Yves here. Wolf Richter gives an important, granular take on the way the top 1% is pulling even further away from everyone else in wealth accumulation, enabled by the Fed. There’s a lot of anecdotal confirmation for his view that even the top 10% ex the 1% aren’t really doing all so well. For instance, a colleague who regularly lectures at and attends conferences for what we might call 9% professionals says they are anxious about how much it costs and how difficult it is to get their children into elite schools. At most top colleges, the slots left to non-legacy, non-athlete (don’t get me started), non-rich foreigners is about 20% to 30% of the student body. The college bribery scandal has these parents up in arms because it tells them that their uphill battle is even harder than they thought. And all the money being poured into the children project means they typically aren’t saving enough for retirement. So unless they got lucky with the timing of their house purchase, they aren’t in terrific financial shape despite their high incomes.
This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:
OK, the Federal Reserve just came out with its quarterly data on the wealth of American households. It’s mostly the headline numbers that are being displayed in the media – how much wealth American households have – namely a new record of $107 trillion, thank you Fed, QE, interest-rate repression, and Wealth Effect. But the Fed’s data also shows the wealth distribution.
Everyone knows that if you’re in the bottom 50% of households in terms of wealth in this country, you’re essentially screwed. At the bottom 50%, you’re chasing after the American dream, and while a few are able to get out of the bottom 50%, for most, the American dream remains just a dream.
But the share that the bottom 50% of households have of the overall wealth, of that record $107 trillion, is minuscule. It’s just 1.9%.
That share is down by half from the already miserably low levels of 1999, according to the Fed’s data. So those folks in the bottom half of households are screwed and we knew that.
But today, we’ll take a closer look at the top 50% to 99% of households by wealth because even their share of the wealth is now declining, while the share of the 1% is surging.
This is the upper middle class and the top of the middle class, and they’re losing out to the 1%. And it’s a big deal in terms of dollars because those households have a lot of wealth, but their share is shrinking as the share of the 1% is gaining.
In other words, this economy – and I will point my finger straight at the policies of the Federal Reserve – is set up to shift an ever-larger share of the wealth to the top 1% and away from everyone else, according to the Fed’s own data. And the Fed is bragging about it.
We already know what is happening at the bottom half of the households: They’ve always been screwed. They’re just screwed even more today than they were 20 years ago, according to the Fed’s data.
As of the new data from the Fed, the bottom half of the households, owns 6.1% of all assets that Americans own. They own just 2.2% of all stocks and stock mutual funds. They own just 2.7% of what the Fed calls “pension entitlements.” The gold-plated executive pension plans are only for the few. They own just 13.5% of household real estate wealth. They own just 0.1% of the “private business wealth.”
But in terms of debt, the bottom half of households carry 36% of the total debt, such as mortgages, credit card debt, auto loans, and student loans. So they own 6.1% of the assets and they owe 36% of the debt.
And the wealth of the bottom half of households – wealth being assets minus debt – amounts to just $2 trillion, or 1.9% of the total household wealth.
These are the people who cannot save anything because their expenses for housing, healthcare, education, transportation, childcare, etc. are eating up their income. And because they cannot save anything, they have no means to invest. The whole system is set up that way.
Healthcare expenses cost roughly the same for rich and poor. The problem is that health care expenses are enormous in the US, and become an affordability issue for the bottom half of the households, a huge burden, and lots of people struggle to pay for it or cannot afford it.
The healthcare sector is now around 18% of GDP, or nearly $4 trillion a year. This business has become immensely profitable with its monopolistic structure, constant mergers, abuse of the patent system to prolong pharma monopolies, outrageous hospital bills as hospitals have become integrated into corporatized medicine. And so on. Paying even for basic healthcare has become a nightmare for the bottom half of households.
For the lucky ones who’re covered by an employer’s health plan, family coverage costs the employee on average $6,000, according to the Kaiser Family Foundation. This is just the insurance premium. Then there are copays and deductibles, etc. And those deductibles can be thousands of dollars.
For families without employer health coverage, the premiums alone for reasonable insurance plans run over $20,000 a year.
Then there are housing costs – whether people own or buy. They have surged in many places in the country. And for the bottom 50%, paying for a roof over the head in a lot of places is straining budgets, or exceeding budgets. Just check out the thousands of parked vehicles that people live in, around Silicon Valley, San Francisco, and other places. These are people with jobs that cannot afford housing.
The costs of higher education have become a huge burden at the bottom 50% of the wealth scale. This burden is carried by the family that now sacrifices in many ways, and it will be carried by the student who will end up with a pile of student loans.
