Cornelius Vanderbilt was one of the most successful capitalists in history, parlaying a US$100 loan from his mother in 1810 at the age of 16, into a fortune equivalent in today’s money to over US$200 billion. That’s double Amazon founder Jeff Bezos’s fortune of US$100 billion.
As Peter wrote recently, Vanderbilt’s fortune was ultimately squandered. He made a fatal error – he never bought real estate, the core foundation of multi-generational wealthy dynasties.
Jeff Bezos, on the other hand, isn’t making that mistake. Bezos already owns 400,000 acres of land… that’s twice the size of New York City. He’s the 25th largest land owner in the U.S., at 54 years of age, and added over 110,000 acres in 2015. I think it’s fair to say it’s highly likely that the Bezos fortune will not only find itself spread into more land over decades to come – but also that the fortune will outlast his grandchildren’s grandchildren.
At the end of October, the value investor Mohnish Pabrai gave a presentation and took part in a Q&A session at Boston College and Harvard Business School on the Uber Cannibal Investor Framework, which he has developed over the past decade. Uber Cannibals are the businesses “eating themselves by buying back their stock,” the value Read More
Bezos didn’t inherit his wealth. He made it. As this photo from 1999 shows, he wasn’t always a billionaire.
Bezos’s rise and wealth creation have been formidable. But it’s also been part of a larger and potentially more pernicious global trend that could be potentially destabilising.
Let me explain.
Bill Gates, Jeff Bezos and Warren Buffet together own as much wealth as the bottom 50 percent of the U.S. population.
Said another way, three Americans own the same wealth as 160 million Americans.
If you expand the rich club to include the wealthiest 400 Americans, then it’s the same as the bottom 64 percent of the population.
Increasing income and wealth inequality is a problem. And it’s certainly not one confined to the U.S.
If we look at the percentage of national income attributed to the wealthiest 10 percent across a range of countries (chart below), its clear the trend has been rising over the past few decades.
Why does it matter?
In the U.S., income inequality is today the highest it’s been since the Great Depression. When it comes to wealth, I think it’s fair to say that 400 folks owning as much as the bottom 64 percent of the population isn’t particularly evenly spread.
Income inequality tends to lead towards low social mobility, which can be defined loosely as the ability to achieve the “American Dream”.
You find also in unequal societies higher rates of depression, drugs and alcohol issues (see the opioid epidemic, for example), stress and violence.
You also tend to see the potential for radical political change. The two biggest surprises in the U.S. election were two candidates who addressed these concerns directly – Donald Trump from the right, and Bernie Sanders from the left.
The rise of European nationalism likewise can in many ways be attributed to inequality. As observed by the Yale professor Robert Shiller:
“Benjamin M. Friedman of Harvard University, in his book The Moral Consequences of Economic Growth (Knopf, 2005), said that at a deep level people make judgments about the economic progress that they see in their own lifetimes, and in comparison with the progress made by the previous generation, especially their own parents. Few people study economic growth statistics. But nearly everyone knows what they are being paid. If they realize that they are doing less well than their forebears, they become anxious. And if they can’t see themselves and others in their cohort as progressing over a lifetime, their social interactions often become angry, resentful and even conspiratorial.
Ethnic nationalism creates an ego-preserving excuse for self-perceived personal failure: Other groups are blamed for bad behavior and conspiracies. Often, ethnic, racial or religious conflict follows. Among the horrific examples are the atrocities committed in the name of nationalism during World War II—not coincidentally following the Great Depression. Mr. Friedman provides other such instances from the last two centuries in which ethnic conflict followed slow economic growth.”
It’s hard not to see parallels here with what’s happening in the U.S., or in the U.K. under Brexit, for example.
My colleague Kim Iskyan has written about one of the potential second order effects of a more nationalist U.S. agenda being the heightened tensions surrounding a trade war with China.
In fact, last September in “Look for this sector to leap if there’s a U.S.-China trade war”, Kim wrote that the “hot commodities” would be a beneficiary of these tensions – his recommendation is up nearly 40 percent since then (and up 90 percent since we first recommended it).
I certainly don’t have the solutions to rising developed market income and wealth inequality. However, common sense would suggest that its persistent rise only heightens the potentially for more drastic geopolitical instability in the future.