A new article came out recently stating that the top 1% of the world population controls $110 trillion of wealth. http://www.oxfam.org/sites/www.oxfam.org/files/bp-working-for-few-political-capture-economic-inequality-200114-summ-en.pdf . I understand that many folks consider this a travesty, but before they get too excited about righting this inequality of wealth, they need to actually “run the numbers” and try to avoid being a hypocrite.
Upon doing a little math, I found many of my clients are in that top 1%. That’s right! Before you get too impressed, consider this: the richest 1% globally control $110 trillion of wealth. There are 7 billion people on earth, so $110 trillion divided by 7 billion equals about $1.5 million each. A farmer client who owns 240 acres of Iowa land (a small farm for those who might not know) or a small business person who owns her business debt free, along with a home and a $500,000 401k, could also fall in that 1%. Heck, a person who can save $275/month and increases that with the inflation rate can get to $1.5 million by retirement age.¹
So to be more fair to the less rich, let’s just take from the “super rich”. That would probably do it, right? Well, according to Forbes list of richest people in the world, the top 50 have roughly $1.2 trillion of wealth.² If you confiscated ALL their wealth, it wouldn’t come close to paying down the total public (government) debt in the world of $52.6 trillion (http://www.economist.com/content/global_debt_clock). It wouldn’t even pay the interest on the debt! And, the $1.2 trillion spread out evenly over every man, woman and child on earth, would give everyone $171.43. Would that pay your cell phone bill for 5 months? Or if you confiscated ALL the wealth of the top 1 percenters and spread it out evenly, everyone would get $15,714.28. For those in third world countries who face REAL poverty, that’s certainly a lot. But in the U.S., although it’s considered poverty, it’s not enough to help most people for any length of time.
How does this affect your investments? When the government attempts to help those in poverty, it spends money on social programs. Since it doesn’t currently bring in enough money through taxes, it borrows the difference from investors with help from the Federal Reserve (our banking system in the U.S.)
Our Federal Reserve creates money out of thin air (“prints” money to increase the money supply) and has been using that money to buy U.S. government-backed debt. That extra money enters our economy.³ Some of it ends up in the hands of citizens. Some spend it, but some save it. For those who save it, some ends up being invested in stocks, some in their businesses, and some in real estate, among other places. This typically pushes asset values higher, which makes those people appear richer….on paper.
They may not be poor but many of them saved that money themselves and they don’t consider themselves rich. When the stock market last crashed, in 2008-2009, many of those people lost nearly 50% of that wealth. Not all of those folks were born with a silver spoon in their mouth. Their plans for a successful retirement hinge on a decent 401k and Social Security. And Social Security is funded by a trust fund expected to be exhausted in around 20 years, with the source of this information being the 2013 Annual Reports summary on the Social Security website itself (http://www.socialsecurity.gov/oact/TRSUM/tr13summary.pdf) and run by a government that is $17 trillion in debt (http://www.treasurydirect.gov/NP/debt/current). The unfunded (future) liabilities of the United States government are projected to be over $127 trillion…more than $1.1 million for every taxpayer alive today.4
So as easy as it is to despise rich people, not all are evil and taking from them won’t come close to solving the problem anyway. And as much as we’d like to think government is the answer, not all government is good and as the debt increases, it probably means much larger problems and much less wealth for everyone when the bubbles pop again like some did in 2008-2009.
Towards that end, we run what-if stress testing scenarios for our clients simulating multiple economic events that could impact their life’s savings, helping them understand the very REAL consequences of actions by governments, terrorists, and the like. Being informed about, and in charge of, your portfolio is the best way to understand and deal with the certainty of uncertainty that affects our life.
Finally, if you really think that rich people have more influence over government than poor people, you may be right. But by that logic, we should all vote for smaller government. There would be fewer people in the government to influence and a chance to reduce the federal debt, which may help save Social Security in the future for us and our kids. If we achieve wealth equality, we’ll need it!
¹annual interest rate 7.5% for 45 years, increasing contributions by an inflation rate of 2.5% and compounding annually. For illustrative purposes only. Not based on any specific investments. Investing in securities involves risk, including potential loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal.