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Category Archives: Wealth

Chart: Top U.S. 0.1% – How Much Wealth Does It Take?

Source : FRED

Why Isn’t the Whole World Rich?

Dietrich Vollrath wrote . . . . . . . . .

The question of why some countries join the developed world while others remain in poverty has vexed economists for decades. What makes it so hard to answer?

In 2019 there were about 648 million people living in extreme poverty, subsisting on the equivalent of $2.15 per day or less. Those 648 million people made up 8.4% of world population — representing an improvement over 1990, when 35.9% of people lived on that little. Yet even though extreme poverty has fallen, in 2018 about 80% of the world population still had material living standards less than one-third of that in the United States.

One of the most frustrating things about the persistence of global poverty is that it is possible to eliminate it — at least within a country — in the space of a generation. In 1953, South Korea emerged from the Korean War desperately poor. It was almost entirely agrarian, and whatever infrastructure the Japanese had built during their occupation between 1910 and 1945 had been destroyed. In 1960 GDP per capita in South Korea was only around $1,200, lower than in Bangladesh, Nigeria or Bolivia, and about 6% of the GDP per capita in the United States.

Shortly thereafter, everything started to change. In 1968 the growth rate of GDP per capita in South Korea topped 10%. Throughout the 1970s, per capita GDP grew nearly 9% each year on average, slowing only slightly through the 1980s and 1990s. By 1995, South Korean GDP per capita had eclipsed Portugal’s. By 2008, it was ahead of New Zealand’s and just behind Spain’s. In 2020, GDP per capita in South Korea was nearly equal to that in the U.K. Not only is South Korea no longer developing; in many areas, it leads among developed nations.

What happened in South Korea offers proof that fundamental transformations of living standards are possible in a few decades. South Korea’s experience, and similar growth trajectories in Taiwan and Singapore, have often been referred to as “economic miracles.” But what if South Korea’s economic growth wasn’t something mysterious or unpredictable, but rather something that we could comprehend and, most importantly, replicate? At current rates of growth, living standards in the poorest countries in the world will eventually catch up to the United States — in about 700 years. If we could identify what caused South Korea’s takeoff, we might be able to make the miraculous seem routine, and see more countries catch up over decades and not centuries.

Economists have been engaged in research for decades to understand what happened in South Korea and other countries that left extreme poverty behind. It turns out to be one of the trickiest questions in economics. On the surface, it seems like the answer should be obvious: “Do whatever South Korea did.” Or, more broadly, “Do whatever countries that grew rapidly did.” But what, exactly, did South Korea do? And if we know, is it plausible to replicate it?

Scratching the Surface

Some of the first attempts to explain what happened in places like South Korea examined the role of “factors of production,” as economists like to call them. Those factors include physical capital — tangible products like buildings, infrastructure and manufacturing equipment — and human capital — skills and education embodied in workers. In a famous and widely cited study, Greg Mankiw, David Romer and David Weil looked at how the accumulation of both factors was associated with economic growth. Countries that allocated a large share of GDP toward producing new physical capital or had high levels of secondary school enrollment tended to grow faster than others. In addition, countries with lower population growth rates tended to grow faster, as they were able to equip each worker with more physical capital, raising their productivity.

Mankiw, Romer and Weil studied a broad set of nearly 100 countries from a very high level. Alwyn Young took a similar approach but narrowed his focus to four East Asian economies — Taiwan, South Korea, Hong Kong and Singapore — that had all experienced rapid economic growth.5 What he found corroborated Mankiw, Romer and Weil’s findings on physical capital to some extent. Young, however, attributed even more power to the changes in human capital. In each of the four countries, he found that families were having fewer children and investing more in their education. Increases in educational attainment created a more skilled workforce — an impact which Young was able to track in more detail than Mankiw, Romer and Weil. Their slower population growth was associated with increased labor force participation by women and an increase in the share of the population that was of working age.

Research like this established how economic growth was able to accelerate in some countries, but it does not tell us why those changes took place in the first place. Why did capital formation speed up in South Korea or Taiwan (and not in Bangladesh or Nigeria)? Why did families start to have fewer, better-educated children in those same places?

What we are after is a deeper set of fundamental characteristics, policies and events that created the circumstances under which rapid economic growth occurred.

