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Analysis: Catastrophe in waiting

By Paul Mackintosh   
July 10, 2019

Investors celebrating the US stock market’s record highs last week may want to contemplate another high: peak inequality.

Reuters has put together a slew of data points to highlight the problem. According to UBS, the number of US billionaires jumped from 267 in 2008 to 607 in 2018, while Federal Reserve figures show that the bottom 90% of the US population owns less than 25% of the country’s national wealth, a record low share.

People getting poorer are surely more distressed, and the US boom looks to be creating distress on a massive scale. That ought to foster guilt – and a great deal of fear. It looks like an explosion waiting to happen.

You can’t say you weren’t warned. French Finance Minister Bruno Le Maire inaugurated France’s presidency of the G-7 in January with warnings that capitalism may collapse if nothing is done to address inequality.

In April, hedge fund supremo Ray Dalio – one of those US billionaires – described inequality as “a national emergency” and “an existential risk” to the US. The same month, an umbrella group of United Nations organisations called for “a fundamental shift in the international financial system” to combat rising inequality and make sustainable development achievable. And last month, a group of ultra high-net-worth individuals, including George Soros, urged US presidential candidates to support a wealth tax.

French economist Thomas Piketty’s famous book Capital in the Twenty-First Century focuses entirely on the issue of inequality – as Das Kapital did on the exploitation of labour.

The asset management industry, with its stewardship of public as well as private wealth, from pension funds to sovereign wealth fund, bears its own share of responsibility. When Bain & Company calculates that global financial capital has more than tripled over the past three decades and is now roughly ten times global gross domestic product, you have to ask why that capital hasn’t found its way to the bottom nine-tenths.

Calls from BlackRock’s Larry Fink for greater corporate social responsibility may be a start, but you have to wonder whether such moves are too little, too late. A fiduciary with responsibility for investment of pension fund money ought to have an eye to the financial interests of those pensioners, which might well include supporting a wealth tax. And pension fund investors could certainly seek to support asset managers with the most socially responsible policies.

If hedge fund managers are already ready to make the call, the wider asset management industry should, too. If it’s ready to follow Mr. Fink, why not follow Morris Pearl, a former managing director of BlackRock, with his call to “raise my taxes”? Asset management had better look to this before the entire system it relies on crumbles.