand that there is no return on this building while it is in this state.

Now go and read this. It is from an always-excellent US project which monitors the impact of monopoly and excessive market power. It is a very neat encapsulation of the problem. If you're short of time, it analyses what its author calls the 'number go up' problem.

Basically in actual capitalism the capitalist had to be able to win, but they also had to be able to lose. That's Adam Smith's conception of how the market sorts competing options and selects the best. That was the whole idea of capitalism – bad products failed, as did expensive ones, or useless ones.

Unfortunately, this perfectly reasonable analysis morphed into a cult of the capitalist. If the market was always right and they were rich because of the market, they were justified. So they were the best of us, so accumulating enormous political power as well as financial power was only sensible.

But they used their political power to do something other than compete in a free market. Instead they started to form cartels and monopolies. These are more unstable (as we saw in the 'supply chain crisis' after Covid) but they are more profitable. You can pilfer more eggs if all the eggs are in one basket, but the basket better not break.

It did – the 2008 financial crisis. The finance markets had increasingly acted as cartels and monopolies and were creating a system without checks and balances (exactly the kinds of checks and balances which Adam Smith believed a free market provided).

Excessive market power enabled massive, uninsured risk. When the risk was exposed, there was no capitalistic mechanism which would maintain economic continuity. The banks broke capitalism. Instead we created a system of guaranteed profits. You don't need to compete to create profit now, the entire system is designed to guarantee it for you.

This is because the wealth industry has persuaded politicians that there are two numbers (and only two numbers) that must go up always and forever without interruption. Interestingly, GDP isn't really one of them (it is politicians who like GDP because they believe it equals tax income). They're stock market value and house prices.

“This is fantasy economics which only exist because of the willingness of government to repeatedly hand over your money when the real economy doesn’t do what the rich want”

Of course they are. The era when the super-wealthy made their money from productive activity ground to a halt a while ago. It is asset inflation which generates wealth now. The belief is that if you start with money then it is your god-given right to have more of it without doing anything and with no risk.

But this is fantasy economics which only exist because of the willingness of government to repeatedly hand over your money when the real economy doesn't do what the rich want. The banking crisis led to a bailout which led to austerity. Covid led to a massive injection of public cash into assets which led to the cost of living crisis.

But here's the problem; these returns are not generated as the result of real activity. Look at Tesla – its stock price and its profit levels are miles apart. Take a house – it's value has risen way above inflation rates even though it is the same, unimproved asset. This is not the creation of new wealth, this is just the magicking of profits from thin air, profit which is extracted from someone else.

That someone else is all of us. If the 'economy is growing' without real value growing with it, all that is happening is a bubble, an unrealistic over-valuing of assets which are in the possession of a tiny minority. That inflated value largely comes out of our pockets. We don't gain from house price inflation any more. Few of us gain from stock market rises (only those with large pension funds).

It just means more and more of the world's wealth is taken away by the ownership class. This is because effectively we pay their inflation. All of this fake wealth creation produces inflation and it is our spending power that reduces as a result.

We are becoming poorer as a direct result of the policies of our (and every other) government, policies based on as complex theory which, at its far end, just summarises as 'rich people must never lose money ever or the economy will fail'.

The nutty thing is that government willingly goes along with this because the ideology of the rich is now the ideology of government. I watched in horror as the Scottish Government compulsorily purchased a piece of land which contained on it an A-listed ruin which the landowner was deliberately letting fall down because he didn't want to look after it.

And when they bought this agricultural land which in a million years will never get planning permission given it is an A-listed historical site, the Scottish Government agreed to pay the landowner the value of the land as if it had planning permission for a giant hosing estate.

Why? Because the ethos is that we stuff with gold the mouths of those who already have gold. Last weekend's sorry, pathetic sight of the First Minister giving Donald Trump freebie money so a tournament could be held at his golf course is just part of that mindset. But it happens every day, all the time.

This cannot do anything but fail the rest of us. It is why we can't afford public services – public and household wealth is being funnelled away to the already rich faster that anyone can track it. Again, can you come up with a reason to give Amazon big grants to build a warehouse in Scotland?

And why will it fail completely? Because eventually the economy will reach a point where it cannot work anymore. Arguably we're already there. Arguably Western capitalism is on its knees because productive investment cannot and will never make the same results as speculative investment, because while speculation returns real money to its actors, it is not real money which is backed up with anything.

If you build a factory you need to produce goods. If you buy a property portfolio you need to do nothing at all. House price inflation undermines productivity and has done for nearly 50 years. All that we are left doing is renting other people's assets at a rising premium. (Taxi apps are an asset we rent from - it’s the same taxis that come. Sales platform monopolies are an asset we rent from - we're getting the same consumer goods as before. And so on.)

At the end point of this is not just the lack of productivity but the creation of a market in which the majority of us can no longer rent (never mind own) assets because the value of our share in the economy (constantly coming down) is no longer sufficient for us to pay a proportion of the assets we need (constantly rising). At that point the assets have no value. So we get an asset price reset. It's coming. It's a question of when.

For the owner of the Egyptian halls that is now. He thinks he owns a stonking city centre property because he's told himself that in his head again and again. In fact he owns a money sink that can't generate any income at all. It is more liability than asset. He still doesn't seem to understand this. If you think his confusion is odd, just wait until this pattern is repeated, economy-wide.