by Tim Di Muzio
The first band consists of what they call the ‘millionaire next door’ – a group demarcated by their ownership of financial assets worth US$1 million to US$5 million. This group forms the base of the wealth pyramid and owns 42.8% of total HNWI wealth. In dollar terms, this translates into just over US$19.7 trillion. The next category consists of mid-tier millionaires with US$5 to US$30 million in capitalised assets. This group owns 22.0% of the total HNWI wealth or, in monetary terms, just under US$10.2 trillion. The top tier – the ultra-HNWIs – have 35.2% of the wealth share or just over US$16.2 trillion held as financial assets of one kind or another.
1.1 Wealth pyramid by financial assets owned (source: Capgemini and RBC 2013)
But this is within the wealth pyramid. What about their numbers in comparison with the global population of 7 billion people? The numbers are staggering: as a whole, the 12 million HNWIs by investible assets make up a meagre 0.2% of the global population. If we consider just the base of our pyramid, the millionaires next door represent 0.15% of the population. From there, the numbers really start to thin. Mid-tier millionaires make up 0.015% and ultra-HNWIs make up 0.0016% respectively.7 Keep in mind that to be 1% of the global population, HNWIs would have to be a group of 70 million people. In other words, they would have to increase their numbers by 483%.8
The wealth pyramid by net worth A more inclusive way to classify the unusual suspects at the top of the global wealth pyramid is by net worth rather than just by investable assets (see Figure 1.2). Included in this calculation is everything a person owns after all their personal liabilities are subtracted from the total. Since this would include primary residence, art works, vehicles and so on, it allows for a more expansive field of players. Credit Suisse (2013: 22–5) estimates that there are 32 million people on the planet with at least US$1 million in wealth. If the figures are rounded, they represent a mere 0.5% of the global population, or 0.7% if we consider only the adult portion of the global population. Collectively, this class of wealth-holders owns 41% of all global wealth – US$98.7 trillion, or, on a per capita basis, just over US$3 million each.
1.2 The hierarchy of wealth by net worth (source: Credit Suisse 2013)
But the truly remarkable story is how wealth is divided among them, and we see something immediately familiar to us from Figure 1.1: the base of the pyramid is massive, but, as we move up the wealth bands, numbers become as thin as oxygen at high altitudes. If, like Credit Suisse, we consider just the adult population of about 4.6 billion, then the base of our pyramid represents a mere 0.6% of all adults. The next three wealth bands represent 0.04%, 0.02% and 0.002% of the global adult population respectively. A tiny fraction of humanity, to be sure.
But once again, these wealth bands are somewhat arbitrary and serve to mask the extreme disparity within the HNWI class. For example, why use the cut-off of US$50 million for the highest band? Why include billionaires with those who have a net worth of at least US$50 million? Surely there are considerable differences between someone worth a billion dollars and a multimillionaire? So what would our global wealth pyramid look like if we stayed with net worth as the leading metric but altered the wealth bands to include billionaires and what Knight Frank called centa-millionaires (individuals with US$100 million in disposable assets) in its 2012 World Wealth Report? Figure 1.3 provides an illustration and considers each band as a percentage of the global adult population.
1.3 High-net-worth categories as a percentage of the global population (source: www.forbes.com/billionaires/; Knight Frank 2012; Capgemini and RBC 2013)
We already know that all 32 million individuals considered by net worth have wealth equal to US$98.7 trillion (Credit Suisse 2013: 22). Moving up the ladder, centa-millionaires make up a mere 0.3% of all HNWIs but have a net worth of US$39.9 trillion (Knight Frank 2012: 9). The billionaires make up a minuscule 0.005% of all HNWIs and have a collective net worth of US$5.4 trillion or a 5.5% share of all high-net-worth wealth. The top ten billionaires have a collective net worth of US$451.5 billion or 0.5% of the ultra-net-worth pie.
