Global inequality has been rising in recent years, and just one percent of the population now owns nearly half of the world’s wealth according to the Credit Suisse 2014 Global Wealth report. Even though recent gains have actually just brought inequality back to pre-crisis levels, the longer secular trend is toward greater inequality, and a feedback loop between existing inequality and asset prices means that the gap could continue to grow.
“Rising inequality in recent years may have contributed to asset price increases by providing the top income groups with more funds to invest, and caused wealth inequality to rise further, by giving those lower down more reason to borrow,” says the report.
Morningstar Investment Conference: Using Annuities In A Portfolio For Added Stability
US among the most unequal developed nations
It’s important to keep the difference between wealth and income inequality in mind, because the former is far more entrenched than the latter. Put simply, there’s no limit to how much a person can own and if that wealth is put to work it will keep compounding over time, but a person can only do so much and the differences in pay are dwarfed by mammoth differences in wealth.
In the US for example, 10% of the country accounts for about 75% of the wealth, but the top 10% by income earns less than half of the income each year. It is interesting that the top 1% of the US by wealth has actually grown more slowly than the top 10% by wealth or the top 1% by income.
It’s hard to make exact rankings because the quality of data varies from country to country, but this puts the US in the top category of income inequality. Since 2000, China, Egypt, Hong Kong, Argentina, India, Korea, Taiwan, Turkey and Russia have all seen rapid increases in income inequality while only Poland and Saudi Arabia have had sharp drops.
How different asset prices impact wealth inequality
The Credit Suisse report points out that portfolios vary by wealth in a predictable way. People at the lower end of the ladder typically have savings accounts (assuming they even have positive wealth, many are deeply in debt); for middle class families home equity is usually the bulk of their wealth; and families in the wealthiest ten percent have a mix of stocks, bonds, real estate and possibly other assets.
That means that low interest rates will disproportionately affect poor families because affects all of their wealth (the authors speculate it might also encourage irresponsible borrowing, sinking a family’s future prospects); rising housing prices help the middle class and the wealthy while leaving poor families behind; and a booming stock market usually increases the gap between the top 10% and everyone else.
These different portfolios setup a feedback loop that can turn temporary differences in income into permanent differences in wealth.
“It is suggested that rising income inequality in the United States from the 1970s onwards raised the disposable income of the top groups… this led to an increase in funds seeking investment opportunities, driving down interest rates and raising stock prices, which in turn created further capital gains for the top income groups, propelling income inequality to even higher levels,” says the report.
The full report can be found here credit-suisse-global-wealth-report-2014