In today’s Money Morning…left versus right…revolution is the solution…enter Biden…and more…
We’re currently living through a period of dramatic change. Demographic shifts underpinned by significant technology developments and increasing levels of wealth. Not only that but increases in wealth disparity.
The following chart shows how the gap between the super-rich and everyone else has increased in the US over the past 60 years. The richest 5% have an ever-growing slice of the wealth pie.
You could be forgiven for thinking that this trend is specific to the US. However, Australia is experiencing something similar.
This next chart shows the change in household wealth in Australia between 2010 and 2016. The richest 30% had the biggest increase in wealth in percentage terms.
Source: Australian Parliament House
The trend is clear. The following chart shows the concentration of global wealth as it currently stands. The richest 1.1% of people in the world have 45.8% of the wealth. I don’t know about you, but that strikes me as quite astounding.
It’s worth asking why wealth concentrates the way it does. It’s the age-old conundrum of innovation versus equality. To put it simply, there are some people who are better at allocating resources.
Those people become rich, and they teach their children how to be good at allocating resources. Their children become richer, and the wealth concentrates.
Then, there are people who are bad at allocating resources. Who pass on their own ways of handling time and money to their children. A self-reinforcing cycle of poverty. Now, this is just one aspect of how wealth concentrates. It’s a simple way of thinking about it, which will do for the purposes of this discussion.
The second part of this equation is what we as a society do about this wealth inequality. If we give resources to the people who are bad at managing them, our economy becomes less productive.
This occurred in the 1920s when the Soviet Union murdered and enslaved its farmers. Bureaucrats took control of the farms and growing food.
The result was the murder by starvation of millions of people, notably many Ukrainians. Of course, this is an extreme example. But the principle is the same. If you give resources to people who aren’t financially savvy, the results will be suboptimal.
Left versus right
This need for efficient use of resources needs to be balanced with ensuring everyone has enough. This whole dynamic is the basis for left versus right politics from a purely economic perspective. The left believes we need to share the pie equally and give everyone a fair share.
The right believes we should leave as much of the pie with those who are good at managing it. This will increase the size of the pie and everyone benefits. Both left and right parties are needed. If we have too much of one, things become unbalanced.
Trends of wealth concentration can go on for long periods of time. But they can’t go on forever. When the disparity becomes too great, it can lead to a reset event.
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Revolution is the solution
This can come in the form of revolt. The kind of events that lead to a communist revolution at the extreme end — the literal murder and enslavement of the rich class.
Of course, the riches are never evenly distributed among the masses. Instead, a new wealthy ruling class takes power and the process starts again.
Only this time with more murder, incompetence, and corruption. Now, a revolution might sound unlikely in a developed country like the US or Australia. But as humans, we have short memories for the things that happened before we were alive.
Ray Dalio — founder of Bridgewater Associates — believes there is a 30% chance of civil war in the US in the next 10 years. He cites wealth inequality as one of the main causes.
He’s become one of the greatest hedge fund managers of all time by understanding cycles and how they repeat through history. He’s worth listening to. But let me give you a less extreme example of a reset event. One that requires less murder.
Joe Biden and the Democrats in the US are pushing their ‘Build Back Better Plan’. It seems to me that its aim is to redistribute wealth from the rich to the poor.
They’re even calling it a ‘once-in-a-generation investment’.That’s another way of saying they’re hitting the reset button.COVID has allowed them to push through some of these early measures as pandemic relief.
They even called it the first part ‘The American Rescue Plan’.After all, it sounds OK when your government is supporting those affected by a pandemic. Saying that you’re redistributing wealth from the rich to the poor is a bit more contentious.
The following chart shows how after-tax income will change with the new laws:
I have one main concern with Biden’s plan. Fiscal policy — that is, government spending and taxation — should align with monetary policy — which is interest rates and quantitative easing.
The US economy is starting to heat up. Inflation is at 7%. Interest rates will likely start increasing in March. Watch the next FOMC meeting this week for hints.
The Build Back Better Plan will add about US$160 billion to the US deficit over the next 10 years. It’s just adding to the growing pile of US debt. However, with all its faults, this plan could be the mechanism to redistribute wealth without civil war or revolution.
So why am I writing about this? I’m not trying to instil some sense of guilt regarding what you have or anger regarding what you don’t have. I’m also not trying to argue for or against Biden’s plan. It’s just a fact.
It seems to me that we’re ripe for a transfer of wealth back from the rich to the less rich. This can happen in a destructive way with revolution. Or it can happen in an orderly and constructive way with taxes and spending.
While things might not look so bad in Australia, I expect that we could follow a similar path. We have a federal election due in the first half of this year.
Will an economically left agenda win the votes? I expect home ownership for the young and retirement for the wise will be key battlegrounds. Low- and middle-income families will want to hear a plan for the rising cost of groceries and petrol.
Understanding and positioning for these themes can give your investments an extra edge. The time to start thinking about them never changes. It’s now.
Until next week,
Editor, Money Morning
PS: Izaac is also the editor at Exponential Stock Investor, a stock tipping newsletter that hunts for promising small-cap stocks. For information on how to subscribe and see what Izaac’s telling subscribers right now, please click here.