Institutions as Fundamentals

The hunt for the fundamental whys of rapid economic growth arguably defines the study of economics. Adam Smith was concerned with exactly this question in The Wealth of Nations. While that hunt has always been near the core of the discipline, there was an eruption of research on the subject in the decades following the studies by Young and Mankiw, Romer and Weil.

Within that literature, economists have tended to group those fundamentals of economic growth into three broad categories: culture (e.g., the willingness to trust and engage in trade with strangers), geography (e.g., ease of transportation) and institutions (e.g., security of property rights). Of the three categories, institutions have received the most attention. This is in part because they tend to be more legible to economists than issues of geography or culture, and in part because they would appear to be more amenable to change.6

But what exactly is an institution? Douglass North, the Nobel Prize winner credited with originating the study of institutions as a driver of long-run growth, has defined them as “humanly devised constraints that structure political, economic, and social interactions.” That is so broad it offers little chance of identifying real policies or changes that countries could pursue. Researchers who took North’s ideas and ran with them contributed in part by being more specific. In early work, Daron Acemoglu, Simon Johnson and James Robinson, responsible for initiating detailed empirical research into institutions, focused on the security of private property rights, measured by either the risk of expropriation (based on assessments by investors) or the legal constraints on government executives (based on assessments by political scientists).

Work by Acemoglu, Johnson and Robinson, and those that followed, looked across a wide set of countries, searching for common institutional elements that existed in all the countries that experienced rapid economic growth (or that were absent in those that did not). These studies focused at first on measurements of institutions and growth during the 20th century, but soon incorporated data from even earlier. The same three authors (along with Davide Cantoni) studied the importance of an institution we could call “equality before the law” by examining the effect of Napoleonic reforms made in Germany at the turn of the 19th century on subsequent development. In other work, they estimated that European countries with more representative institutions, like Britain and the Netherlands, were able to grow more quickly in response to the opening of trans-Atlantic trade routes than absolute monarchies like Spain and Portugal.

These authors and the literature that followed them tended to find that things like robust property rights for individuals and governments with clear restraints on executive power, democratic political processes and a lack of government corruption were all associated with economic growth.

Those institutions certainly sound “right.” They are things we’d associate with almost any major developed country like the U.S., France or Germany. But, at heart, most of these studies share the same fundamental issue as those that looked at capital accumulation: Just because certain institutions are present in places that had rapid economic growth, that doesn’t mean they were necessary for the miracle to occur. Perhaps things like property rights and a lack of corruption are “luxury goods” that rich countries can afford to indulge in but are not, in fact, the reason those countries became rich?

The problem gets even thornier when researchers try to pin down how to even measure an “institution” in the first place.

A concrete example: The World Bank has a set of “Governance Indicators” it collects from each country. Those indicators include a measure of the “control of corruption” that a country has. For example, in 2020 Eritrea had a “control of corruption” indicator of −1.33, quite low. Mauritius had a 0.47, which is around the middle of the pack, and Denmark had a 2.27, among the highest. In terms of absolute ranking, it is probably correct that Eritrea is more corrupt than Mauritius and that both are more corrupt than Denmark.

But do the numbers themselves mean something? Is Denmark exactly 4.8 times less corrupt than Mauritius? If Eritrea managed to raise their index to −1, would that imply the same change in corruption as Mauritius moving to 0.80? The answer to both questions is obviously no. At best the numbers let us rank countries on these dimensions of governance, but there is no sense that 2.27 means anything in practice.

The statistical analysis that establishes the link between control of corruption and economic growth assumes, however, that the corruption index has a precise numerical meaning. It’s not that the statistical analysis is wrong — it’s that it has no practical interpretation. The control-of-corruption index, like other World Bank governance indicators, is based on survey data. But people in rich countries are more likely to give their institutions high ratings. In one striking case, Edward Glaeser et al. pointed out that Singapore has historically scored highly on measures like constraint on executive power — even when it was ruled by Lee Kuan Yew, a dictator who had no constraints on his power but did happen to respect property rights. Ideally, economists would try to control for confounding variables like wealth or education, but the fact that there are only about 50 to 70 countries with available data makes that impossible. As a result, the measures are circular: They tell us that Denmark is better governed than Mauritius or Eritrea, but not much else.

This isn’t a problem unique to measuring the degree of corruption. Every index of institutional quality is subject to this critique, because every index is attempting to assign numbers to something that is not inherently quantifiable: the degree of democracy, the rule of law, government effectiveness, respect for property rights, etc. In each case, the research might indicate that “being like Denmark” is a good thing, without any practical way of expressing what that means.

