I’m beginning to recognise this. Stick loads of numbers together and ask the audience to shout “Wow! That’s Terrible!” without actually tying the various figures together into a coherent whole.
It’s the sort of thing that works well at The Guardian as none of the people there understand numbers anyway.
In its latest report on global wealth, Credit Suisse describes the UK as a country that enjoyed stable income-to-wealth ratios for the first 70 years of the last century and an evening out of the distribution of money across the population for most of that period. The average household came to have assets worth between four and five times their income, and more households were nearer that average than ever before.
That stability ended during the 1980s. Apparent wealth grew rapidly and became more concentrated among a few households. The housing market and equity in shares boomed for most years until 2007. By that point, the average household had nine times as much wealth as average income, double the ratio reported some 25 years earlier, but there were far fewer average households. The country appeared richer, but it was in riches increasingly held by the few.
According to the report, the UK’s 2007 wealth-to-income ratio was “the highest level recorded for any country apart from Japan at the peak of its asset price bubble in the late 1980s”. Credit Suisse doesn’t spell out the implications but house prices in Japan in the late 1980s reached record levels, and subsequently halved in value in the great property crash around 1990.
In the UK, there was a similar, if smaller, collapse in wealth after 2007. Property and financial assets fell by 12%, or by 36% when measured in US dollars (because the pound itself fell in value). Measured in dollars, these assets have still not recovered to 2007 levels. Household debt in 2013 stood at 150% of national income. By 2014, that debt had rocketed to 170%, largely as some people borrowed more to try to buy a home.
I do like that “fewer average households” bit.
But let’s try to piece these numbers together a bit. Without referring to anything else, just using what he’s given us.
Household income, in aggregate, is going to be pretty similar to GDP. Not exactly, but all of GDP is income to someone and at least one measure of GDP does assign all of GDP to household incomes. Probably not this one though. However, the allocation to depreciation, or other capital incomes etc, isn’t going to change all that much (maybe a few percentage points) over this time scale.
Let’s just, for giggles, assume that household income does equal GDP, we’ll not be far off for our uses. So, Danny tells us that the average household had four to five times, in assets, their income. Thus the ratio of GDP to household assets was, roughly, 4.5:1.
And then in 2007 households had 9 times their annual income in assets. So our GDP to household asset ratio is 9:1 (this is why whether household income really is GDP isn’t all that important, because we’re still comparing like with like). It then falls by 12%, leaving us with say 8:1.
And now household debt has risen to 170% of GDP.
Now normally household assets are recorded as net: that is, after we take off that debt load and look at the net asset position. So, Danny’s telling us that the asset backing that is behind household debt has risen: and this is something that is terrible, right? And even if they’re using the gross figure, when we take off that debt load of 1.7 times GDP we still have household assets being a higher portion of GDP than it was in those halcyon days of the 1970s.
And Danny leaves us with the impression that this is all a terrible problem but without actually putting all the numbers together to explain why.
My impression of this is, and yes I have read his latest book in full which is packed with this sort of stuff, is that Danny himself doesn’t understand why. He is, after all, a geographer, not an economist.
By the way, absolutely my favourite line in his book is that no one can afford to be ill in America because it costs $110,000 a year to be so. Seems he’s not heard about this insurance lark as yet.
And isn’t this great?
It says real estate prices will rise, corporations will make greater profits and new financial instruments will be issued to raise wealth.
How does issuing a new financial instrument raise wealth? Move it around a bit, maybe, but create it? Srsly?
But markets are not self-correcting mechanisms.
And what in buggery do you think 2008 was?
Most importantly, there comes a point when more and more people understand that wealth cannot increase by 40% in five years without repercussions. We are not all suddenly working so hard that we will produce 40% more of everything we have in that short time.
No shit Sherlock. But you have noticed the difference between a flow and a stock have you? Wealth being a stock, our production being a flow? And if our production rises by 10% over 5 years (not unlikely at all) then by how much does that raise the value of the stock, that wealth? Think about a share for a moment: double the company profits, double them in a manner which everyone believes is sustainable but had no clue about before the announcement, and do the shares rise by less than 2x, 2x or more than 2x?
You know, it would probably do the British left quite a lot of good to pay a great deal less attention to Professor Dorling on the subjects of finance and economics. He’s just not very good at either of them.