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WEALTH, DEBT, INEQUALITY AND LOW INTEREST
RATES: Four big trends and some implications
Adair Turner
Senior Fellow
Cass Business School
106 Bunhill Row, London
26 March 2014
www.ineteconomics.org
300 Park Avenue South | New York, NY 10010
22 Park Street | London W1k 2JB
1
0
50
100
150
200
250
300
350
1980 1985 1990 1995 2000 2005 2010
bottom 20% top 5% top 1%
S
Rising inequality
200%
250%
300%
350%
400%
450%
500%
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
Rising wealth/income
-2
-1
0
1
2
3
4
5
01
-Mar
-85
01
-Mar
-87
01
-Mar
-89
01
-Mar
-91
01
-Mar
-93
01
-Mar
-95
01-M
ar-9
7
01
-Mar
-99
01
-Mar
-01
01
-Mar
-03
01
-Mar
-05
01
-Mar
-07
01
-Mar
-09
01
-Mar
-11
01
-Mar
-13
Falling interest rates
10-year Yield 20-year Yield
% o
f n
atio
nal
inco
me
1
%
Rising leverage
Average income increases US (1980=100)
0
50
100
150
200
250
300
350
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
bottom 20% top 5% top 1%
S
Source: US Census Bureau; World Top Incomes Database
2
The world capital / income ratio: 1950 - 2010
3
200%
250%
300%
350%
400%
450%
500%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Val
ue
of
pri
vate
cap
ital
(%
nat
ion
al in
com
e)
Source: Capital in the Twenty First Century, T. Piketty (2013)
Private domestic credit as a % of GDP: Advanced economies 1950 – 2011
4
Source: Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten, C. Reinhart & K. Rogoff, 2013
Real yields to maturity on UK indexed linked gilts
Source: Bank of England Statistics, Zero coupon real yields
-2
-1
0
1
2
3
4
5
01
-Mar
-85
01
-Mar
-86
01
-Mar
-87
01
-Mar
-88
01
-Mar
-89
01
-Mar
-90
01
-Mar
-91
01
-Mar
-92
01
-Mar
-93
01
-Mar
-94
01
-Mar
-95
01
-Mar
-96
01
-Mar
-97
01
-Mar
-98
01
-Mar
-99
01
-Mar
-00
01
-Mar
-01
01
-Mar
-02
01
-Mar
-03
01
-Mar
-04
01
-Mar
-05
01
-Mar
-06
01
-Mar
-07
01
-Mar
-08
01
-Mar
-09
01
-Mar
-10
01
-Mar
-11
01
-Mar
-12
01
-Mar
-13
10-year Yield 20-year Yield
5
Perc
ent
Output per capita and real wages in 19th century Britain
1800 - 1830 1830 - 1860 1860 - 1900
Source: Engel’s Pause: Technical Change, Capital accumulation and Inequality in the British Industrial Revolution, R. C. Allen (2009)
% Per annual change
0.6
0.0
1.1
1.6
1.0
0.8
6
Wealth and employment in ICT businesses
Market Value ($bn) Employees (000s)
330 ͠ 99,000
404 ͠ 50,000
170 ͠ 6,000
1* ͠ 12
19* 55
7
We have over 1 million users per engineer and this number has been
steadily increasing
* Paid by Facebook With only 32 engineers, one
WhatsApp developer supports 14 million
active users
Probability that computerisation will lead to job losses 2010 – 2030
OCCUPATION PROBABILITY (1=certain)
Recreational Therapists 0.003
Personal Trainers 0.007
Firefighters 0.17
Economists 0.43
Machinists 0.65
Retail salesperson 0.92
Accountants & auditors 0.94
Telemarketers 0.99
Source: The Future of Employment: How Susceptible are Jobs to Computerisation? C. Frey and M. Osborne (2013)
8
The present and future economy
Equity value without investment
Hi-tech and Hi-touch
- Robots and apps, brands and design, and face-to-face services
Rising inequality
9
Private capital /national income: Rich countries, 1970 – 2010
10
100%
200%
300%
400%
500%
600%
700%
800%
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
USA Japan
Germany France
UK Italy
Canada Australia
Source: Capital in the Twenty First Century, T. Piketty (2013)
Capital in France 1700 – 2010
11
0%
100%
200%
300%
400%
500%
600%
700%
800%1
70
0
17
50
17
80
18
10
18
50
18
80
19
10
19
20
19
50
19
70
19
90
20
00
20
10
% n
atio
nal
inco
me
Net foreign assets
Other domestic capital
Housing
Agricultural land
Source: Capital in the Twenty First Century, T. Piketty (2013)
0%
100%
200%
300%
400%
500%
600%
700%
800%
17
00
17
50
18
10
18
50
18
80
19
10
19
20
19
50
19
70
19
90
20
10
Net foreign assets
Other domestic capital
Housing
Agricultural land
Capital in Britain 1700 – 2010
12
% n
atio
nal
inco
me
Source: Capital in the Twenty First Century, T. Piketty (2013)
Two potential sources of increasing wealth
13
Relative Price Effect
Wt (1+q) = Wt+1 S = I = O
2
Savings & Investment
Wt + sYt = Wt+1 sY = S = I ˃ O 1
*
