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November 23, 2021 | McKinsey: Inflated Asset Prices Leave Economy and Net Worth Vulnerable

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

McKinsey report published this week examines how productively we are using global ‘wealth,’ and the conclusion is, not very.

While global net worth (asset prices- liabilities) has tripled since 2000, the increase mainly reflects financialized gains in assets, especially real estate, rather than investment in productive activities that expand economic momentum and well-being.

As financial assets and liabilities have grown faster than GDP, two-thirds of global net worth is now based on elevated realty prices and only about 20 percent on productive fixed assets such as machinery, infrastructure and inventories; this is not historically typical or sustainable:

“…in the countries in our sample, net worth in 2020 was nearly 50 percent higher relative to income than the long-run average between 1970 and 1999. Asset price increases above inflation propelled by low-interest rates drove this divergence while saving and investment accounted for only 28 percent of net worth growth. In 2000–20, annual post-inflation valuation gains quadrupled compared with earlier decades…”

The trouble is, higher asset prices are not more economically or socially productive–quite the opposite.  A reversion of prices toward historical norms would wipe out about 33% of global net worth.

The report encourages a shift in policies and focus towards productive and sustainable investments that contribute to the global gross domestic product (GDP) to mitigate the downside.  The video below gives a few of the low lights.

The market value of the global balance sheet tripled in the first two decades of this century. These findings raise important questions for policy makers and business leaders. Foremost among them: is the global economy undergoing a paradigm shift as the world finds new sources of wealth? What might some of those new stores of value be? Or are we at risk of reversion to the historic mean that could result in a decline in net worth? And what will it take to rebalance the global economy? Here is a direct video link.

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November 23rd, 2021

Posted In: Juggling Dynamite

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