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The costs of $160 trillion in 20 years
We've generated a lot of wealth, but it wasn't cheap.
It’s June 1, 2023. I missed you the last couple of weeks, unexpectedly. Sorry. But let’s take a big-picture look at our progress in generating tons of wealth in recent decades.
We created $160 trillion in 20 years, but at what cost?
(some) People are making a lot of money, but it’s coming at a cost.
I like to think about the big picture. The long-game. I don’t like following the day-to-day movements of the stock market, or who AOC or MTG slammed on Twitter today. I want to know how and where those market movements are allocating capital, who’s going to benefit from it, and why. I want to know what AOC or MTG think life, for the typical person, should look like in the U.S. 40 years from now, and what they’re doing to make those visions become a reality.
That’s why I was thrilled to come across a new report from McKinsey Global Institute this week — no, that’s not a sentence that’s ever been written or said out loud — looking at the big picture. That report, titled The future of wealth and growth hangs in the balance, was right up my alley.
Here’s the teaser: “The past two decades have generated $160 trillion in paper wealth but sluggish growth and rising inequality. What comes next?”
What, indeed? First of all, let’s consider the two pieces of information preferred in that teaser.
We have $160 trillion generated in 20 years. That’s astounding. And overall wealth has tripled during that time, too. But note that that says “paper wealth,” which basically means “unrealized” wealth. Assets could be sold for that amount, but have not necessarily been sold. So, it’s not “real” real wealth. At least not yet.
The other thing: Sluggish growth and rising inequality. That’s interesting. We’ve tripled our wealth, but it’s come at the cost of slower growth and more inequality. So, things have grown worse for many people (maybe not necessarily worse, but more people are behind, in a sense), and the economy isn’t growing as fast it could have, or should have.
That’s tough to reconcile when you look at the stock market’s growth over the past two decades:
Also, look at average home prices:
I could add more visuals, but let’s stick with these two — investment appreciation and increasing home valuations are, for many people, the primary drivers of wealth, after all. But with just these two things in mind, it’s easy to see how wealth could’ve tripled within the past 20 years.
But we have to go back to the costs of that wealth generation: A slower economy, and one that is inherently less fair. This is, in large part, due to the decade-plus Fed spending spree that pumped tons of money into the stock market after the Great Recession — which we didn’t stop until recently. That, in large part, has amounted to a transfer of wealth from the public (government) to private hands (but probably not yours).
So, all that wealth generation has come at a cost. It’s hard to determine what, exactly, that cost is, but it probably takes the form of fewer or less-lucrative job opportunities (consider that the federal minimum wage has not been raised since 2009), lower wage growth, and increased rent-seeking by giant companies and wealthy individuals.
Again, consider this: Since 2020, $42 trillion in wealth has been created, and two-thirds of that money was pocketed by 1% of the population — the 1% that really doesn’t need it.
So, while most people have likely benefited in some way from all of that wealth creation, I would argue that the costs of generating all those trillions has been too high. While we have smartphones in our pockets and a TV can be purchased for relative pennies compared to decades past, I think it’s worth asking whether life is actually better for most people. Again, in some ways, yes.
But the bigger issue, in my mind, is that there really isn’t a way to slow this whole thing down — at some point, inequality becomes such an issue that people take to the streets (they already have, in some cases), and the disparity between the costs of homes (which have increased in price by an average of ~250% in 20 years), education (tuition and fees at in-state, public universities is up 175% between 2003 and 2023), and food (up 78% in 20 years) and people’s actual earnings (the median household income in the U.S. was about $71,000 in 2021, up from $43,000 in 2003, a 65% increase), is putting people in a higher squeeze every year.
Again, this tells me that for a majority of people, there’s less breathing room in the budget. Of course, we all make choices about where and how we live, and what we spend our money on, but speaking in broad strokes, the prices of everything (don’t get me started on vehicles) is far outpacing how much money the typical American is earning.
At some point, it becomes too much. That’s what worries me. Yes, your portfolio is up, but are you actually better off?
Let’s jump back to the report, here’s another interesting tidbit: “Economic growth was sluggish, inequality rose, and every $1.00 in investment generated $1.90 in debt.” Again, this tells me that the wealth generation we’ve seen has come at a cost, isn’t sustainable, and is probably largely due to the public sector pouring money into the private sector — the whole damn thing’s been propped up by you, me, all of us, for years.
As for the future? The report outlines four scenarios. From my point of view, and one that I’ve espoused in this newsletter plenty of times before, all of this is completely unsustainable, and at some point, someone has to pay the piper — we all know who that’s likely to be.
Here’s what the report says about those scenarios:
…the McKinsey Global Institute (MGI) models four scenarios to capture the range of potential outcomes. We call them “return to past era,” “higher for longer,” “balance sheet reset,” and “productivity acceleration.” In the most desirable scenario by far, productivity accelerates so that economic growth catches up with the balance sheet, thereby combining fast GDP growth, rising wealth, and a healthier balance sheet. The three other scenarios are all far from ideal, each in its own way.
Here’s a visual:
The scenario on the far right is the one we should be aiming for:
The scenario decision makers should strive toward is the one in which investment strengthens and is productive, accelerating productivity growth. This scenario somewhat resembles the period of very rapid productivity growth in the late 1990s and early 2000s. The balance sheet grows, but less quickly than GDP, and therefore is healthier and more sustainable.
Interestingly, it mentions that we want an economy that looks like the late 90s and early 2000s…you know, before we started to triple our wealth generation. We’ll see what happens. But again, I think we’re a little too addicted to easy, cheap money and bailouts to really put the genie back in the bottle at this point.
But this brings me back to big-picture thinking. The ups and downs of the market on a daily basis, debt ceiling fights, “milktoast” — it’s all noise. We need to focus on the big picture, and consider the overall costs of what we’re doing. That’s no easy feat, of course, but it could make a long-term difference.
See you all out there.
Numbers and links
$1 trillion: Nvidia became the latest trillion-dollar company after its stock price went bananas. Thanks, AI! (CNN)
$22 billion: How much executives and early insiders profited through “well-timed” trades of SPAC shares before prices “collapsed.” Shocking stuff. (The Wall Street Journal)
You can BS a BSer: Scientists uncover a “BS blindspot,” in which people who think they’re good at spotting BS are, in fact, full of S. (PsyPost)
The debt limit debacle: Enjoying the flirtation with economic destruction? How we can avoid another debt limit problem. (The Message Box)