Earlier this week, I referenced the increasing concentration of wealth in the U.S., on both the individual and corporate level.
It turns out this phenomena is global in nature. From Metrics 2.0:
"The wealth of high-net-worth individuals (HNWIs), people with net financial assets of at least U.S. $1 million, excluding their primary residence and consumables, climbed to $33.3 trillion in 2005, an 8.5% increase over 2004, according to the 10th Anniversary Edition of the World Wealth Report, released by Merrill Lynch and Capgemini.
The Report found that the number of HNWIs grew by 6.5% over 2004, to 8.7 million, and that the number of Ultra-HNWIs — those who have financial assets of more than $30 million — grew by 10.2 percent, to 85,400 in 2005."
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Sources of HNWI Wealth, 2005
click for larger chart
Interesting stuff . . .
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Source:
Global High-Net-Worth Population Grows to 8.7 Million, Worth $33.3 Trillion
Metrics 2.0,
http://www.metrics2.com/blog/2006/06/20/global_highnetworth
_population_grows_to_87_million.html
I’m not concerned about HNWI as long as they do not sequester their money away. If they do, aggregate demand declines, and then everyone else must try to craft an economic balance with the circulating non-sequestered money. I don’t care who the nomical owners of the resources are as long as the resources are devoted to things that will preserve our system’s well being.
So, where does investment (non-owner occupied) real estate show up in here?
There is no proof of increasing wealth concentration by these statistics. If you pick a fixed number like 1 million dollars and call that HNWI then that is going to increase every single year. 100 years from now 99.5% of all Americas will be HNWIs by this definition.
The fact that it grew by 6.5% is also meaningless. We have no information about how many people were just ready to bump into this category and we have no information about how much they increased their wealth by.
This information is simply meaningless.
Lets apply this logic to LNWI, lets say less than $50,000. Great news! The poor are doing better because there are less LNWI this year than there were last year.
I think the true picture of concentration of wealth is personal debt versus GDP, the higher the ratio, the higher the wealth concentration assuming a relatively closed system. One person’s debt is another one’s wealth. Also, the higher the ratio, the lower the interest rates needed to sustain the equilibrium.
Wouldn’t wealth concentration best be defined as a fraction of the total pie?
i.e. iF HNWI numbers grow by 6.5% while the total asset pie grew by 5%, that’s concentration. If HNWI growth lagged the total pie, that’s dilution. And so forth.
As a side note, anecodotal evidence suggests that socialistic memes are on the uptrend. The fairness brigade is certainly out in force in the comments section of this site; libertarian ideals feel thin on the ground. If that’s the case round here, one wonders what less capitalist environments must look like.
Dennis Gartman blamed a recent break in stock prices on Hank Paulson’s tax cut cave-in to left of center Democrats. From the sound of it, Gartman sees a gilded age backlash coming.
I have to admit the recent rise in “fairness” talk has me worried. When the heart is in the right place but the head out is out to lunch, it’s very easy to do something stupid. Or to support a fire-breathing demagogue who wants to do it for you.
I’m not sure that LNWI are decreasing every year. Population growth will tend to increase the size of any group. Poor people tend to have large families. Inflation will increase net worths, but I suspect that at the moment population growth is beating inflation to increase the number of LNWIs. Particularly given that most LNWIs lose net worth from cost inflation that is not matched by wage inflation. But this is all speculation. Does anyone collect data on LNWIs?
I think the more interesting thing is the differences in where the wealthy in different countries get their money. The US seems to have an unusually large amount from income and stock/option grants and an unusually small amount from business ownership. I would expect that business ownership would represent how well entrepreneurs manage, but perhaps it doesn’t.
«I’m not concerned about HNWI as long as they do not sequester their money away.»
Problem is, these guys cannot consume all their money, and increasingly what they don’t spend they invest abroad, stimulating other economies.
«There is no proof of increasing wealth concentration by these statistics. »
Not directly from these but from other statistics but also see my note at the end.
