THE YEAR THAT CHANGED HOW WEALTH GROWS / BARRON´S MAGAZINE

The Year That Changed How Wealth Grows

By Ludovic Subran

Illustration by Kiersten Essenpreis

At the end of 2008, the U.S. Federal Reserve lowered the key interest rates to zero. 

Americans’ average financial assets amounted to $155,780. 

At the end of 2021, interest rates were still at zero, but financial assets had climbed to $349,920—an increase of 125%. 

And it’s not only Americans who can look back on a long decade of rich monetary blessings. 

Worldwide, per capita wealth rose almost as fast during this period, to $47,740.

The only downside, however, is in how that money was distributed. 

Despite—or because of—this rapid increase in wealth, equality has not improved, neither in the U.S. nor in most other countries. 

U.S. wealth inequality, as measured by the Gini coefficient, remains among the highest in the world. 

A thought experiment: If U.S. inequality could be reduced to the same level as France—which despite its national motto is hardly known for egalitarian wealth—the normal middle-class American would be almost twice as wealthy.

But this is water under the bridge—missed opportunities in good times. 

In 2022, the focus will not be on distribution issues but on concerns about wealth preservation. 

The following years also promise to be demanding in this respect. 

But first things first.

This year marks a turning point. 

The war in Ukraine choked the recovery from Covid-19 and turned the world upside down. 

Inflation is rampant, energy and food are scarce, and monetary tightening squeezes economies and markets. 

Households’ wealth will feel the pinch. 

Global financial assets are set to decline by more than 2% in 2022; in the U.S., where households have a high percentage of their assets invested in stock markets, a fall of more than 6% is on the cards. 

At first glance, this may not seem particularly dramatic. 

The declines in the wake of the 2008-09 global financial crisis were significantly higher. 

But it is important to bear in mind that inflation literally “inflates” some asset classes, such as bank deposits. 

In real terms, households worldwide are likely to lose a tenth of their wealth; in the U.S., the loss could amount to 15%. 

These would indeed be setbacks, the likes of which we have not seen since the ill-fated 1970s.

What follows 2022? 

Eventually, markets will find a bottom, and central banks will stop raising rates. 

However, a return to the era of “easy money” is highly unlikely. 

There will be no more happy years of accommodative monetary policy and ample liquidity, which created a relaxed environment for market dynamics. 

Structural changes such as deglobalization, shrinking workforces, and rising carbon prices are mighty obstacles for inflation to fall back to the target of 2%. 

Without monetary support, however, financial markets will become more volatile. Securing steady value gains in choppy waters will be much more difficult for savers worldwide.

Will fiscal policy makers step in to drive growth now that monetary policy makers have turned restrictive? 

Without question, the policy mix will change. 

But it seems doubtful that finance ministers will be able to play as active and supportive a role in the future as central bankers have in the past. 

Rather, the opposite is likely to be the case. 

The (over)generous aid during the pandemic and now again in the energy crisis represent both the high and the end point of the bailout state. 

Politicians would undoubtedly prefer to claim a stronger role for the state. 

However, they hardly have the means anymore. 

Record-high debts and rising interest rates dramatically limit their room for maneuver. 

This is also the significance of the British crisis, beyond all of the peculiarities of the pension funds’ investment strategies. 

It is a portent that indicates the inevitable paradigm shift from loose to tight fiscal policy. 

It does not require prophetic gifts to predict that the coming years will be dominated not by debates about tax cuts, but by increases. 

This applies equally to richer and poorer countries.

For the poorer countries, however, there is an additional burden. 

The overhaul of the global division of labor implies a shortening of supply chains, leading to the on- or near-shoring of production in the rich world. 

This could undermine the business model of many emerging markets that strived in the era of hyperglobalization to become the workbench of advanced markets. 

At the same time, digitization is not only changing the way we communicate but also the way we work and create value. 

Big Data, artificial intelligence, and connected automation are taking over the workplace. 

The rise of the emerging markets and the global middle class in recent decades was primarily based on the comparative advantages of relatively cheap labor. 

They count for less in this new world.

No monetary support, rising taxes, faltering business models: The environment for savers will become far more challenging in the coming years, to put it mildly. 

This will lead to a change in the drivers of future wealth growth: Value gains accounted for over 70% of growth in the U.S. 

They are now being replaced by savings efforts.

In other words, when there is no wind blowing the wealth sails, the only way forward is to row hard.

About the author: Ludovic Subran is chief economist at Allianz .