The rich get richer, the poor get poorer and the middle- and upper-middle class is lucky to preserve its piece of the proverbial pie. That’s part and parcel of why American voters have turned to populist candidates in recent years.
The irony, as ever, is that the self-declared “chosen one” is himself a billionaire with a long history of narcissism and flaunting his wealth, making him an odd choice when it comes to resurrecting the “forgotten” everyman/woman.
The following simple chart shows that as of the second quarter, the top 1% now controls as much wealth (basically) as the 50-90th percentile combined. You’ll note that this was not the case 13 years ago.
If you’re wondering what accounts for that, you can thank stocks – or at least in part.
Have a look at the breakdown by asset and percentile group for 2006 versus 2019:
That’s a big chunk. In fact, at $13.3 trillion, the 1% now controls more than the other percentile groups combined.
This is hardly surprising, and doesn’t look that much different than it did years ago from a distributional perspective. But looking purely at the disparity between the value of stocks held by the bottom 50% versus the top 1%, the numbers are nothing short of outrageous. The bottom 50% holds around $550 billion, while the top 1% controls $13.3 trillion.
Stephen Colavito, chief market strategist at an Atlanta-based firm catering to high-net-worth investors, spoke to Bloomberg about the situation. “Chalk up at least part of their good fortune to interest rates”, Alexandre Tanzi and Michael Sasso write, summarizing Colavito’s take. “People can’t get much of a return on certificates of deposits and other passive investments, so they’ve pumped money into stocks and propped up the market overall”.
As the value of shares soars, so too does the wealth of the already rich, which in turn affords them more opportunities. For example, the more money you have, the more likely you are to be eligible for investment vehicles (e.g., private equity) not available to the average person.
Obviously, post-crisis monetary policy facilitates this. A consequence of the hunt for yield is lower borrowing costs for corporate management teams, and in a world where all that matters is next quarter’s earnings report, companies are incentivized to borrow at rock-bottom rates and plow the proceeds from debt sales into buybacks, which inflate the bottom line and share prices further.
The benefits of this don’t accrue linearly, but rather exponentially, precisely because the majority of financial assets are concentrated in the hands of the wealthy.
The icing on the cake was the Trump tax cuts which added another incentive for companies to buy back shares, driving up the same equity prices which were already inflated by QE and a decade of low rates. (The promise that the windfall from the tax cuts would be spent to improve the plight of workers proved to be largely nonsense – surprise, surprise.)
The administration has also pondered indexing capital gains to inflation, a move which would amount to placing the final cog in what would be, essentially, a perpetual motion machine for inequality creation. That idea has been championed by the likes of Larry Kudlow and Stephen Moore (a pair of PhD-less supply-side sock puppets). Trump has variously considered implementing it by decree, despite that being a legally dubious proposition. As Bloomberg reminded everyone over the summer, “those who save in Roth IRAs or 401(k) retirement accounts wouldn’t benefit from indexing because of the way the accounts are taxed, omitting many middle-class Americans from the savings the tax break generates”.
Given all of this, you can understand why large swaths of the voting public aren’t interested in the tearful pleas of Leon Cooperman and various other whining from billionaires about how purportedly awful it would be if Elizabeth Warren were to throw a monkey wrench into a system that, according to actual numbers (and, you know, facts), is working for a smaller and smaller percentage of the population.
Of course, Americans being Americans, millions of voters are so brainwashed by the religion of capitalism that they’re willing to suspend disbelief, even when that means pretending their own situation is vastly different than it actually is.
There are lots of “temporarily embarrassed millionaires” among you.
Those people donâ€™t see themselves as victims of exploitation and general workings of the capitalist system, but as temporarily embarased millionaires
— Bjarne Knausgard (@BjarneKnausgard) September 14, 2019