Experimenting With History

The picture I painted of cross-country research on economic growth is bleak, but those issues are not lost on researchers. Knowing these issues, scholars have tried to establish better evidence for which institutions matter for economic growth.

Much of this research is based on an examination of historical or natural experiments. Once again, South Korea is a useful example. After World War II, the Korean peninsula was, of course, partitioned between South and North Korea. The two countries share similar geography, so the miracle in South Korea and the utter lack of one in North Korea cannot be attributed to their endowment of minerals or physical access to foreign markets. They have a shared language and culture, so it is hard to say that there was something unique about the South Korean culture or history that prompted the miracle there (or halted it in North Korea). They both were left devastated and poor by the Korean War.

What’s left as an explanation is that the set of institutions governing economic activity in the two countries were distinct after 1953. The North adopted a communist ideology and built a set of economic institutions around it. We can see the results of that today. North Korea has failed, by any plausible metric, to advance economically. In addition to the lack of individual freedom, living standards are among the worst in the world, and North Korea continues to suffer from recurring issues such as famine that advanced economies like South Korea left behind years ago.

This example is useful in that it tells us institutions matter for economic growth, and unlike other research can more clearly eliminate other options like geography or culture. It also doesn’t require us to assign an artificial index to the institutions of South Korea or North Korea. We know they’re different, and that’s enough.

What that case study lacks, of course, is a clear answer to which institutions were the relevant ones making South Korea an economic miracle. Was it the subsidization of the “chaebol” — conglomerates like Samsung, Hyundai or LG — with cheap credit? Was it, uncomfortably, the lack of real democracy until 1988? Was it the promotion of exports versus domestic consumption? We can’t know from this simple comparison.

Research has thus continued to search for more historical natural experiments where the nature of a particular institution is much more apparent. The experiments the authors rely on are often quite clever. Melissa Dell compared areas of Peru subject to a Spanish forced-labor requirement called the “mita” to areas that were not and found that they have lower living standards centuries later. Lakshmi Iyer found that areas of India subject to direct British rule (as opposed to those ruled through proxies) have lower investments in schooling and health today. Stelios Michalapoulos and Elias Papaioannou compared areas of sub-Saharan Africa that had historically more sophisticated political structures prior to colonization continue to be richer today than areas that were less organized. In each case, a very specific institution — a forced labor regime, direct British rule, precolonial political structure — was found to have a significant effect on contemporary economic outcomes.

The empirical work here is on more solid ground, and the authors avoid the measurement issues mentioned above. But these studies, by narrowing their focus to specific historical experiments and individual institutions, have their own limitations. These studies don’t tell us about the immediate effect of any of these institutions. The British Raj ended decades ago, the Spanish forced-labor system in Peru ended over two centuries ago, and the historical political organization of sub-Saharan Africa are just that — historical. What we learn from these studies is that institutions can have persistent effects well after the institution disappears, implying that countries or regions can get stuck in a poverty trap. Once the region is impoverished, it’s more likely to stay poor.

These papers work as cautionary tales; they tell us what won’t work, but not what will work. And while they don’t provide any silver bullets for generating economic growth, they remain valuable contributions to the study of development. This work is eliminating bad options from the menu of institutional choices that countries could make.

Negotiating for Growth

Alongside the literature on what not to do, there is recent work that attempts to be more constructive. Acemoglu and Robinson, who helped initiate the empirical study of institutions, are among the leaders in this new line of inquiry as well.16 The key here is a change in the question. Rather than asking what the right institutions are to promote growth, they ask why failed institutions persist. For them, countries stagnate at low levels of development because there is a stalemate among interest groups; despite the aggregate benefit, no group is willing to implement an improved set of institutions.

What their research suggests is that breaking out of that stalemate requires a fundamental expansion of the distribution of economic and political power within a country. By incorporating more people in economic and political decision-making, they argue, a country is better able to negotiate a set of economic institutions that promote economic development.

