The Apple flash crash shows the danger of monopolies

A global economy in which too much power and wealth is concentrated at the top is inherently unstable.

On 3 January, Apple’s share price fell by 9 per cent – its largest single drop in five years – after the company issued a highly unusual revenue warning. A mini crash in currency markets followed an hour later and stock markets soon tumbled around the world.

The Apple flash crash followed a series of warning signs in financial markets. The market capitalisation to GDP ratio – also known as the (Warren) Buffett indicator after the eponymous investor’s preferred means of measuring overvaluation in equity markets – has soared in the US. Volatility also rose sharply in 2018: the S&P 500 rose and fell by more than 1 per cent 64 times over the course of the year, compared to just eight times the previous year.

These trends are partly due to quantitative easing. Central banks in the US, the UK, Europe and Japan have used newly created money to buy up government bonds, pushing investors into higher-yielding assets such as equities. Donald Trump’s exorbitant tax cuts added to the problem in the US. Tech stocks, in particular, have benefited from what to some resembles a government-inflated bubble. Many investors are now ready to cash out at the first sign of trouble.

Apple’s revenue warning reflects another of the greatest potential dangers in 2019: a global economic slowdown centred on China. In his letter to shareholders, Apple’s chief executive, Tim Cook, pinned the blame for lower-than-expected revenues on slow growth in the world’s largest smartphone market. This slowdown, he argued, was both because of lower consumer confidence and the escalating trade war between China and the US.

Some may say it is in Cook’s interest to blame macroeconomic trends, rather than the rising competition Apple faces from brands such as China’s Huawei. But the indicators from the world’s second-largest economy are not promising. Chinese GDP statistics are to be viewed with scepticism, but most experts expect the economy to grow by about 6 per cent in 2019 – still high, but much lower than the 9-10 per cent a year that typified the post-crash period. Manufacturing output is contracting and export growth has slowed, so household consumption and government spending will be more vital to maintain demand in 2019.

Yet consumer confidence is falling and household debt is rising, suggesting that Chinese shoppers won’t be able to act as the global economy’s consumers of last resort for much longer. Meanwhile, China is running out of room to increase public spending after implementing a stimulus package around a quarter of the size of the entire Chinese economy in 2008 (extended again in 2015).

If the Chinese boom is truly over, it is unclear where future global growth will come from. Household debt is too high and wages too low for the global economy to rely on debt-fuelled consumption by British and American consumers. The US Federal Reserve’s decision to raise interest rates four times in 2018 has weakened many emerging economies by sparking capital flight. Growth in Europe is woeful, partly because of structural problems in the eurozone that have yet to be resolved.

But perhaps the most important lesson of the flash crash is the extraordinary economic influence now wielded by international corporations such as Apple (which became the world’s first $1trn company last August).

The behaviour of monopolies such as Apple can be linked to many of the economic problems we face today. In 2015, Cook was paid $9.2m while the average Apple employee earned $36,760 – meaning that for every $1 earned by the average Apple employee, the chief executive earned $251. This is even higher than the pay ratio for the largest 350 US companies, which rose from 10:1 between 1965-78 to 240:1 between 1978-2016. Rising inequality means workers have less to spend on the products business produce, suppressing consumer demand.

Such are Apple’s profits that the company cannot invest all the money it earns. Cash hoarding by global monopolies is part of the explanation for falling business investment. Apple is also notorious for tax avoidance, which deprives governments of the resources they need to invest.

History shows that a global economy in which too much power and wealth is stuck at the top is a fragile one. And it will be ordinary taxpayers, not Apple’s shareholders and executives, who most suffer the consequences.