Anyhow I guess that these numbers are not so much about concentration of wealth, but that, as the title says, increasing numbers: «Global HNWI Grows».
HNWIs and UHNWIs are marketing categories, and there are companies whose products are targeted to them. If one reckons that the growth in those categories it going to continue to go strong, then perhaps those companies will grow strong.
The biggest long term stockmarket story of the past 60 years is that companies owning brands (or selling stuff) that appealed to an expanding post-WWII middle class have outperformed (just ask Buffett).
I think that I have mentioned it before, that I saw an article on this in The Economist or BusinessWeek, but cannot find it anymore, that reported a paper saying that spending by HNWIs is driving more and more of growth….
It may then be that the next outperform story is brands (and products) that target the expanding number of HNWIs and above. Luxury goods? Non-cutprice airlines? Private banking services? Interestingly the number of HNWIs is booming in Asia too…
Note: if the number of people with net worth at least X millions grows way faster than GDP (6.5%, 10.2%) the simplest and most probable cause is that the share of total wealth going to them is increasing, unless some unlikely oddities are happening.
If HNWI is the independent variable, then what is the dependent variable?
What does a graph of GDP growth vs. HWNI look like?
Barry: we need an open topic on guessing (forecasting) what Bernanke is going to do tomorrow. I call 50 basis points and no hint of stopping.
Why ? Inflation is ACCELERATING. The hikes that have been done this far haven’t slowed it at all. That requires an accelerating rate increase.
The market will sell off.
BTW: I’m sitting in 100% cash. I made 4% in oils in the last week. I’m up 5% over my May 10th totals.
As you wish
Thanks, Barry.
Thomas Sowell discussed an interesting thought experiment about a year ago on this topic. Take an “ideal” society where everyone starts their career at the same salary, get the same percentage raise every year, spend the same amount on baseline needs and spend the same percentage of their disposable income. What you find is that even in this “ideal” situation wealth becomes concentrated as people age and the beauty of compound interest comes into play. This explains a lot of this to me. We have an aging population worldwide and we are witnessing the fact that people’s wealth is increasing from savings and investments.
If anything this should be advertised as something “good” in that younger people can move into these HNWI levels if they save and invest wisely.
«wealth becomes concentrated as people age and the beauty of compound interest comes into play. This explains a lot of this to me.»
This is surely a potent force, but the striking feature of Barry’s data is not that the number of people of people crossing the $1m and $30m threshold are growing much faster than GDP.
Perhaps their wealth is not growing as fast as their numbers (e.g. that 6.5% of new millionaries are all at $1,000,001 and not at $1,065,000) or perhaps there was an unusually large number of people just under $1m and $30, so we seeing some statistical oddity; but this is rather unlikely also in the light of other statistics.
Now net worth is unlikely to grow faster than GDP for everybody; it is indeed likely to grow slower than GDP, as savings for most people are well below 100%. Of course the paper valuation of investments can grow faster than GDP.
What I suspect is happening is that the rich are indeed getting richer both in relative and absolute terms because roughly 8% of USA’s income has shifted from the bottom 99% to the top 1% (those with taxable income over around $300,000) over the past few years.
An extra 8% a year for a group that was already earning 8% is a colossal amount of money, and if someone has a lifestyle based on an income of say $750k year, getting to $1.5m year does not mean that their consumption is going to double; at least in the short and medium term most is going to be added to their wealth.
Now the statistics above, as someone said, do not directly show that wealth is becoming more concentrated, but that the growth rate of HNWIs is growing significantly faster than GDP seems to indicate it strongly.
As someone has pointed out, it could be a threshold effect, as an abnormally high number of people with a net worth of just under $1m cross it; but this is unlikely, and also consider that the number of people crossing the $30m threshold is growing even faster.
It is more likely that the number of people crossing those thresholds is representative rather than the opposite.