This sounds promising, but can we see it in the data? These authors and others have made progress and are beginning to provide supportive empirical work. What sets them apart from earlier work is that they have the benefit of knowing that mistakes were made in the past. A good example is from Acemoglu and Robinson along with coauthors Suresh Naidu and Pascual Restrepo. They show that the transition to democracy leads to higher economic growth in the future, finding GDP per capita is around 20% higher in a democracy compared to an otherwise identical nondemocracy. What they see is that countries that democratize invest significantly more in public health and education, consistent with the initial work that Mankiw, Romer and Weil and Alwyn Young did on economic growth.

They explicitly take on all of the empirical issues I complained about above. They do not try to quantify “democracy” along some arbitrary scale (e.g., North Korea is a one, the U.S. is a seven, etc.). They instead focus on a simple comparison of places that clearly democratized versus those that did not. They use several methods to try to assure themselves, and us, that their results are coming from the causal effect of democracy on growth, and not the other way around. This includes a sort of natural experiment where democratization is more likely to occur when more neighboring countries are democracies.

Some counterexamples may immediately come to mind. South Korea, whose economy took off in the ’60s, did not democratize until 1988, and China has undergone impressive economic growth without democratizing at all. But once Acemoglu, Naidu, Restrepo and Robinson make the comparison across all countries, it turns out that their experiences are something of an outlier, not the norm. And in both, there were events that led to a widespread expansion of the distribution of economic power, even though it was not accompanied by political power: the massive redistribution of land in South Korea following World War II and the market reforms in the 1970s and ’80s in China that gave more people rights over their land and assets.

This result is exciting, in part because it suggests that something inherently positive — wider representation and democracy — is also conducive to economic growth. But it doesn’t mean we’ve cracked the code and are capable of generating economic miracles at will. Countries that do expand the distribution of political and economic power still have to negotiate the institutions supporting growth. This is where our expanding knowledge of which institutions don’t work becomes valuable, helping eliminate dead ends.

Making Modest Conclusions

At this point the situation may seem rather grim. Can we say, with any confidence, that we know the set of policies or institutions that can create the rapid economic growth seen in South Korea and others? The frank answer is no.

But this does not mean we are at a complete loss. Do not dismiss the power of the cautionary tales I mentioned. While the Korean “experiment” didn’t tell us what exactly South Korea did right, it continues to provide a vivid lesson that the North Korean centrally-planned authoritarian regime was not a viable economic path to take. Documenting which institutions don’t work is slow, but it is progress nonetheless. Furthermore, recent results regarding the importance of the distribution of economic and political power mean we understand more about the conditions that can cause good institutions to arise.

Can we make an economic miracle? No. Do we understand what might make economic miracles more likely? To some extent, yes. That wishy-washy answer doesn’t sound very inspiring, but it represents a tremendous amount of progress. The series of critiques and incremental improvements I’ve described is an example of the research process at work. Given the stakes, the slow pace is frustrating, but we are headed in the right direction.


Source : Asterisk

Infographic: A Global Look At Wealth and Happiness

See large image . . . . . .

Income Inequality and Happiness

See large image . . . . . .

Source : Visual Capitalist

Chart: Where the 1 Percent Dominate Wealth Creation

Source : Statista

Infographic: The U.S. and China Account for Half the World’s Household Wealth

See large image . . . . . .

Source : Visual Capitalist

Charts: Mark Zuckerberg Lost $100 Billion in One Year – Probably the Greatest Wealth Loss in History by an Individual

Source : Bloomberg

China’s Wealthy Activate Escape Plans as Xi Jinping Extends Rule

Edward White and Mercedes Ruehl wrote . . . . . . . . .

Wealthy Chinese are pulling the trigger on exit plans from their homeland as pessimism builds over the future of the world’s second-largest economy under Xi Jinping and the ruling Chinese Communist party.

At the weekend, Xi cemented his position as the most powerful leader since Mao Zedong, staying on as head of the Chinese Communist party and its powerful central military commission for another five years. Following the quinquennial CCP congress, the 69-year-old now has an ironclad grip on power and the potential to rule for the rest of his life.

David Lesperance, a Europe-based lawyer who has worked with wealthy families in Hong Kong and China, says Xi extending his rule beyond two terms is a tipping point for China’s business elite, who thrived for decades as China’s economy boomed.

“Now that ‘the chairman’ is firmly in place . . . I have already received three ‘proceed’ instructions from various ultra-high net worth Chinese business families to execute their fire escape plans,” said Lesperance.

In the months leading up to the congress, there had been speculation that Xi was under pressure inside the 97mn-member CCP to pivot from controversial policies, including his zero-Covid controls, support for Vladimir Putin and reassertion of party control across the business landscape.