Based on these statistical observations, the human experiment with capitalism seems to confirm one of Braudel’s key insights about capitalist civilisation:
Conspicuous at the top of the pyramid is a handful of privileged people. Everything invariably falls into the lap of this tiny elite: power, wealth, a large share of surplus production ... Is there not in short, whatever the society and whatever the period, an insidious law giving power to the few, an irritating law it must be said, since the reasons for it are not obvious. And yet this stubborn fact, taunting us at every turn. We cannot argue with it: all evidence agrees (Braudel 1983: 466, my emphasis).
Thus, whichever way we might seek to classify HNWIs, one thing is certain: while their class may expand yearly to encompass new entrants, HNWIs seem always to represent a minuscule share of humanity. As Braudel suggests, the reasons why so few have so much and so many have so little are not altogether obvious. In fact, one of the key tasks of our study will be to scrutinise Braudel’s law so that we might start to give reasons for this incredible disparity in wealth, power and life chances. But for this we need a theory of capitalism. Providing a convincing theory of capitalism is the subject of our next chapter, whereas the conventional reasons given for wealth disparity are investigated in Chapter 5. But before moving on, we must consider how the 1% holds their wealth.
Holding wealth
Those of us who have no financial assets, live pay cheque to pay cheque or have little or no knowledge of finance and investment are probably unfamiliar with how the rich hold and accumulate their wealth. The fact that most people are financially illiterate is already a substantial indication that finance is a language of power and domination. We should all recall that one of the most recognised articles in the various slave codes of the United States was the one that banned literacy and education to slaves. It was reasoned that if they could read and write, they could communicate and overthrow the system of slavery that virtually every slave abhorred (Cornelius 1983). To provide a quick example of the measure of our ignorance when it comes to modern finance, when asked what they would do if I gave them $5 million, many of my students at the University of Wollongong in Australia say they would spend some of it (typically on a home) and ‘put the rest in the bank’ to make more money. When I ask them why they prefer to make the lowest rather than the highest possible returns on their money, they are typically lost for words. It just seems natural that if you have surplus money you do not want to spend today, you keep it in the bank and the bank pays you interest. To some extent this is true: the 1% do keep some of their wealth as digital cash in the bank, earning interest. In 2013, according to Capgemini and RBC (2013: 16), about 28.2% of all financial assets were held as cash deposits. But the majority of high-net-worth holdings (71.8%) are in four additional asset classes, and this makes a big difference to how they accumulate more money and, by extension, power.
The first class is equities, or what are commonly referred to as ‘stocks’ or ‘shares’ in companies. Equities may represent an ownership interest over the company’s assets and earnings potential but owners of equities may not have control over the company’s day-to-day operations or future business strategy. Today’s owners are largely what Veblen called absentee owners – they own but do not take care of the day-to-day running of the business. There are two ways to make more money by owning equities: 1) by selling them on to someone else for more money than you bought them for; and 2) by holding the equities and receiving periodic dividends from the company. Dividends are typically paid in cash per share and represent a portion of the company’s earnings. In 2013, HNWIs held 26.1% of their financial assets in equities or stocks.
The second class of assets is real estate, sometimes referred to colloquially by the more expansive term ‘property’. Typically, real estate means a given portion of land as well as any physical structures on that land. However, some countries have laws regarding who owns and can explo
it the minerals or materials under the surface of the land. In many cases the true owner of sub-surface land is the government, which may exploit it by selling contracts to private companies. There are three types of real estate – residential, commercial and industrial – and three main ways to make money: 1) by selling the property for more than you bought it for; 2) by collecting periodic rent for allowing an individual or organisation to use the facilities; and 3) by collecting interest from people who need to borrow to buy or lease property. In 2013, HNWIs held 20% of their portfolios in real estate.
The third class of assets are called fixed-income securities. These financial instruments are typically corporate or government bonds on which returns are paid periodically and the full sum of money borrowed – the principal – is returned to the bondholder on a specific date. Unlike equities, where holding shares implies some degree of ownership of the firm, fixed-income securities are debt instruments. In other words, investors in fixed-income securities are creditors of the corporations and governments whose bonds they purchase. These are typically considered safer investments and, because of their low risk, usually yield lower returns than other asset classes. In 2013, the 1% held 15.7% of their wealth in fixed-income investments.