«We have an aging population worldwide and we are witnessing the fact that people’s wealth is increasing from savings and investments.»
Note that «wealth becomes concentrated» and «people’s wealth is increasing from savings and investments» are not necessarily related!
Indeed the relationship is rather unlikely because:
* The more millionaires there are compared to decamillionaires the less there is concentration; but even among those with high incomes and net worth the gains are more than linearly higher with income and wealth (6.5% more millionaires but 10.2% more 30-millionaries).
* In general, and not just among millionaires, as more people save and their wealth grows, concentration of wealth should decrease.
* While more people are putting more money in savings and investements, the effect is unlikely to grow much faster than GDP, because most save only a fraction of their income.
* There has been a huge bulge of investment for sure because of increased savings by middle aged boomers, but boomers are starting to retire (or be fired) in ever increasing numbers and thus to starting consuming their wealth.
* The generation after the boomers, those likely not to have much accumulated savings, is rather less numerous.
What I suspect explains the numbers posted by Barry say is:
* That the top 1% now gets 16% instead of 8% of national income means that probably they have greatly increased the rate at which they are accumulating wealth.
Making up numbers, if for example the top 1% were spending 4% of GDP and investing 4% when they were getting 8% of it, and are now spending 2% GDP of the extra 8% they have got an investing 6% of GDP, they are now spending 6% and investing 10% of GDP…
* The the share of GDP going each year to the top 1% has doubled, that going to the top 0.1% has trebled, which correlates with the number of new 30-millionaries growing much faster than the number of millionaires.
* The major asset class whose valuation, even more than its quantity, has grown much faster then GDP in recent years has been real estate. 70% of households own real estate so in theory wealth concentration should have gone down, not up, and anyhow only a fraction of that 70% of households have a house worth a significant fraction of $1m, never mind $30m, and most of those do not have 100% equity in that house, thus not the whole value contributes to their net worth. While lots of people have some real estate, both by quantity and especially by value real estate wealth is very heavily concentrated. I suspect that the top 1% are putting much or most of their extra 8% per year in real estate investments, as an inflation hedge, and that probably has a lot to do with the house valuation boom.
As usual this is a longish analysis, but hey there are lots of factors and counterfactors at work here, and it takes a while to go through them…
Mike,
Your thought experiment can’t work. In a closed system, people have to spend the same amount as they earn. Either everyone in your ideal system spends every penny they earn (in which case wealth does not build up) or there are outside people that are getting poorer.
In the long run, the savings rate of any group of people has to be 0. A positive savings rate is deflationary because money is being withdrawn from the system. A negative savings rate is inflationary because money is being added to the system. I consider the ideal case to be one where individuals have a positive savings rate starting at about age 20 and then a negative savings rate once they retire, leaving them with approximately nothing when they die.
If people are saving money, they are not spending it. Which means nobody is earning that money. Income cannot remain higher or lower than spending in a closed economy. Any subpopulation that has a positive savings rate is getting money from another subpopulation that has a negative savings rate (this should not in general be considered theft). For example, the emerging markets are lending money to us, and we spend it buying things from them. They have a positive savings rate and we have a negative savings rate. The world as a whole has a savings rate of 0 at all times because you can’t save money unless somebody else borrows it. But you have to include people, governments, and corporations to get the savings rate to 0.
«As a side note, anecodotal evidence suggests that socialistic memes are on the uptrend. The fairness brigade»
But fairness is not at all a socialist concept; it is a good old yankee concept.
The yankee republic of old was based on the idea of fairness and wide distribution of power and wealth, and an anti-aristocracy attitude, both in politics and policy (to the point that early yankee colonies had anti-luxury statutes). The yankee capitalist ideal is one of widespread private property, business ownership, and prosperity, based on smallholdings, and no aristocracy of property and power.
It was (and is) the dixie side that is all about wealth concentration and state power over individuals (to the point of confiscating the property and liberty of most of the population, putting them in Gulags). The dixie ideal is one of oppressive concentration of property, where most people have no property or are property, and political control is in the hands of a ”politburo” of plantation owners controlling most wealth.