However, Kia Meng Loh, a Singapore-based senior partner at Dentons Rodyk, a global law firm which has 6,000 employees in China, said inquiries and instructions for setting up “family offices” — private entities used to manage a family’s wealth — had also been building in the city-state “for months”.

“The clients I work with saw [Xi’s] third term as a foregone conclusion much earlier than this week,” Loh said.

He added that Hong Kong, long a favoured destination for Chinese wealth and elite families, had become less attractive as Beijing increased control over the territory.

The number of family offices in Singapore jumped fivefold between 2017 and 2019, and almost doubled from 400 at the end of 2020 to 700 a year later, according to Citi Private Bank.

Ryan Lin, director of Singapore-based Bayfront Law, said he was approached by five families during China’s party congress last week to establish a Singapore family office, three of which are proceeding.

Lin, who has set up around 30 family offices in Singapore in the past year, said most Chinese hoped to relocate there, as well as move their money.

Lesperance said many of his clients spent years preparing their exit from China, legally moving capital to safe offshore jurisdictions and arranging alternative residences and new citizenships outside China for their families.

China’s rich, he said, are not only worried about rumours of an official wealth tax that would replace informal “common prosperity” donations. They are also increasingly concerned for their personal safety, even once they have left.

Those fears have deepened following a series of temporary or longer term disappearances of high-profile people from public view over recent years, including Alibaba founder Jack Ma, tennis star Peng Shuai, elite financier Xiao Jianhua and real estate mogul Whitney Duan.

“The family motto has always been: ‘Keep a fast junk in the harbour with gold bars and a second set of papers’. The modern equivalent would be a private jet, a couple of passports and foreign bank accounts,” Lesperance says. “That is the world we are in . . . it is tough stuff.”

Others, however, appear less well prepared.

The founder of a US real estate platform for wealthy Chinese said he is struggling to handle the flood of inquiries as most clients were in a hurry to leave the country and had not planned carefully.

Meanwhile, immigration firms in Shanghai and Beijing have reported a spike in applications for US green cards for people with “extraordinary ability”, as the wait time is less than for investment-based green cards often used by the ultra wealthy.


Source : FT

Ten Thousand Rich Chinese Residents Are Trying to Pull Their Wealth Out of the Country

Ironclad, seemingly never-ending lockdowns of financial capital and quixotic, brutal crackdowns on major industries don’t inspire confidence among high-income earners? Who would’ve guessed?

China’s President Xi Jinping tried the experiment anyway. Now, investment migration consultancy Henley & Partners estimates that 10,000 high-net-worth residents of China want to pull $48 billion from the country this year.

The Xi Market

Jinping’s approach to the pandemic, built around a zero-Covid strategy, included five weeks of strict lockdowns in Shanghai earlier this year that led to residents shouting and banging pots and pans from their homes in protest. Last month, a rare public demonstration broke out in the city among shopkeepers demanding compensation for the damage done to their livelihoods.

At the same time, Xi has thrown regulatory hammers down on some of his country’s biggest tech companies. The first wave of crackdowns wiped $1 trillion off markets. Subsequent crackdowns included a ban on nearly all for-profit tutoring conducted by education firms and a total ban on mining, trading, or sending digital currency — wiping away trillions more. With that economic backdrop, it’s little wonder that many of the Chinese residents with the most wealth to lose want out:

  • In Singapore, the number of family offices almost doubled last year, according to the Monetary Authority of Singapore, as Chinese entrepreneurs moved their families abroad.
  • Emigrants are also running out of time and ways to get their cash somewhere else — Chinese citizens can only convert $50,000 worth of yuan into foreign currency in a single year. Tricks to get around that cap, such as using cryptocurrencies, are quickly being banned.

“It’s just easier to put China aside for now when you see no end in sight from Covid Zero and the return of geopolitical risk,” Matt Smith, investment director of $31 billion investment firm Ruffer, which shut down its Hong Kong office, told Bloomberg.

The Biggest Loser: China is second among countries in Henley & Partners’ forecast of high net worth exoduses. Number one, no surprise, is Russia with 15,000 emigrants expected this year.


Source : The Motley Fool

Where Does the Wealth Go When Asset Prices Go Down?

Noah Smith wrote . . . . . . . . .