The last class of assets is considered to be alternative investments. According to Capgemini and RBC Wealth Management, these assets include investments in hedge funds, structured products, derivatives, foreign currency, commodities and private equity. In 2013, HNWIs held 10.1% of their wealth in such alternative investments. Let us now take each in turn.
Hedge funds are typically unregulated investment portfolios that are aggressively managed to generate higher than average returns. Whereas many workers will be familiar with regulated pension and mutual funds, hedge funds are typically reserved for very wealthy clients who have money in the millions to invest. Hedge fund managers can also borrow against their clients’ capital, swelling their pool of funds and making it two to ten times larger (Mallaby 2010: 12). For example, if US$1 billion is deposited with a hedge fund manager, he or she can then leverage this capital by borrowing US$10 billion from a bank. As of 2013, US$2.51 trillion were invested in hedge funds. The most fortunate managers – whom the BBC has labelled the Masters of the Universe – can make a yearly salary in the billions (Anderson 2011). For example, David Tepper of Appaloosa Management made US$4 billion in 2009, followed by George Soros, whose fund earned him US$3.3 billion. By comparison, the median salary of a registered nurse in the United States is US$56,165. We can express this as a ratio with Tepper’s salary so we have some means to compare the difference in income between an average income earner and a billionaire: 1:71,219. This means that Tepper makes 71,219 times more money than a registered nurse. Thanks to a good deal of lobbying, he likely pays less in tax as a proportion of his income as well. The key question is whether Tepper is that much more productive in contributing to society than an average nurse. It is doubtful that Tepper’s contribution to society is twice that of a nurse, let alone an absurd 71,219 times more, but we explore this question in greater depth in Chapter 5.
Structured products are tailor-made investment vehicles that typically package a traditional (safe) security such as a bond with an alternative payout schedule based on one or more underlying assets. Some claim that they can enhance an investor’s portfolio by protecting capital while at the same time increasing the chances of better returns. Derivatives are financial instruments that derive their value from some underlying asset the investor does not own. The most common derivatives are swaps, options, futures and forward contracts. HNWIs also hold foreign currency to hedge against currency fluctuations and to take advantage of exchange rate differentials. The final two alternative investments are commodities, such as metals, agricultural goods and energy, and private equity. Private equity consists of equity securities (and often debt) that are not publicly traded on an exchange. Investments can be made by venture capitalists, angel investors or a private equity firm. Whereas the former may invest in young businesses or start-ups with the potential for strong earnings, private equity firms typically buy up publicly listed companies, delist them and then restructure them. Once they are restructured, the private equity firm usually relists them on an exchange to sell equity to the public. Money is made on the difference between what the company was purchased for and the value of the new shares issued to investors. Tidy profits have been made this way – typically to the detriment of workers and their income security.9
Now that we have a reasonable idea of how HNWIs hold their wealth, a look at their geography and their investments is in order. At first glance, this may seem like a trivial endeavour: why should we care where the mega-affluent are from or where they invest? But, as we shall see, geography has a lot to do with how HNWIs accumulate their fortunes.
The geography of the 1%
Human geography studies the places and spaces of human activities and social relations. It is a central argument of this book that the 1% continually create and inhabit a separate geography from the majority of humanity. We will explore the meaning of this claim in Chapter 4 on differential consumption. Here, however, we are concerned with the distribution of the 1% and their investments based on regions and countries.
If we define HNWIs by having a minimum of US$1 million in investable wealth, as Capgemini and RBC Wealth Management do, then the population of HNWIs can be divided by region as seen in Table 1.1 (Capgemini and RBC 2013: 5).