There is that interesting book, ”Seeds of Albion” that ascribes that difference between yankee fair capitalism and dixie elitarian quasi-feudalism to the different histories of the different areas from which the original English immigrants come to the 13 states.
Real Socialism is in the concentration of the control of the means of production, that is assets/wealth, in the state, and since the state is run by an elite, which in practice ends up as exactly the opposite of fairness.
«is certainly out in force in the comments section of this site;»
Well, what I see is good capitalist-style comments, pointing out that fewer people have managed somehow to grab a much bigger share of the pie, and any red blooded capitalist seeing that would want to do the same… Try to imagine GM’s CEO saying to analysts ”oh well, our dealerships are getting an ever bigger slice of the value added of the car industry, good for them, we are happy to take less”.
Anyhow, whatever the moral and capitalistic merits of a small elite of quasi-rentiers managing to increase their take, just pointing out it has happened is important for people investing, because shifts of that magnitude can severely impact the profitability of whole sectors of industry and segments of asset classes.
Decreasing fairness and the slow gutting of the middle glass are important to spot because there are many important companies whose fortunes are tied to those of the middle and low classes, and who cannot move up scale all at the same time.
Pointing out what is happening is not a call to socialism (begone!) or even yankee fairness… It reveals the shifting landscape of opportunity.
Look, this blog is by Barry, who is a trader/investor and on ”The Big Picture”, that is, in my interpretation, about the ”macro”/long term factors that affect trading and investment. Barry does not strike me as a closet socialist dreaming to become Commissar of the People, but he posts charts also on the how wealth and income distribution goes because that is a huge factor on placing macro/long term bets.
Look for example at these map and chart from Wikipedia (thanks to whoever posted a link to it) on the worldwide distribution of the Gini (”inequality” coefficient):
http://en.Wikipedia.org/wiki/Image:World_Map_Gini_coefficient.png
http://en.wikipedia.org/wiki/Image:Gini_since_WWII.gif
Broadly speaking, if you want to invest in consumer goods companies in emerging markets, Brazil and Poland might require very different choices. There also seems to be no advantage to efficiency or growth in countries with greater Gini coefficients, as many highly developed, stable, efficient countries have low Ginis, and they also have very profitable companies.
The only correlation I see in both countries is that higher Ginis associate with countries which are more racist or where political control is more concentrated.
Look at Warren Buffett: he has made lots and lots and lots of money investing in companies positioned to profit (in volume if not in margin) from the greater prosperity of the masses and the much lower inequality in the USA during the post-WWII decades as compared to the pre-WWII decades. The whole of american industry has made lots of executives and shareholders very wealthy thanks to the rising welfare of low and middle earners.
If the rules of the game have changed, and the balance of political power in the USA that drives the relative shares of income and wealth have changed, it is important to spot it and adjust one’s strategies.
«libertarian ideals feel thin on the ground.»
My feeling is exactly the opposite; perhaps Ayn Rand is not a libertarian, but most people think so, and Ayn Rand’s attitudes, especially the notion that the poor are parasites who exploit the rich, seem to be dominant nowadays, and are well reflected in the policies of the Republican leadership, who controls both Houses and the Presidency.
The ”save the rich” think tanks and their ”soak the poor” tax policy ideas like a flat consumption or sales based tax seem to dominate the policy agenda (never mind the abolition of the estate tax, which is designed to prevent wealth concentration and to tax the windfalls of heirs who get a huge lump of income from an estate); the top 1% and 0.1% have not doubled and trebled their share of a growing GDP by becoming more productive at a rate much higher than GDP; the CEOs of IBM or GM of today are not dozens of times more productive than 30 years ago; immigration law is not being enforced; and welfare and the minimum wage, the ”fairness brigade”s signal issues (wrongly I think), have been made meaner and meaner for decades.
