The Bennett Newsletter
The Financial Crisis, which may yet be called The Greater Depression, has played mayhem with many lives, especially in the West. At a time when people in poverty have reached record levels in the US (and over 40 million people are on food stamps) new research has established that the rich are substantially richer, and more have emerged, especially in Australia, Latin America and Asia.
I intend to establish the fact that the rich are getting wealthier, and explain that their rise is uneven: higher growth in emerging countries helps to confirm the hypothesis that the Financial Crisis accelerated the decline of the West. But there is more.
The growth of inequality is a subject that has fascinated me since I encountered the great Richard Tawney. As an academic I even-handedly discussed its merits and unfortunate consequences to students who were largely apathetic on this topic. My intellectual position has been confirmed recently by Richard Wilkinson and Kate Pickett’s very cogent “The Spirit Level: Why more Equal Societies Almost Always Do Better”.
My focus, however, is on new research which suggests that inequality is a major cause of financial crises.
Rich expanding
The World’s high net worth individuals (HNW) grew in number by 17% last year, and their combined financial wealth grew by 18.9% to reach US$39 trillion. The rich recovered quickly from the 2008 disaster, especially those in Latin America and Asia-Pacific who surpassed 2007 levels of wealth.
How are the “rich” defined? Basically a HNW is someone with US$ 1m or more in investments, excluding primary residence, collectibles, etc and an Ultra-HNW has US$30 m in investments. The Research is by Capgemini and Merrill Lynch.
The number of HNWs in Asia-Pacific surpassed that of Europe for the first time and their wealth increased by 30%. Hong Kong and India were standouts because their stock markets are very robust. The number of HNWs in Hong Kong doubled in 2009. The largest concentration of HNWs remains in the US, Germany and Japan. Australia became significant, overtaking Brazil as the tenth largest home of the rich.
The ultra-rich are only 0.9 of the HNWs but they own 35.5% of HNW wealth, and their wealth rebounded a massive 21.5% in the year.
The Asia-Pacific region is likely to be a HNW powerhouse this year as the underlying economy is robust. Russia and Brazil are also drivers in their regions. But the rich depend upon strong markets, and they are concerned about contracting world gross GDP and recession in Europe. The weakness of the recovery is of concern.
Nevertheless, markets were the great drivers of wealth. Global equity capitalisation in 2009 rose 47% to stand at $47 trillion. The BRIC markets doubled.
Kiwi investors and fund managers rate real estate lowly but deeper study reveals that global real estate turned positive: Hong Kong again led the way with a 20% increase, helped by a massive influx of buyers from China. The DJ Global Select REIT Index ended the year with total returns of 32% with Canada (86%) and Singapore (83%) as standouts. Commercial real estate is dangerous in the US, but worthy of consideration elsewhere.
Relative wealth of HNWs
The combined wealth of the global HNWs is $39 trillion. I have tried to put that into context. One comparison is that global stock markets combined capitalisation of $47 trillion in 2009 is very close to the net financial assets of the HNWs.
Another comparison: the Fed reports that US household wealth fell in Q2, 2010 by 2.8% to $53.5 trillion. So the net worth of all US households and non-profit groups is comparable to global HNWs financial assets of $39 trillion. The survey has no valuation for the residences of the HNWs, nor their aircraft, cars and boats, or their collectables of art, stamps, wine etc or their watches and jewellery. I presume there could be some extensive land assets near their residence. My conclusion is that the world’s 10 million rich control wealth equivalent to about 80% of the total values of the US’s wealth, and close to the total capitalisation of the world’s stock markets.
Inequality as a risk
David Moss has long believed that the growing inequality of incomes is dangerous. The Harvard historian suddenly perceived that inequality was dangerous to markets. During the Financial Crisis he overlaid two charts: one of bank failures and financial regulation and the other of income inequality. He was surprised to find “the timelines danced in sync with each other”; income disparities widened as government regulations eased and bank failures rose.
Had David Moss had a classical education he might have called it a “eureka” moment after Archimedes made his great discovery. But one supposes that philosophers no longer run through the street shouting for joy.
Mr. Moss is more mundane: he admits: “I could hardly believe how tight the fit was- it was a stunning correlation”. Are there causal links between financial deregulation, economic inequality, and financial instability? There are not many scholars in the same field, and there are few comparative crashes except 1929.
Yet 1929 and 2008 have a lot in common, they represent peaks in income disparities, where the top 10% earned about 49% of income. Moreover, the top 1% earned 23.94% of all income in 1928, and 23.5% in 2007. Moss suspects that such gaps put the financial system at risk.
Such is the academic world that fundamental refutation is almost automatic. Moss comes from Harvard Business School, and Glenn Hubbard of Columbia business School cryptically attacks: “cars go faster every year and GDP rises every year, but that does not mean speed causes GDP”.
Moss survived that assault, and has further ruminated that students of inequality have tended to concentrate on the effects upon the poor, but he thinks people at the top need some investigation. He points to Mary Blair (Vanderbilt) whose research suggests financial workers favour trading strategies that promote bubbles.
Moss’s most important point is that in 1929 the system collapsed. It survived in 2008 and financial elites survived. Perhaps they are developing projects that will lead to more and deeper crashes.
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