Need to Know Where the Economy Is Going? Watch The Top 10% – Investment Watch

by Charles Hugh-Smith

Should the wealth effect reverse as assets fall, capital gains evaporate and investment income declines, the highest 10% will now not have the means or appetite to spend so freely.

Soaring wealth-income inequality has all types of consequences. As many (including me) have noted, the concentration of wealth and income in the highest 0.1% has enabled the few to purchase political influence to guard their interests on the expense of the various and the common good.

In other words, extreme wealth-income inequality dismantles democracy. There isn’t a approach to sugarcoat this reality.

However the concentration of wealth and income isn’t limited to the highest 0.1% or top 1%. The highest 5% and top 10% have increased their share of household wealth and income, too, and this has far-reaching consequences for the economy, as the highest 10% accounts for the majority not only of income but of spending.

In line with the Federal Reserve, ( Distribution of Household Wealth within the U.S. since 1989), the highest 1% owned 22.7% of all household wealth in 1989. Their share increased to 30.6% in 2022. The share of the 9% below the highest 1% (90% to 99%) remained virtually unchanged at 37.4%. The highest 10% own 68% of all household wealth.

But this doesn’t reflect the actual concentration of income-producing assets, i.e. investments. Total household wealth includes the family home, the F-150 truck, the snowmobile, etc. What separates the economic classes isn’t their household possessions, it’s their ownership of assets that generate income and capital gains.

Because the chart below shows, the highest 10% own the overwhelming majority of business equity, stocks/bonds and income-producing real estate, between 80% and 90% of every category.

This implies the tremendous increases in asset valuations of the past twenty years have flowed almost exclusively to the highest 10%, with the vital caveat that the overwhelming majority of the gains in income and wealth have flowed to the highest 0.1%, top 1% and top 5%.

In line with the US Census Bureau, ( Income in the USA: 2021), the highest 20% of households have 52% of all household income, and the highest 5% have about 1/4th, (23.5%). The highest 20% have roughly 50% of all income, however the top 10% have 40% of all income.

The opposite charts below reveal that the majority of income gains sine 1980 have been concentrated in the highest 1%. The highest 5% registered triple the gains (71%) of the underside 90% (24%). The income of the highest 0.1% soared by 340%.

For context, let’s have a look at some annual-income numbers. In line with the Bureau of Labor Statistics, the mean income of the highest 10% ($290,000) is sort of six times the mean income of households on the 50% level ($51,000).

Much more telling, the highest 10% households ($290,000) earn twice as much because the 80% to 90% households ($145,000).

What’s all this mean? It boils all the way down to the wealth effect and spending. The highest 10% account for roughly half of all consumption, which is smart given they own 2/3 of the wealth and 85% of income producing assets, and so they get 40% of the overall income.

If their wealth were to diminish in an prolonged Bear Market, their spending may even diminish. Not only will they now not feel so wealthy (the wealth effect), the income and capital gains produced by their assets may even decline.

The dependence of major sectors of the economy on the spending of the highest 10% is commonly ignored. For instance, one study of US airline flights found that 12% of the American populace take two-thirds (66 per cent) of all flights.

You see the pattern here: the highest 10% account for half, two-thirds or over three-quarters of all the pieces: wealth, income, income-producing assets, capital gains and spending.

Should the wealth effect reverse as assets fall, capital gains evaporate and investment income declines, the highest 10% will now not have the means or appetite to spend so freely. By concentrating wealth and income in the highest 10%, and making their spending so heavily depending on capital gains and income generated by the bubble du jour, we’ve set our economy up for an asymmetric decline as credit-asset bubbles popping will result in steep declines in top 10% spending–spending that supports myriad sectors which might be heavily depending on the free-spending top 10%.

Put one other way: the chickens of income-wealth inequality will inevitably come home to roost, generating far-reaching consequences in consumption, employment, tax revenues and virtually every other economic metric.

If you would like to know the direction of the economy, watch the highest 10%. In some sense, all the pieces else is signal noise.

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