“Fugayzi, fugazi. It’s a whazy. It’s a woozie. It’s fairy dust. It doesn’t exist. It’s never landed. It is no matter. It’s not on the elemental chart.” — Mark Hanna

I’ve been writing a lot about the crashes in the stock and crypto markets. Sometimes I say stuff like “Over $2 TRILLION of notional value has now been wiped out compared to the peak in late 2021.” And some people have been asking me: Where did all that wealth go?

The short answer is: It didn’t “go” anywhere. It vanished. It stopped existing. That’s not a natural or intuitive idea — how can wealth just disappear? — so this post is an explainer of how that works. And as we’ll see, this has implications for policy, for how we think about inequality, and for how we plan our own financial futures.

Wealth isn’t like water

A natural — but wrong — way to think about wealth is like a liquid, getting poured from one container into another.

But this isn’t how wealth works. It’s not conserved, like energy or momentum. It’s not even usually conserved, like mass. It can be created and destroyed, and in fact it is created and destroyed in pretty large amounts every day.

Now when I say “wealth gets created and destroyed”, I don’t just mean that the economy grows, or houses get destroyed by fires, or new companies start up, or old companies go bankrupt. Yes, all those things do create or destroy wealth. But I’m talking about something else here. Financial wealth gets created and destroyed not just because the real economy changes, but because the amount we pay for financial assets changes.

Ultimately, wealth isn’t a physical property of the Universe itself. It’s just how much humans value stuff like stocks, crypto, bonds, houses, or gold.

Mark-to-market accounting: How market prices determine wealth

To understand how wealth works, we first need to understand what “mark-to-market accounting” means.

Mark-to-market accounting means that ALL shares or units of an asset are valued at the market price. The market price is the price of the shares that get TRADED.

Suppose there are 1 million total shares of stock in Noahcorp, but that only 1000 shares of Noahcorp get traded on any particular day. And most Noahcorp shares just sit in people’s accounts and never even get traded at all. Now suppose that the 1000 shares that DO get traded go for $300 a share. Mark-to-market accounting means that we value all 1 million Noahcorp shares at $300 a share, including all the ones that never get traded. So the total value of all 1 million shares of Noahcorp — which is called Noahcorp’s “market capitalization” or “market cap” — is $300 million.

Now suppose that tomorrow, those 1000 Noahcorp shares get traded for only $200 a share. The mark-to-market value of the traded shares and the non-traded shares alike goes down to $200 a share. So Noahcorp’s market cap goes down to $200 million.

Noahcorp’s market cap is wealth. So when Noahcorp’s market cap goes down, where did the wealth go? It vanished. It ceased to exist. There aren’t more dollars out there. The number of Noahcorp shares is the same. The only thing that changed is that now people decided to buy and sell Noahcorp shares at a lower price. So mark-to-market accounting says Noahcorp is worth less than before. There is simply less wealth in the world.

But don’t people “pull money out” of a stock and put it somewhere else?

“But Noah,” you may ask, “when the price of the Noahcorp shares fell from $300 to $200, doesn’t that mean that people pulled their money out of Noahcorp and put it somewhere else?”

First of all, the answer to that question is “No.” It doesn’t mean that. You can personally pull your money out of a stock and put it into another stock, sure. But the market as a whole doesn’t work like that, because when you pull your money out of a stock, someone else puts exactly the same amount of money into that stock.

Here’s how that works. Suppose I sell you a share at $300 today and tomorrow you sell it back to me for $200. All that happens is that $100 of cash went from your account to my account over the course of those two days (Thanks!). The value of Noahcorp has gone down but there’s no more cash in our combined accounts than there was two days ago. No money has been “put in” or “pulled out”, but the amount of wealth in the world has changed.

But the even deeper answer is that this doesn’t even matter, because most shares don’t even get traded. Remember, in this example, only 1000 shares out of a total of 1 million get bought and sold every day. When the price of the 1000 traded shares drops from $300 to $200, the other 999,000 shares go down in value even though they don’t change hands.

The drop in the value of those other 999,000 non-traded shares happens not because they’re traded, but because we infer their price from the price of the few shares that do get traded. The “tail” of the traded shares wags the “dog” of the non-traded shares.

Liquidity: When mark-to-market accounting doesn’t work

So, it’s worth mentioning that not all assets can be valued using mark-to-market accounting. Some assets are illiquid — they almost never get traded. For these assets, we have to determine their value some other way.