It boils down to this: The households in the bottom half of the wealth spectrum are spending alltheir money just getting to the next paycheck, and they cannot accumulate money to invest, and they cannot benefit from the Fed’s ingenious Wealth Effect.
The wealth effect is reserved for the already wealthy that have the most assets, and when asset prices surge, those that hold the most assets benefit the most.
So now let’s look at the bottom 99% – and I mean, this sounds really funny, “the bottom 99%.” But that’s what it is coming down to.
And we’ll look at the top 1% to see how the share of wealth has changed since the Fed started its wealth effect, QE, and interest-rate repression. And we may soon add to this strategy the fantastical repo market bailout.
So over the past 10 years, the Fed has engineered an enormous amount of asset price inflation. And over those 10 years:
- The wealth of the top 1% has soared by $18 trillion to $34 trillion.
- The wealth of the next 9% has soared by $16 trillion to $39 trillion.
- The wealth of the 50% to 90%, so that’s the upper middle class, has risen by a more modest $13 trillion to $31 trillion.
- The wealth of the bottom half of households has ticked up by $1.4 trillion to $2 trillion, a tiny fraction of the wealth of the 1%.
In terms of percentage share of all household wealth, it looks whacky:
The top 1%’s share of household wealth over those ten years increasedby 5 percentage points to 32%. The 1% now own nearly one-third of total household wealth,
But over those 10 years, the share of household wealth owned by the next 9% fellby 3 percentage points to 37%.
And the share of the 50% to 90%, the upper middle class, also fellby 3 percentage points to 29%.
Today, the share of the 1% is nearly 4 percentage points higher than the share of the 50% to 90%.
Back in 2002, it was reverse: The share of the 1% was about 10 percentage points lowerthan the share of the 50% to 90%.
The first time that the 1% had a larger share of household wealth than the 50% to 90% was in 2013, and the gap has ballooned since.
So what is going on here? How is the 1% able to hog more and more of the household wealth that the Fed has so strenuously inflated, even at the expense of the next layers down?
There are several factors:
The Fed’s interest rate repression has destroyed returns on bank savings products. Households own about $10 trillion in these savings products, such as CDs and savings accounts. These types of products are a classic way of saving money at the lower income levels, and people have mostly gotten screwed doing it.
The stock market is open to all who have money to invest. And returns have been huge since the last collapse, and those with the most money invested in stocks gained the most.
But the wealthy have access to other types of investments. Many hedge funds, private equity firms, and venture capital funds require a $5 million minimum investment. Households that don’t have an extra $5 million to invest, in addition to their broader investment strategies, are excluded from the club.
Then there is a very small group of people who are super wealthy, who are billionaires and multi-billionaires, such as Amazon’s Jeff Bezos or Warren Buffett and others. Some of them, like Bezos, made their money on the immensely inflated stock price of their companies.
Warren Buffett’s entire finance and insurance empire got bailed out during the Financial Crisis, and he is probably the single biggest beneficiary of those bailouts. Then after the bailouts came QE, and his finance and insurance empire hugely benefited from that.
Then there are stock compensation plans. This includes people like Tesla’s Elon Musk. Tesla has been a financial nightmare throughout its entire existence, but its shares have been pushed by hook or crook to a valuation of $61 billion, and Musk has already awarded himself a bunch of them, and in addition has given himself an extraordinarily rich share compensation package valued at $56 billion that is now heading to court.
While Tesla fans have to buy shares, Musk just gets them – to the tune of billions of dollars. This principle is spread far and wide with stock compensation plans at the top of Corporate America.
Then there is the startup craze. Even if the shares flop after the IPO, the pre-IPO investors, such as VC funds made huge returns. These funds hold money that was invested by the top 1%. Again, a big minimum investment is required. Small fry cannot play in the VC arena.
And there are the stock compensation plans in the start-up craze where early employees make out with huge stock positions after the IPO. They’re also part of the 1%.
But this money at the top gets plowed into various real-economy things such as housing, and is one of the reasons why housing costs have skyrocketed over the past five years in areas where this wealth is, such as the San Francisco Bay Area. This is where the bottom half of the households suddenly find themselves tangled up in a housing crisis.
It is ironic that the Fed puts out this data on a quarterly basis, as if to show off its handiwork, its success, as measured by how much of the wealth is increasingly concentrated at the 1% of households, and how every time their wealth appears threatened even a tiny little bit, the Fed comes up with new bailouts, rate cuts, and other shenanigans, such as the repo market bailout recently. This data is like a report card that the Fed issues of how successfully its policies help the 1% gain an ever-larger share of household wealth.
You can listen to and subscribe to Wolf’s podcast on YouTube.