Late last year the IMF published a working paper called, “The Rich and the Great Recession”. In analysing the US recession of 2008-09, the authors find that the conventional macro explanations offered for the recession are flawed. Indeed, the authors argue that the rich (those households that are in the top 10% of incomes and have an average net worth of $3.3m or more) were the cause of the swings in consumption during the boom and bust (note that the financial side of the crisis is ignored in the paper).
The key conclusion, says Anthony Doyle, an investment director in M&G’s fixed interest team, is this: the rich must have played a key role in driving the consumption boom-bust cycle
because they were the group that received the bulk of the income and wealth gains during the period. Today, income inequality in the US has never been greater and America’s richest 10% of families own 85% of financial assets. Quantitative easing and record low interest rates have pushed up the value of these financial assets even higher as investor portfolios have been rebalanced towards higher yielding investments.
The authors conclude: “The rich now account for such a large part of the economy, and their wealth has become so large and volatile, that wealth effects on their consumption now have a significant impact on the economy. Indeed, the rich may have accounted for the bulk of the swings in aggregate consumption during the boom-bust.”
“This conclusion is in stark contrast to the conventional narratives put forward for the economic cycle, which focus on the role of the middle-class,” says Doyle. “The rich are increasingly driving the bulk of overall consumption growth, which is the main component of economic growth in the developed economies. If policymakers want to generate GDP, then they should encourage
the rich to consume and reduce their savings rate.”
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