Moving from a regional to a country-level perspective, Figure 1.4 shows that the largest population of HNWIs is found in the United States, followed by Japan, Germany and China (ibid.: 6). Perhaps not surprisingly, HNWIs prefer to hold wealth in their own home regions; only 20% to 35% is invested or held outside their home region. Figure 1.5 illustrates how wealth is allocated by region (ibid.: 17).
TABLE 1.1 High-net-worth populations by region
Region
HNWIs
Regional population
Total wealth (US$ trillion)
HNWIs as a % of the population
Africa
100,000
1,033,000,000
1.3
0.01
Middle East
500,000
394,409,001
1.8
0.1
Latin America
500,000
429,239,000
7.5
0.1
Europe
3,400,000
739,200,000
10.9
0.5
Asia-Pacific
3,700,000
4,200,000,000
12.0
0.09
North America
3,700,000
348,000,000
12.7
1.1
Note: I use the rounded numbers provided by the report so they do not necessarily add up to the exact figures given for the HNWI population or total investable assets owned.
Source: Capgemini and RBC 2013; World Bank population data.
1.4 Largest high-net-worth populations by country (thousands) (source: Capgemini and RBC 2013)
Using data from Wealth-X’s 2013 report, we can also map the 199,235 individuals considered to be in the ultra-high-net-worth category.10 Collectively, the ultras have a net worth of US$27.8 trillion, the distribution of which is illustrated in Figure 1.6.
1.5 HNWI wealth allocation by region (percentage), 2013 (source: Capgemini and RBC 2013)
1.6 Ultra-HNWIs by region (source: Wealth-X 2013)
North America has the largest share of the ultra-high-net-worth population at 70,485 individuals, followed by Europe with 58,065 and Asia with 44,505. These three regions also have the highest net worth at US$9.7 trillion, US$7.7 trillion and US$6.6 trillion respectively.11 Africa and Oceania have the smallest proportions of ultra-HNWIs with 2,775 and 3,955 respectively. They also represent the smallest share of net worth, with ultras claiming US$350 billion in Africa and US$485 billion in Oceania.
The top five cities by ultra-high-net-worth population are New York (8,025), London (6,360), Los Angeles (4,945), San Francisco (4,840) and Paris (3,195) (Wealth-X 2013: 31, 39).
Of the entire ultra-high-net-worth population, 175,730 individuals, or 88%, are men who collectively own US$24.3 trillion of the US$27.8 trillion ultra-net-worth pie. Their average age is 58. Women make up a mere 12% or 23,505 of the ultra-HNWI population. Their average age is 54 and their total net worth a minuscule fraction of that of their male counterparts at US$3.5 trillion (ibid.: 20–4). Expressed as a ratio, this means that for every 1 ultra-high-net-worth woman there are 7.5 men. It is crucial for us to keep this vast disparity in mind when we consider one of the most important questions raised by this study: why is the world’s wealth divided this way, and what, if anything, can justify it? Before considering this question in the chapters that follow, we have to make a stop in Billionaireville and then take a quick look at the rest of us (Frank 2007: 10).
Billionaireville
In 1985 there were only 13 billionaires (Figure 1.7). In 2013, Forbes put the number at 1,426, with a total net worth of US$5.4 trillion – up from US$1.2 trillion in 2003 (Kroll 2005). So within the span of 28 years or about a generation in the world’s wealthiest nations, the billionaire class increased by 10,869%. To put this increase in perspective, let’s consider our nurse again with a median salary of US$56,165. An increase of 10,869% would mean a yearly pay cheque of $6,104,573 – an incredible sum for any year’s worth of work. What could possibly explain this rather abrupt spike in the numbers of the billionaire class? In 2005, Forbes chalked it up to ‘improved global economic factors for their swelling fortunes. Bullish world stock markets, a weak dollar and surging commodity and real estate prices have all played a part. But so has old-fashioned entrepreneurialism’ (ibid.). These may indeed be some contributing factors, but, as I will argue in the next chapter, they are not the decisive factors and therefore cannot convincingly explain this rapid increase in billionaires.