Most of Us Will Not Have a Better Life Unless We Turn the Tables on the Super Rich
Continued from previous page
So when the economy seized up in 2008 and access to easy credit ground to a halt, so did the consumption engine. Millions of people lost their jobs or a significant household income. But they also lost the borrowing lifeline that had eased the gap between inadequate income and spending. Without debt-driven consumer demand, the entire economy froze.
Extremely unequal wages and income contributed to the collapse of consumer buying power. If consumption had been based on a foundation of healthy wage growth, the situation would have been considerably less volatile.
Ingredient Two: Financial Speculation
The dynamic of debt-based consumption was bad enough. But there was another way that inequality contributed to crashing the economy. At the top of the economic pyramid, those in the top 1 percent were doing their part by taking part in risky gambling. Unfortunately, the gambling was not confined to a casino, where the losses could be contained, but took place at the heart of our whole economy.
In 2007, the richest 1 percent owned 36.5 percent of all the private wealth in the United States and over 42.4 percent of all financial assets. Part of this estimated $20 trillion in wealth was in the form of land, houses, artwork, jewelry, private jets, and other private property. But an enormous fraction of it was in the form of stocks, bonds, and ownership stakes in the world’s corporations.
The 99 percent, when they have money to invest, look to banks, bonds, and mutual funds. But almost everyone in the 1 percent has investment professionals who advise them about allocating their invested wealth. So imagine for a moment that you’re a member of the 1 percent, with $200 million in wealth, and I’m your trusted investment advisor. It’s sometime between 2000 and 2007.
I explain that a typical asset allocation strategy is to park a portion of your wealth in stable investments that are a bulwark against serious market downturns. These include insured deposits in banks and credit unions and bonds backed by local, state, or federal governments. This guarantees that you will always be rich, even in tough times. The problem, I explain, is that these have relatively low rates of return. In fact, in 2005, we’re talking 2–3 percent returns. In other words, real snoozers.
I suggest taking another portion of your $200 million and investing in some long-term growth equities—companies that have been around for a long time. These include Ford, General Motors, and General Electric, the “blue chip” or seemingly stable companies. But it’s the same problem again: very boring and modest returns on investment, maybe 5–6 percent.
With another portion of your funds, we’ll start to increase risk and return, looking for a diversified mixture of small- and large-capitalization new companies outside the stock market. These are more interesting and have the potential for higher returns, in the 7–10 percent range.
Now we pause and take a deep breath. Our hearts start to beat a little faster in anticipation of what comes next. Up until now, we’ve pursued the investment strategy that the super-rich have employed for decades—diversified, sensible, a nice blend of risk and return. We will tweak it based on your age and special needs, but it’s a tried-and-true approach.
There is, however, a new class of investments that are generating very high returns. You’re smiling because this is what brought you in my door. These new investment vehicles are complicated but highly lucrative—dazzling returns of 10 or 15 percent. Some funds have even had 20 percent returns for five years in a row.