Explaining instability and secular stagnation | 14
Explaining the W/Y increase: The growth versus savings effect
Equilibrium condition:
S g
Proof: If W/Y is to remain stable:
∆ W
∆ Y = W
Y And by definition:
W Y
=
=
sY = W gY = Y
∆
∆
∴ ∆ W
∆ Y = = = sY
gY
s g
W Y
sg
Implication: If s/g ˃ and continues to be so
W Y
… then W/Y will rise until
W Y
Explaining instability and secular stagnation | 15
Explaining the W/Y increase: The relative price effect
Wt (1 + q) = Wt+1
Yt (1+g) = Yt+1
*
*
If q ˃ g, will rise over time ∴ W Y
The UK W/Y ratio: 1970 – 2010
16
314% -64%
250%
+270% 520 %
1990 actual
2010 if no relative price effect
2010 actual
Impact of relative price
effect Impact of
savings relative to growth
Source: T. Piketty, Technical Appendix http://piketty.pse.ens.fr/en/capital21c2
Note: This decomposition accounts for savings via research and development as well as tangible investment
Sources of increase in W/Y ratio: Change in % ratio
EXPLAINED BY NEW SAVINGS
EXPLAINED BY RELATIVE PRICE
EFFECT
-34 +66
-64 +270
-20 +204
+170 +83
+150 +189
+186 +72
+271 -173
+155 -22
More than 100% explained by the
relative price effect
More than 100% explained by overt savings
USA
UK
AUS
FRA
ITA
JPN
DEU
CAN
17
60/40 ͠
The share of housing rent in national income, France 1900 – 2010
18
0%
2%
4%
6%
8%
10%
12%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Capital in the Twenty First Century, T. Piketty (2013)
Shar
e o
f h
ou
sin
g r
ent
in n
atio
nal
inco
me
Desirable urban land: an indeterminate price?
19
Price highly
indeterminate
Inelastic supply of
locationally
specific land
High income
elasticity of
demand
Desire for capital
gain
… or at least not
opportunity loss
Expectations drive
prices; prices drive
expectations
The world capital / income ratio: 1870 – 2100?
20
100%
200%
300%
400%
500%
600%
700%
800%
1870 1890 1910 1930 1950 1970 1990 2010 2030 2050 2070 2090
Source: Capital in the Twenty First Century, T. Piketty (2013)
Val
ue
of
pri
vate
cap
ital
(%
nat
ion
al in
com
e)
Capital share in rich countries: 1975 – 2010
21
10%
15%
20%
25%
30%
35%
40%
1975 1980 1985 1990 1995 2000 2005 2010
U.S. Japan
Germany France
U.K. Italy
Canada Australia
Source: Capital in the Twenty First Century, T. Piketty (2013)
Cap
ital
inco
me
(% n
atio
nal
inco
me)
Private and public leverage cycles: US
22
Source: McCulley and Pozsar
1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 0
50
100
150
200
250
Financial Repression
Ho
usi
ng
bu
rsts
WW
II e
nd
s
Private debt as a % of NGDP Public and
Household deposits and loans: UK 1964 – 2009
Source: Bank of England, Tables A4.3, A4.1
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
% o
f G
DP
Securitisations and loan transfers
Deposits
Loans
23
Total German private sector leverage: 1991 - 2010
24
80
90
100
110
120
130
140
1501
99
1-Q
1
19
91
-Q4
19
92
-Q3
19
93
-Q2
19
94
-Q1
19
94
-Q4
19
95
-Q3
19
96
-Q2
19
97
-Q1
19
97
-Q4
19
98
-Q3
19
99
-Q2
20
00
-Q1
20
00
-Q4
20
01
-Q3
20
02
-Q2
20
03
-Q1
20
03
-Q4
20
04
-Q3
20
05
-Q2
20
06
-Q1
20
06
-Q4
20
07
-Q3
20
08
-Q2
20
09
-Q1
20
09
-Q4
20
10
-Q3
Private sector debt as % of GDP
China: total social finance to GDP
25
100
120
140
160
180
200
220
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Banks create credit, money and purchasing power
26
Loan to
entrepreneur
Credit to
entrepreneurs
deposit account
100 100
BANK
Three conceptually distinct functions of lending
Finance of new capital investment
• Enabling inter-temporal shift of consumption within life time income
Finance of purchase of existing assets
Finance of increased consumption
• Non-real estate
• Commercial real estate
• Residential real estate
• Human capital
• Real estate
• Collectibles
• Existing business assets – e.g. Leveraged Buy Outs
27
Categories of debt: UK, 2009
28
227
1235
243
232 Primarily productive investment
Some productive investment and some leveraged asset play
Mainly purchase of existing assets
Pure life-cycle consumption smoothing
Other corporate
Commercial real estate
Residential mortgage (including securitizations
and loan transfers)
Unsecured personal
£bn
But also achieves life-cycle consumption smoothing
