Sometimes the strands of the news flow link together as if they have been constructed into a chain. One of these at the moment concerns the way that central banks have pumped money and funds into the world economy via Quantitative Easing. This is a hot topic on its own right now as we await the European Central Bank policy announcement on Thursday and I am sure that the midnight oil was being burnt in its Frankfurt towers over the weekend. That is of course without the event that redistributed wealth last Thursday when the Swiss National Bank abandoned its Swiss Franc cap against the Euro which then saw the Swiss Franc end the week some 18% higher against the US Dollar than it started it. Happy Days for those long the Swiss Franc but unhappy days for those short it or indeed brokerages with client short it as Alpari UK bit the dust.
What about inequality?
The theme of the 1% and the 99% or rather the 0.1% and the 99.9% has haunted the credit crunch era. Furthermore the issue of how much of this has been created by central bank policy has been hotly debated. I will return to that subject in a moment but let us first examine today’s report from Oxfam on world inequality.
Oxfam steps into the fray
Some of today’s release is certainly eye-catching to say the least.
In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just
5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years, as shown on Figure 2, with the wealth share of the top 1% exceeding 50% by 2016.
There is plenty of food for thought in a statement that the world’s richest 1% are soon to own a majority of world wealth. But was it always like this? Apparently not.
Data from Credit Suisse shows that since 2010, the richest 1% of adults in the world have been increasing their share of total global wealth.
Actually if you look at the chart in the report the statement above is simultaneously true and misleading. You see if we go back to the beginning of this century the top 1% were pretty much in the position they are now and they were then hit by the credit crunch but have regained ground since. I guess that global wealth held by the top 1% is less than in the year 2000 does not make as good a headline.
However of course there is another possible scenario at play here which is that the moves such as QE are in effect an attempt by the global elite to regain their previous position and maybe even improve it as we move forwards. Indeed the ultra-rich seem to be doing just nicely out of events.
The very richest of the top 1%, the billionaires on the Forbes list, have seen their wealth accumulate even faster over this period. In 2010, the richest 80 people in the world had a net wealth of $1.3tn. By 2014, the 80 people who top the Forbes
rich list had a collective wealth of $1.9tn; an increase of $600bn in just 4 years, or 50% in nominal terms.
Of course correlation does not prove causation but it is the mother and father of thousands of conspiracy theories! Although some care is needed here as in the credit crunch era conspiracy theories have developed a habit of actually being true.
What about QE and timing?
If we look back we see that extraordinary monetary policies do seem to fit with the timescale here. If we examine the moves of the Bank of England where QE began in March 2009 and some £200 billion was spent on bond purchases by January 2010 followed by later tranches making the total some £375 we do see that the timing is indeed consistent with the wealth increases above.
Of course on a world scale the biggest player by far has been the US Federal Reserve. The first effort now called QE1 came down the slipway in December 2008 and was followed by QE2, Operation Twist and then QE3. It’s balance sheet has expanded in total by £3.6 trillion on top of the just under US $0.9 trillion of the run up to the credit crunch. What has been in doubt throughout this period has been where the money went!
To this we can add on and off actions by the Bank of Japan which has been proclaiming “bold action” until it really let rip recently and the ECB with its trillion Euro LTROs.
Never believe anything until it is officially denied
We have seen a litany of denials that the policies of central banks have indeed led to rising inequality. Instead they tell us that such policies have boosted economic growth and “saved the world”. Every now and then even a main player such as Federal Reserve Chair Janet Yellen goes off message. From October 17th.
It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,
The distribution of wealth is even more unequal than that of income, and the SCF shows that wealth inequality has increased more than income inequality since 1989.
She of course avoided the impact of the policies of which she has been an avid supporter.
The Bank of England in its enthusiasm to demonstrate some sort of benefit from QE ended up firing a bullet or two into its feet back in July 2012.
this in turn has led to an increase in demand for other assets, including corporate bonds and equities. As a result, the Bank’s asset purchases have increased the prices of a wide range of assets, not just gilts. In fact, the Bank’s assessment is that asset purchases have pushed up
the price of equities by at least as much as they have pushed up the price of gilts.
Who owns the most equities? The richest and wealthiest of course. So we see something of a QED for QE.
What about the bond party?
This is a more recent trend which most data will miss. But we are now seeing extraordinary surges in many government bond prices and it is not an exaggeration to say that some falls in yields have become collapses. Last week saw even ten-year yields in Switzerland dice with negativity and this morning has seen the same maturity in Japan have a yield of below 0.2%. I note these as Japan is into I think QE 13 and the Swiss currency cap was a type of QE in drag. Oh and a consequence of the Swiss policy was that it bought a lot of Euro area bonds.
Who is likely to be holding such bonds? You do not have to be a conspiracy theorist to believe that they and their advisers will be aware of the plans of central bankers. After all they will all be meeting up at the World Economic Forum in Davos later this week won’t they?
There is much to consider on the subject on inequality and the first issue is getting any sort of accurate data. The Oxfam Report quoted from above uses data collected from Credit Suisse which makes them an odd couple for a start! But there are issues with the methodology as Felix Salmon pointed out last year.
How is it that the US can have 7.5% of the bottom decile, when it has only 0.21% of the second decile and 0.16% of the third? The answer: we’re talking about net worth, here: assets minus debts. And if you add up the net worth of the world’s bottom decile, it comes to minus a trillion dollars.
My niece, who just got her first 50 cents in pocket money, has more money than the poorest 2 billion people in the world combined.
So perhaps the one thing we are left with is that the ultra-rich are getting richer. Also we are left wondering about Oxfam as an organisation which publishes such a report but also does this. This is from Forbes about Oxfam America.
Top Person: Raymond C. Offenheiser
Top Pay:4 $355,941
Fiscal Year ending on 10/31/10
So what have we learnt? That such analysis has a litany of problems. But that we do these days have more availability of information which means that we know more about this than we did. So was it always true? Probably. There is an element of irony in the impact of the credit crunch reducing inequality but we are left with the thought that whether it was deliberate or by chance that policies like QE have increased inequality since and are likely to continue doing so. Something to think about as we see them take the stage at the World Economic Forum at Davos from Wednesday.