The best example is your house. Every share of Noahcorp is identical, but every house is different, so the sale price of other houses doesn’t automatically tell you how much your own house is worth. And your own house almost never gets sold. Your own house is very “illiquid”.

So how does the value of your house get determined? By appraisal. An appraiser comes by and says how much they think your house would sell for if you did sell it.

For houses this is really the best we can do. For some assets, there’s an argument over whether or not to use mark-to-market accounting or some form of appraisal. For example, in the financial crisis of 2008, some banks tried to argue that because their financial assets (CDOs and the like) were highly illiquid, that they shouldn’t be forced to use mark-to-market accounting to value them. If they were forced to use mark-to-market accounting, they argued, there would be a fire sale and the price would be unrealistically low, making banks look less solvent than they were. (This debate was resolved when the Fed came in and bought all the illiquid assets from the banks, and ended up making a profit.)

So is wealth just fake?

The quote and the picture at the beginning of this post come from the movie The Wolf of Wall Street. In that scene, stockbroker Mark Hanna (played by Matthew McConaughey) explains to rookie Jordan Belfort (Leo DiCaprio) that stock prices aren’t real, and that only cash is real. Reading me talk about how the price of 1000 traded shares of a company can determine the price of the other 999,000 untraded shares, maybe you’re starting to wonder if Hanna is right, and the numbers we use for wealth are simply fake.

Well, in fact, it is a little bit fake. Not entirely, but a little bit. The reason is something called price impact.

To go back our previous example, imagine if one guy (let’s call him “Noah”) owned 999,000 of the shares of Noahcorp. The price of Noahcorp shares — and therefore, the value of Noah’s wealth — would be determined by the remaining 1000 of the shares that did get traded. So if the price is $300 per share, then Noah’s wealth is $299,700,000.

But now imagine that Noah tried to sell all his shares of Noahcorp at once. The price would probably go way down. This is because in real life, asset prices aren’t determined only by fundamental value (Noahcorp’s earnings and cash flows and such), but by supply and demand. When Noah dumps his stock onto the market, it increases supply by 1000x. That’s probably going to tank the price.

So Noah won’t get $300 a share. As he keeps selling more and more shares, the price will go lower and lower. By the time he sells all his shares, he’ll have much less than $299,700,000 in cash. In a sense, that means that some of his $299,700,000 in wealth was always somewhat “fake”. There was simply no way for him to get that much in cash, because of price impact.

In fact, there can be other reasons for price impact besides just increased supply. If Elon Musk decided tomorrow to dump all his Tesla shares, people might conclude that there was something deeply wrong with Tesla, and the price would go down.

Price impact can affect the value of whole asset classes, not just individual stocks. For example, our best estimates suggest that crypto ownership is extremely concentrated. That means that if the “whales” who own most of the Bitcoin and Ether all tried to cash out, the amount of cash they got would be significantly lower than their wealth today would indicate. This isn’t just true of the whales, either; if crypto owners as a whole tried to dump their crypto, there would be massive price impact, because the people who don’t currently own crypto would have to buy it all, and they will probably value it a lot lower than the people who currently own crypto.

So does this mean that “true” wealth inequality — that is, inequality of potential purchasing power — is less than the headline numbers suggest? Well, yes, a bit less.

“But Noah,” you may ask, “if price impact means the wealth numbers are somewhat fake, then why don’t we calculate wealth as the amount of cash you COULD get out if you DID sell?”

Well, the answer is: Because we can’t. We just don’t know. The only way to find out price impact is to actually sell. So we can’t really calculate how much cash people could get from selling all their stock or all their Bitcoin, because we don’t actually have any way of knowing how much it is in advance.

So what’s the upshot here?

So why does any of this matter? Well, first of all, don’t assume that the price of some asset class going down means that money is “flowing” somewhere else in the economy. That just isn’t how it works.

And sometimes people will assure you that drops in asset markets don’t mean anything because no actual wealth was destroyed. But paper wealth is as “real” as wealth gets, and people whose assets get marked down may cut back on spending, which affects the real economy.

Second, take wealth numbers with a grain of salt. Yes, the rich people are all actually rich, but the net worth numbers you read in the Forbes 400 or on Wikipedia are more like indicators than exact measures of how much stuff someone could buy.

