There are nearly 22 million individuals in the U.S. with financial and real assets to fit the definition of being a millionaire, according to a 2021 Credit Suisse Global Wealth Report. Overall in 2020, total global wealth grew by 7.4% and wealth per adult rose by 6% to reach another record high of USD 79,952, according to the report.
Net worth, or “wealth,” is defined as the value of financial assets plus real assets (principally housing) owned by households, minus their debts.
The core reasons for asset price increases which have led to major gains in household wealth are a result of significant monetary and fiscal intervention by governments and central banks, like the U.S. Federal Reserve. Many governments and central banks in more advanced economies have taken pre-emptive action to prevent an economic recession in two primary ways: first, by organizing massive income transfer programs to support the individuals and businesses most adversely affected by the pandemic, and second, by lowering interest rates – often to levels close to zero – and making it clear that interest rates will stay low for some time.
There is little doubt that these interventions have been highly successful in meeting their immediate objectives of countering the economic impact of the pandemic. However, they have come at a cost. Public debt relative to GDP has risen in the U.S. and throughout the world by 20 percentage points or more, according to a 2021 Credit Suisse Global Wealth Report.
In essence, there has been a huge transfer from the government coffers to household net worth, which is one of the reasons why household wealth has been so resilient. In one respect, these transfers generously compensated households.
Generous payments have meant that disposable household income has been relatively stable and has even risen. In combination with restricted consumption opportunities, this has led to a surge in household saving, which has inflated household financial assets and caused household debts to be lower than they would be otherwise. This increase in savings was an important source of household wealth growth last year.
The lowering of interest rates by central banks has probably had the greatest impact on the growth in household wealth. It is a major reason why share prices and house prices have flourished, and these translate directly into our valuations of household wealth.
However, there are inflation implications in the long term from lowering the interest rates and also increased equity market volatility linked to expected future rises in interest rates. However, these were deemed relatively unimportant at the time compared to the more immediate economic challenges caused by the pandemic.
Household wealth appears to have simply continued to grow, paying little or no attention to the economic turmoil that should have hampered progress. Effectively, financial assets accounted for most of the gain in total household wealth accumulation.
The wealth of those with a higher share of equities among their assets, e.g. wealthier households in general. And, home owners in most markets, on the other hand, have seen capital gains due to rising house prices.
Wealth is a key component of the economic system. It is used as a store of resources for future consumption, particularly during retirement. Wealth also enhances opportunities when used either directly or as collateral for loans. But, most of all, wealth is valued for its capacity to reduce vulnerability to shocks such as unemployment, ill health, natural disasters or indeed a pandemic.
The contrast between those who have access to an emergency buffer and those who do not is evident at the best of times. Household wealth has played a crucial role in determining the resilience of both nations and individuals
Roughly 1% of adults in the world are USD millionaires.
Global household wealth may well have fallen. But aggressive governments and central banks to intervene help mitigate the economic impact of the pandemic. These have led to rapid share price and house price rises that have benefited those in the upper wealth echelons. In contrast, those in the lower wealth bands have tended to stand still, or, in many cases, regressed. The net result has been a marked rise in inequality
In many countries, the overall level of wealth remains below levels recorded before 2016. Some of the underlying factors may self-correct over time. For example, interest rates will begin to rise again at some point, and this will dampen asset prices.
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