The dominance of real estate in bank lending
29
Total bank credit to domestic
private sector % of GDP
Mortgage credit
% of GDP
Mortgage credit
as % of total
129% 74% 57%
206% 131% 64%
155% 78% 50%
175% 101% 57%
122% 78% 64%
130% 91% 70%
+ Commercial
real estate at
typically
around 20% -
25% of total
lending
Source: Jordá, Schularick and Taylor, “Betting the Home”, forthcoming 2014 (*Bank and non-bank combined)
* USA
AUS
ESP
NLD
SWE
DNK
Residential property investment: UK 1997 – 2013, share of nominal GDP
30
0
1
2
3
4
5
6
7
81
99
7Q
1
19
98
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
20
09
Q1
20
10
Q1
20
11
Q1
20
12
Q1
20
13
Q1
Perc
ent
Source: Economic and Fiscal Outlook, Office for Budget Responsibility (March 2014)
New buildings Improvements to dwellings Transfer costs
Credit and asset price cycles: upswing
31
Expectation of future asset price
increases
Increased credit extended
Low credit losses: high bank profits • Confidence reinforced • Increased capital base
Increased asset prices
Increased lender supply of credit
Favourable assessments of
credit risk
Increased borrower
demand for credit
Credit and asset price cycles: downswing
32
Expectation of future asset price
falls
Less credit extended
High credit losses: low bank profits • Confidence dented • Reduced capital base
Falling asset prices
Restricted lender supply of credit
Cautious assessments of
credit risk
Reduced borrower
demand for credit
Desirable urban land: a market without equilibrium?
33
Indeterminate price – is there
an equilibrium?
Potentially infinite
supply of credit
and private money
Highly income
elastic demand
Capital gains
motivation
Expectations prices
expectations
Inelastic
supply of
locationally
specific land
Inequality, demand and credit
34
Rich have higher marginal
propensity to save than poor
Rising inequality
Deflationary impetus – growth of NGDP falls
Rich lend to poor
Deflationary impetus offset: • NGDP growth
maintained • Growth in credit
intensity
Savings not matched by investment
+
Changes in housing wealth: UK 2003 – 2013
Households with no mortgage debt
Buy-to-let landlords
Households with mortgages
£bn
556
434
-59
Source: Savills, Private landlords gain the most from rising property market, Financial Times, 18 January 2014
35
Global investment as % of GDP 1970 – 2006
36
1
2
3
4
5
6
7
8
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
Source: McKinsey Global Institute Analysis
% o
f gl
ob
al G
DP
27
26
25
24
23
22
21
20
Corporate loans by broad sector: UK 1987 – 2008
37
Source: ONS, Finstats
Note: Part of the increase in real estate lending may be due to re-categorisation of corporate lending following sale and lease-back of properties and PFI (public finance initiative) lending, but we do not think these elements are large enough to change the overall picture. Break in series from Q1 2008 due to inclusion of building society data. Sterling borrowing only.
0%
5%
10%
15%
20%
25%
30%
35%
Q1
1987
Q1
1989
Q1
1991
Q1
1993
Q1
1995
Q1
1997
Q1
1999
Q1
2001
Q1
2003
Q1
2005
Q1
2007
Q1
2009
% o
f G
DP
Non-commmercial real estate PNFC lending Commercial real estate lending
38
Two drivers of wealth without savings
Falling prices of capital goods
Equity value creation without much
investment
Leveraged purchase of existing real estate assets
Wealth accumulation
without explicit saving
Rising real estate prices
Lower demand for
capital goods
Lower real interest rates
Complex interconnections (1)
Inequality
39
ICT
Falling cost of capital equipment
Financial instability, debt overhang and post-crisis recession
Rising leverage
Rising W/Y Equity value with little investment
Rising but unequal income
Rising demand for brands and design
Rising W/Y
Low capital investment demand
Lower real interest rates
Rising W/Y Rising property values
Rising W/Y
Rising leverage
Inequality
Debt contracts
Leverage + rising W/Y
Rising demand for locationally specific property
Inequality
The modern economy
40
More unstable
More unequal
Wealth is back • Equity and land value without investment • Wealth accumulation without savings
Hi-Tech and Hi-Touch • Robots and Apps • Brands and design • Buildings and land • And face-to-face services