Third, in my opinion this should make people reconsider their support for taxing unrealized capital gains. There are some good arguments in favor of this approach, but at the end of the day, A) price impact, and B) the fact that asset values fluctuate based on the price of just a few traded shares mean that some portion of the gains you’ll be taxing will just be “fugazi”. (Allowing tax-loss carry-forwards alleviates some of this issue, but not all of it, since not every gain is preceded by a loss.)

Anyway, I hope this explainer was helpful (and to the people who already knew all this stuff, at least not boring). Pretty basic stuff, but fun and important to know!


Source : Noahpinion

Are You Rich? How the Wealthy Are Defined

Emma Kerr wrote . . . . . . . . .

The vast majority of Americans do not meet commonly held definitions of what it means to be rich in the U.S.

Respondents to Schwab’s 2021 Modern Wealth Survey said a net worth of $1.9 million qualifies a person as wealthy. The average net worth of U.S. households, however, is less than half of that.

But wealth is in the eye of the beholder – a person’s location, career, community, background and so many other factors can influence his or her perception of wealth. Those perceptions may be evolving as new generations enter adulthood and redefine success.

“The generations of today, Gen Y and Gen Z, they don’t think about wealth and success the way boomers did, especially as it relates to finances,” says Penny Phillips, president and co-founder of Journey Strategic Wealth in New Jersey and California. “It was, ‘Save my money, make some investments and when I’m 65, I’ll try to take my first big vacation.’ Today, success is defined so much more by life experiences and impact and living for today.”

Indeed, the annual Schwab survey found that respondents are lowering the bar for what they consider wealthy. Compared to 2021 standards, respondents to the 2020 survey described the threshold for wealth as being a net worth of $2.6 million.

Alongside the coronavirus pandemic, rising inflation and low unemployment rates are both factors that affect how consumers perceive wealth, according to Amy Richardson, a certified financial planner at Schwab, on the company’s Intelligent Portfolios Premium team.

“We still don’t know how this bout of inflation is going to play out, but in the short term it’s probably fair to say that many people feel like they need to attain more to get where they want to go, regardless of their individual ideas about wealth,” Richardson wrote in an email.

“On the positive side of things, the job market has roared back from the depths of the pandemic-driven recession and wages have steadily risen. So, while people are feeling the bite of inflation, many are also doing better from an income perspective and have been able to maintain their spending patterns while also focusing on amassing savings and investing,” she said.

Net Worth vs. Income

Net worth is the sum of an individual’s assets, less liabilities. But individuals with high incomes don’t necessarily have a net worth to match, and the reverse is true as well.

“A lot of people who are wealthy in this country are wealthy not because of income, but because they own assets, they have investments that appreciated, real estate or otherwise,” Phillips says, while income funds an individual’s lifestyle and day-to-day costs.

An individual’s income can also be a measure of wealth.

To be in the top tax bracket of 37%, an individual filer must earn at least $539,900 annually in 2022, and married taxpayers filing jointly must collectively earn $647,850.

Among the top 5% of earners, the average annual wage was $342,987 in 2020, according to the Economic Policy Institute, a nonprofit think tank; among the top 1%, the average income was $823,763. Meanwhile, the average income in the U.S. in 2020 was $59,900.

“Wealth inequality is a growing issue in our country, especially for underrepresented communities,” Richardson says. “We know that low stock market participation exacerbates wealth inequality and that’s one reason we’ve been excited to see many people eager to learn about the markets and start investing for the first time during the pandemic.”

Standards of Wealth

For some, no amount of amassed wealth will be enough, and many who do qualify as wealthy by these standards may not see themselves in that light. Others struggling with debt or unemployment may see these standards of wealth and feel a sense of defeat.

Understanding how you compare to your peers can be an opportunity to learn about money management and positive financial habits, experts say. They advise taking cues from co-workers and competitors on issues of salary, for example, and setting net worth goals that consider the possibilities seen in peers as well as your unique circumstances.

But Eric Pierre, CEO, owner and principal of Pierre Accounting in Texas, says when it comes to money, this saying holds true: Comparison is the thief of joy.

“Different people make money in different ways, they have different skills, and wealth can go up and down for different reasons,” he says. “You should set a net worth of what you want it to be, whether it’s billions or thousands. Set a goal that will make you happy. Stop worrying about what your neighbor’s doing.”


Source : U.S. News