This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
There is a stark and bewildering contrast between booming share prices and the horrors of war in Ukraine and now the Middle East. Despite everything, most of the major equity markets, including here in the UK, are within a percentage point or so of their all-time highs.
It is almost as though the worse the news of global conflict becomes, the more optimistic investors feel. Why? And will the rich just go on getting richer, whatever happens in the world?
The most helpful explanation comes in two parts. The first is that markets – which represent the collective views of the global investment community – judge that, for the moment at least, neither of the wars in Ukraine or the Middle East will become a global conflict. Both will be contained, and both will reach some kind of settlement in the months ahead. That may turn out to be wrong, but that is what they expect to happen.
They believe, too, that the tariff war launched by Donald Trump will also be settled swiftly, and before it does lasting damage to international trade. Again, that may be wrong, but that is what they think.
As far as trade is concerned, there’s the acronym “TACO”, which stands for “Trump Always Chickens Out”. The President does not particularly like it, but it has served investors well.
US shares plunged when he launched the tariff war at the beginning of April, with the S&P500 index falling by nearly 20 per cent from its February peak. But now it is nearly back up to its previous high, and 2 per cent up on the year to date. Anyone who bought shares in the dip of early April would have made a bumper profit. The FTSE100 index also fell in April, but is now up 7 per cent from the beginning of the year.
That leads to the second half of the explanation, which is that there has been a lot of money around chasing a place in which to invest. That’s the legacy of that long period of very low interest rates, “quantitative easing” (QE) and all that, which we can now see was a huge collective mistake made by the world’s central banks.
Mervyn King, who was governor of the Bank of England from 2003 to 2013, put the counterargument forcefully in an interview in the New Statesman in 2022. Talking of QE, he said: “This was a terrible mistake. They lost track of the fact that QE was simply printing money.”
That came with a social cost; as asset prices go up, which QE does by design, wealth inequality is exacerbated.
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At any rate, most investors have done very well. In recent months global uncertainty has driven funds into the classic safe haven of gold and to the new, as yet relatively untried, havens of cryptocurrencies. But the bulk of the money has gone into equities and property, including homes, both of which have risen sharply in just about every country.
One asset class that has done badly is fixed-interest securities, or bonds. As interest rates have risen to combat inflation, the price of bonds, which moves inversely to their yield, has plunged. But for most people with a stock of assets, including homeowners, it has been a bumper time.
It may be that many owners of assets are not particularly optimistic about the global economy, but what else can they do with their money? There is nowhere else to go.
So will the rich go on getting even richer, leaving everyone else behind? Here, at least as far as the UK is concerned, the picture is more complex, because many people who would not think of themselves as wealthy are relatively well-off.
The most recent wealth estimates from the ONS only go up to 2022, but they show that the median family – that’s the one with as many richer families above it as poorer ones below – has assets of £293,700. In the south-east of England it was £489,800. Roughly 40 per cent of that wealth was in property, with the next biggest element being pensions at 35 per cent. Given what has happened since then to house prices and interest rates, those numbers now would be over £300,000 and over £500,000.
Median wealth in the poorest part of England, the North East, was £179,000, so even there this family in the middle would by now be pushing towards £200,000.
If this seems surprising, it is because that median family owns their own home. About 65 per cent of homes are owner-occupied, rising to 70 per cent of white families and 68 per cent in the Indian ethnic group. The ONS reports that only “14 per cent of households in the Mixed White and Black African ethnic group owned their own homes”.
In addition, older people are more likely to own their homes than younger ones, so you can see how rising asset prices – in this case that of people’s homes – increases inequality in terms of geography, racial groups, and age. For people with pension pots, a similar shift of wealth is almost certainly happening too.
Stand back and there is a message here. On the surface, this boom in wealth will, if sustained, lead to the rich becoming even richer. But that family in the middle is pulled up too. The real challenge is how to lift the wealth of families lower down, and we can’t blame the markets for that.
Need to know
The annual Global Wealth Report from the Swiss bank UBS has just been published and it sheds a bit more light on how market movements have had an impact on the stock of wealth in different parts of the world last year.
They looked at 56 markets, ranging from the US (of course) to relatively small economies such as Colombia and Uruguay, and in particular at what the authors dub the everyday millionaires – those with wealth between $1m and $5m. There were 52 million of them at the end of last year, accounting for $107 trillion of total wealth. That’s an increase in real terms of about two-and-a-half times since 2000.
Looking at the way markets performed last year, the sharpest gains were in the Americas, where wealth rose by more than 11 per cent. By contrast they were up less than 3 per cent in the Asia Pacific region and by under 0.5 per cent in Europe, the Middle East and Africa. Digging a bit deeper, the UK fared relatively poorly, with a fall in average wealth – that is, the total wealth divided by the number of citizens – and only a modest rise in median wealth.
I’m not sure about the divergence between average and median wealth. Could it be that some very wealthy people have moved offshore? At any rate, over a longer period – the five years since 2020 – UK investors have not done too badly, with real gains of more than 16 per cent in median wealth and 7 per cent average wealth.
This gap between average and median is more remarkable if you look at wealth per adult, for it is one way of measuring inequality. The most extreme example is the US. The average wealth per person (this is measured by individual, not by household) is $687,000, top of the global league. But the median was only $124,000, which puts it way down that league. It is, in short, a wealthy country where many citizens have little wealth to speak of.
The wealthiest median individual was in Luxembourg with $395,000, followed by Australia on $268,000. The UK median was eighth at $176,000, but 13th on average with $340,000. So a UK individual is on average much poorer than an American, but the median person in the UK is much richer than their American cousin.
I’m pretty sure that is largely a function of house prices, because the US has similar home ownership rates to the UK. And that raises a really interesting thing about wealth. Is the American – almost certainly with a bigger but a less valuable home than the Briton – really poorer? Surely not.
However, take the figures as they are, and there are 23.8 million millionaires in the US, 6.3 million in mainland China, 2.9m in France, 2.7m in Japan, just under 2.7m in Germany and 2.6m in the UK. But here’s a surprise. If you look at inequality, as measured by the Gini coefficient of income inequality, guess which countries are the most unequal?
Brazil at the very top, followed by Russia and South Africa, as you might expect. But close behind comes Sweden, which is even more unequal than the US. The UK is relatively equal by western European standards, and more so than Germany or France. Do have a look at the statistics. I know they can be misleading, but they are fascinating indeed.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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