Asset inflation is driving the world into a prosperity trap

This question arises when one looks at the results of a new study by the McKinsey Global Institute (MGI), which does not measure the prosperity of ten nations with more than 60 percent of global economic output in terms of their respective gross domestic product (GDP), as usual, but rather wealth and Lists the liabilities of an economy as in a company balance sheet. The MGI researchers come to the paradoxical result that the world has never been richer than it is today: the global net worth has tripled to 510 trillion dollars in the 20 years since 2000 and is now more than six times as large as the global one GDP.

However, two-thirds of this world wealth is in unproductive real estate, and only about 20 percent are distributed among assets that will ensure the growth and prosperity of tomorrow. The intangible assets, which are a yardstick for the progress of investments in the digital economy, only make up four percent of our net worth.

In other words: we live on the substance and do not invest enough in the future. For a world that wants to enter the digital age and at the same time has to stop climate change, that is grotesque.

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But that’s not all. The MGI auditors have discovered another trend that has to worry us: “The development of assets has moved away from the real growth of the economy. In terms of macroeconomic income, assets are now 50 percent above the long-term average, ”says Jan Mischke, one of the authors of the MGI study.

Three quarters of the prosperity gains over the past 20 years can be attributed to price increases

Normally, prosperity and GDP growth go hand in hand – but this connection no longer holds true. The reason for this is strong asset inflation that goes well beyond the general price hikes. “The rise in asset prices above inflation, driven by low interest rates, was the cause of this divergence,” the MGI researchers write. Around three quarters of the prosperity gains over the past 20 years can be attributed to price increases; we owe only 28 percent to net investments.

So something goes wrong in capitalism – in the truest sense of the word: Capital is abundant, it is just not directed to where it is most beneficial for the economy and society. At the same time we are resting on a “felt” prosperity cushioned by rising real estate prices.

There is much to suggest that we use our wealth so unproductively because the sharply rising asset prices are steering our capital in the wrong direction. A worldwide flood of savings (savings glut) is faced with an investment desert. Adam Smith would speak of a misallocation of capital today.

What to do? To overcome this imbalance, all economic actors (including households, policymakers and business leaders) must invest capital in productive and growth-enhancing investments such as sustainability, affordable housing, digital infrastructure, suggest the McKinsey economists.

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You can also put it more concretely: Fewer dividends and share buybacks, more net investments in digitization and climate protection, more building land – and also more debt, if the money is used for investment purposes. “It makes perfect sense to go into higher debt if you are financing more investments,” says Mischke, especially with a view to the current debate in Germany, whose prosperity balance – for better or for worse – is like the bookkeeping of “a Swabian housewife”.

Of good debt and bad fortune

From their examination of the global prosperity balance, the MGI researchers derive three possible future scenarios: Either the relationship between income and wealth has shifted permanently due to changed savings behavior, and the current prosperity trend is continuing. Or there is a massive correction in assets. However, it would be best if the accumulated wealth could be used more productively by investing more private and public capital in order to make the global economy more digital and sustainable.

The core question of the study is also the fateful question for our current economic mode: Why did the massive increase in global net wealth not lead to a sustained increase in net investments and qualitative economic growth? So far we owe the answer to that to ourselves.

More: Maxed out – Why the real estate boom in Germany is approaching a temporary end

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