Richest people in the world profit from inflated markets


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  • A report on wealth inequalities around the world shows that the wealth gap has widened dramatically over the past 20 years.
  • It also shows a main reason why: the rich simply own more financial assets, like stocks.
  • The report argues that inequality is a political choice. Meanwhile, the United States stocks have been inflated by monetary policy, and neither are they taxed like income.

It is well known that the rich are getting richer and the poor continue to have very little wealth – and that the pandemic has made matters worse.

The World Inequalities Report 2022 reinforces this evidence. The new analysis, led by eminent economist and inequality expert Thomas Piketty, draws on two decades of data on wealth and income inequality across the world to show massive wealth disparities between the rich and the poor. worldwide.

“The poorest half of the world’s population has virtually no wealth, owning only 2% of the total,” wrote Piketty and his co-authors. “In contrast, the richest 10% of the world’s population own 76% of all wealth.”

One of the main reasons that this divide has widened in the post-COVID era is that the markets are inflated right now. The stock market is hovering near record highs, with the S&P 500 up 25% this year and 110% since the recent lows in March 2020. Home prices are rising at a rate not seen in half a century.

In short, financial assets are extremely valuable at the moment. This is good news for the richest 10% in the country, who derive a significant portion of their wealth from these rising valuations.

Helping Wall Street during the pandemic boosted the economy – but also widened the wealth gap

The stimulus initiatives put in place by the Trump and Biden administrations to save the economy and stabilize civilization have ended up indirectly playing a key role in the inflation of these financial assets.

By reducing interest rates to near zero, the


Federal Reserve

gave companies the opportunity to take on massive debt on favorable terms. These companies then deployed that capital in ways that increased their prospects for future earnings growth – and, by extension, their stock prices.

The monetary policy changes that accompanied the stimulus measures also gave already wealthy people the opportunity to take advantage of record mortgage rates, which sparked the inflationary cycle seen in the housing industry.

Simply put, the needed Fed intervention has been excellent for financial assets and the wealthy people who own the majority of them.

Billionaires often invest in sole proprietorships or portfolios of hedge fund and private equity investments, which have also been a major source of their skyrocketing wealth. By October, the wealth of American billionaires had jumped 70%, or $ 2.1 trillion, during the pandemic, according to Forbes data analyzed by Americans for Tax Fairness (ATF) and the Institute for Policy Studies Program on Inequality (IPS).

There is substantial evidence showing that the decisions the Fed made last year were necessary to stabilize the economy at the onset of the pandemic. But looking under the hood at why the rich are getting so much richer now shows how this growing income gap is a byproduct of the central bank’s post-COVID support.

While the world’s wealthiest individuals tend to hold much of the wealth in easily valuable financial assets, the very poor typically deal in cash or bank deposits, according to the report. People at the lower end of the wealth distribution may own land and houses, but the market value of these is not significant. The middle class typically owns bank deposits and real estate, and stocks and bonds often make up a small portion of their wealth.

For the rich, however, financial assets make up about 40-60% of their wealth. In general, the richer the people, the greater the share of financial assets in their wealth. This means that they hold more bank deposits, stocks and bonds than other classes.

The main focus of the Fed’s policies last year was to help stabilize the economy during the pandemic. While these policies are now under closer scrutiny for how they may have widened the wealth gap, they were praised at the time for averting the country’s financial crisis in the first year of the pandemic. He lowered long-term interest rates, provided


liquidity

to help businesses borrow and banks to lend. The Dow Jones Industrial Average regained half of its losses in mid-April and hit record highs in early September.

And it has also been useful for average consumers. The Fed has kept consumer credit available and interest rates on mortgages and credit cards low. In addition to helping companies avoid bankruptcy, the Fed has avoided job losses.

Stimulus payments distributed under the Biden and Trump administrations have also led to economic growth since the start of last year. The money allocated by the CARES Act would have increased U.S. economic output by 0.6 percent in 2020, according to the Congressional Budget Office.

These moves also helped stocks rally as investors rebooted the market at a time when the bond market was not paying much. U.S. household wealth hit an all-time high in the third quarter of the year, reaching $ 123.5 trillion as the rich took advantage of the stock market rally.

But as mentioned earlier, most Americans don’t own stocks. And a year and a half after the Fed backed Wall Street with an influx of cash, Americans are suffering from the resulting 30-year spike in inflation.

The World Inequalities Report ultimately found that these disparities were preventable to some extent, in part because of the government’s reluctance to tax the rich more.

Financial assets like stocks, for example, are taxed differently from income, which means wealthier Americans are taxed less for how they accumulate wealth. As Insider’s Juliana Kaplan reported,


capital gains

taxes are only triggered when an asset is sold, so if a wealthy person lets their stocks or bonds pile up – and those assets have accumulated an incredible amount over the past two years – their wealth on paper grows tax-free all this time.

“These differences… confirm that inequality is not inevitable, it is a political choice,” the report said.

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About Meredith Campagna

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