A First in the History of Capitalism

As you have probably already heard, much of the Port Phillip Publishing team was off at the Paradox of Prosperity summit last week.

What do we mean by ‘paradox of prosperity’?

Well, you don’t need to travel far to see what it is or how it is affecting us. You may have noticed it as you walked to the Grand Hyatt in Melbourne, where Port Phillip held the conference.

Getting off the train at Flinders station and walking up Swanston St, you may have noticed the many who had spent the night out camping on Melbourne streets.

Turn onto Collins Street, and you see a very different Melbourne.

Streets look clean and bright. Buildings have a different shine.

The area is bursting with luxury brands…Gucci, Louis Vuitton…jewellery stores…

While in recent years we have had prosperity, we have also seen an increase in disparity.

Homelessness has been increasing in Australia. As the recent census showed, homelessness in Australia rose by 4.6% in the last five years.

According to a recent Oxfam report, the top 1% Australian’s own more wealth than the bottom 70% of Australians combined.

As the report continued:

Wealth inequality in Australia has been on the rise over the past two decades, with the gulf between the amount of wealth held by the top 1% and the bottom 50% now the greatest at any time over this period.

‘The wealth share held by the top 1% in Australia has been growing almost continuously over the past two decades, while the wealth share held by the poorest 50% of Australians has been falling almost continuously over the past two decades.

But, this is not just an Australian phenomenon.

The following is from the World Inequality Report 2018, by the World Inequality Lab:

At the global level, the top 0.1% income group has captured as much of the world’s growth since 1980 as the bottom half of the adult population. Conversely, income growth has been sluggish or even nil for the population between the global bottom 50% and top 1%. This includes North American and European lower- and middle- income groups.

As you can see in the chart below, in the United States the bottom’s 50% share of national income has dropped from over 20% in the 1980s to about 13% in 2016. Meanwhile the top 1% has increased its share from about 11% to 20% in the same period.

World Inequality Report 2018 23-04-2018

Source: World Inequality Report 2018
[Click to enlarge]

If there is so much prosperity, why are we seeing so much inequality?

You only need to look at recent events like Brexit or political turmoil in the US and Europe to see that people aren’t happy.

Well, markets are up.

Property prices have appreciated.

Unemployment is relatively low.

Yet salaries have barely increased…and costs of living have soared.

We are seeing an increasing growing wedge between the haves and the have nots. While a very few have amassed a large amount of wealth, the grand majority hasn’t.

We have seen a lot of asset inflation in the last years. And, as Dr. Marc Faber told us during the conference, this is a ‘huge problem’.

The people that already have assets, are becoming richer through asset inflation. The big asset holders have benefited from higher asset prices and money printing.

The ones without the assets, will become poorer.

And this is an even bigger problem for millennials. 

Millennials are finishing school with a lot of debt.

They are also spending a higher share of their salary on rents and on living.

And, while baby boomers have been going all out to give their children a better life than they had, this may not happen. As Marc said:

In the western world […] we have a situation that is actually very interesting. We have for the first time a generation, the millennials, they are earning less than their parents who were the boomers, the boomers born just after world war II. And they will have less money, they will die with less money than their parents adjusted for inflation. […] And their standards of living are not as high as their parents were. And that is very unusual because it is the first generation in the history of capitalism and I take the history of capitalism going back approximately 200 years, starting at the end of the 18th century up to today. This is the first generation that will essentially have less prosperity than their parents had.

That is, for the first time in the history of capitalism, we are seeing a generation that will be worse off than their parents.

Interest rates to blame?

This is all exacerbated by low interest rates. The fact is that it takes a lot of time to get rich when you are only getting 1.5% from the bank on your savings. It also takes a long time to save for a deposit for a home.

High asset prices have meant that there is also a lot of debt in the world.

The fact that interest rates have remained low means that this huge debt is not a burden…yet.

But it will be if interest rates go up.

Interest rates have never been this low for this long. We are living through a new experiment…and we don’t know how this will end.

For now, there is ‘prosperity’…for the few.

But what is the tipping point? And how do you prepare for this turning point?

The decisions you make next could be some of the most important decisions in your lifetime.

We heard many different views on how to deal with this paradox of prosperity during this summit.

In fact, this is what I like about Port Phillip Publishing.

We don’t just give you one opinion, but we offer you many.

So you can decide which one makes the most sense to you, and your investments.


Selva Freigedo,
Editor, Markets & Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money