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Markets | Why on earth are hedge fund managers warning of class warfare?

If you have no capital, why be a capitalist?

May 06, 2019 / 07:53 AM IST

The world’s highest paid fund manager this year, according to Institutional Investor magazine, is Ray Dalio of Bridgewater Associates. He earned a cool $2 billion in the last twelve months. That is no surprise--- Dalio is a well-known investment guru. What is astonishing, though, is his recent outpouring of angst about capitalism. He says capitalism is broken and needs to be fixed urgently.

It’s not just Dalio. At the recently held Milken Institute Global Conference in Los Angeles, many multi-millionaire investment managers, all of them fervent capitalists, echoed his views. According to the Financial Times, Guggenheim Partners’ Alan Schwartz even warned of class warfare. JP Morgan CEO Jamie Dimon had said earlier that capitalism needs to be reformed. And at Berkshire Hathaway’s recent annual general meeting, Warren Buffett said that capitalism had to take care of people who are left behind.

None of these staunch capitalist supporters is of course talking of socialism. They all agree capitalism has delivered great benefits, but feel we need to reform it, so as to preserve it. Why this sudden upsurge of worry? Simply put, they think inequality has become too high and the masses may revolt.

What are their concerns? For details, look no further than Dalio’s last newsletter, titled ‘Why and How Capitalism Needs to be Reformed’.

Why does Dalio feel that capitalism is not working in the US? He says inequality has increased enormously, thereby also affecting equality of opportunity. The American Dream has become a nightmare. He cites some telling statistics to prove his point: 1) prime-age workers in the bottom 60 percent have had no real (i.e., inflation-adjusted) income growth since 1980; 2) In the US in 2017, around 17 percent of children lived in food-insecure homes where at least one family member was unable to acquire adequate food due to insufficient money or other resources; 3) in the US, people whose fathers were in the bottom income quartile have a 40 percent chance of staying in that quartile and only about an 8 percent chance of making it to the top quartile; 4) According to a recent Federal Reserve study, 40 percent of all Americans would struggle to raise $400 in the event of an emergency; 5) Today, the wealth of the top 1 percent of the population is more than that of the bottom 90 percent of the population combined, which is the same sort of wealth gap that existed during the 1935-40 period (a period that brought in an era of great internal and external conflicts for most countries); and 6) the US population as a whole scores very poorly relative to the rest of the developed world in standardized tests for a given education level.

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The billionaire hedge fund manager says that these trends lead to outcomes that reinforce the wealth/income/education/opportunity gaps. His summing up: ‘In addition to social and economic bad consequences, the income/wealth/opportunity gap is leading to dangerous social and political divisions that threaten our cohesive fabric and capitalism itself.’ The rise of Donald Trump and the backlash against globalization is no doubt at the back of his mind.

What Dalio says of the US would be true for India too. We all know that inequalities are very high in this country, the public health and education system is in a shambles, equality of opportunity is much narrower and child malnutrition much worse.

To be sure, talk of class warfare is undoubtedly an exaggeration. But the spread of mass media has raised aspirations even among the supine and submissive Indian masses. The lack of decent jobs has become a hot button issue. Political parties know this very well, which is why so many sops have been promised to the masses. Higher spending on education and health has also been assured, this election season. Fears have been raised about the impact these measures will have on the fiscal deficit. Some are worried that we may see wealth taxes and estate duties. But perhaps the better-off have to pay a price for social peace and for preserving capitalism. It is in the interest of those who benefit the most from the system to spread some of the moolah. That is the message the hedge fund managers are trying to send.

As Sir Michael Hintze, founder of hedge fund CQS put it rather neatly at the Milken Conference, “if you have no capital, why be a capitalist? That’s the real problem we’ve got here.”
Manas Chakravarty
first published: May 6, 2019 07:53 am

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