Are the mailbags of representative full of advocacy for ”fairer” deals for the poor, or in favour of the unions, or for a rewording of the AUMF to prevent civil rights abuses, or against the repeal of the ”lucky heir” income tax?
So, what kind of memes dominate?
Most voters are becoming older, have assets, and are terrified of everything (raghead terrorists, black muggers, pervert homo weddings, reds under the bed, whatever …). The spending programs being added majorly benefit, like the colossal new Medicare benefit, for the sake of usually asset rich older people and their heirs, designed to help them not sell their homes so as to pass them unencumbered to their expectant well-to-do boomer heirs.
”Fairness” or liberal memes are not going anywhere.
jkw:
I appreciate your comments, but I think you are trying to read too much into my post. Also the concept isn’t mine, but Thomas Sowell’s, so I certainly didn’t mean to take credit. As I understand his model and posted above, the idea is simply to point out that even in a hypothetical egalitarian situation where everyone’s income, income growth, spending patterns, etc are identical the mathematics will show that wealth becomes concentrated in a small group of people (the oldest) over time due to longer work and saving histories and compounding.
Dr. Sowell was pointing out that this concentration of wealth was unavoidable even in this egalitarian scenario and that as time continues to go on, the younger members of this community will eventually migrate into the “concentrated wealth” group and that this concentration of wealth wasn’t “bad”.
My view is that “the rich get richer” usually is applied in sort of zero-sum game class warfare perspective (i.e., the rich are getting richer to the detriment of the poor). I simply don’t buy this and think that the underlying source of these disparities is driven much more by Dr. Sowell’s simple thesis. Clearly things are much more complicated and the real economic system more variable. However what the simple model brought out to me is that concentration of wealth is a natural development.
Mike
Hey Barry,
I hope you were being sarcastic and or facetious in being flattered at the comparison to DeLong. I checked out his blog and found his lefty drivel to be a real turnoff. Has anybody ever seen DeLong and Krugman in the same room at the same time? I have to ask ’cause what I read on DeLong’s blog could have been written by PK.
Oops! Meant to post this under the Technical Analysis of Stocks and Commodities string. First time poster error.
Real socialism does not concentrate ownership in the state. That is fascism/communism. Real socialism is where companies are owned by the workers. Real socialism consists of co-ops and similar arrangements. The problem is that when you say that the means of production are owned by the people, it is easy to get confused about whether the people are the workers or the government.
Fascism/corporatism is when the corporations control the government. Communism is when the government owns the corporations. In practice they are virtually identical. The difference is primarily that fascism/corporatism claims to be doing things to protect the free market, while communism uses socialist rhetoric (but not socialist ideas).
Socialist memes are on the rise because pure capitalism is brutal. Compassionate people don’t like the idea that some people will die of starvation, exposure, or easily treated medical problems just because they don’t have a job. Socialism is a variation on capitalism that includes various guarantees that people won’t die from being poor. The most common ones include unemployment insurance, universal social-security style pensions, and universal health care.
My personal preference would be to have universal health care and universal unemployment insurance (with a stepped-up level for people over some retirement age), with basically no other elemenfs of socialism. The market figures out the best way to do things when everyone involved is well-informed and can make free decisions. Minimum wage and overtime regulations are a poor solution to the probelm that people will die if they don’t accept some job. Providing just under poverty level unemployment insurance to everyone means that people can decide to not work instead of taking a crappy job. It has to be low enough that people will not decide to freeload. Setting it just high enough to pay for food and shelter keeps people alive even if they don’t work, but leaves them wanting to work so that they can pay for entertainment and useful items. There will be some freeloaders, but not so many that it will be a problem. And if there are too many, you just cut the benefit until there aren’t.
Quite frankly, I don’t care one bit about wealth concentration. I care about poverty. In a modern, wealthy society, there is no good reason to have some people starving while others are earning more money every year than they will spend in thier entire lives.