Markets

The Wealth Inequality Problem in One Chart

Published

7 years ago

June 17, 2016

Jeff Desjardins

The Wealth Inequality Problem in One Chart

It’s clear that America’s financial and political systems are broken

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

It seems that people don’t agree on much these days, but there is one growing exception to that rule.

Across the board, Americans are finding that the “system” isn’t working for most people in its current state. Donald Trump and Bernie Sanders have locked into this sentiment to garner unprecedented support as outsider candidates, and there is an undeniable feeling in the air that something has got to give.

Why is there so much conviction that things must change?

The Wealth Inequality Problem

In today’s chart, we showcase the wealth inequality problem in the best way we could. The challenge with it was that literally the data goes “off” the chart with no easy way to show it.

On the chart, we plotted the “Median Net Worth” of different wealth groups between 1998 and 2013. This is based on a study that the Federal Reserve does about every three years on consumer finances.

When this data is compared in 2013 dollars:

The Lower Class: Wealth has decreased by 26.5% for the bottom 20% of incomes
The Working Class: Wealth has decreased by 52.7% for the second lowest 20% of incomes
The Middle Class: Wealth has decreased by 19.1% for the middle 20% of incomes

However, one segment has shot up “off” the charts:

The Top 10%: Wealth has increased 74.9%, soaring to a median net worth of over $1.1 million.

Then and Now

What’s changed between then and now?

We looked at this from a macroeconomic perspective to get a sense of what has changed between 1998 and today, using latest data from last month (May 2016).

Unemployment is relatively flat between 1998 and today, but the amount of people actively looking for work has dropped by 4.5%. With more workers discouraged since the 2008 crisis, Workforce participation has dropped steadily. Economists also say this is likely due to a rapidly aging population.
Inflation has averaged between 0% and 1% over the last three years. It is currently sitting at 1%. In 1998, inflation was closer to the Fed’s 2% target.
The Federal Funds Rate, which is the rate that generally acts as a backbone for interest rates across the country, has dropped like a rock. Right now it was effectively 0.37% in May 2016, way down from 5% to 6% that existed for most of the 90s.
National Debt has almost quadrupled in nominal terms from $5.5 trillion (1998) to $19.3 trillion today. In real terms, taking into account inflation, it has more than doubled.
Money Supply (M2) has increased from $4.2 trillion (1998) to $12.7 trillion today. About $5 trillion of this increase came after the 2008 crisis.

And while there are many factors that go into wealth inequality, we believe that some of the above factors are worth exploring and understanding in detail.

For example, who benefits from 0% interest rates the most?
Who owns assets like real estate or stocks that have their prices propped up by these policies?
Who can borrow capital at low rates to invest or speculate on rises in these prices – is it the people that already have money, or the people without any?
Where does all the extra money that is added to the system go?
What is each $1 trillion of new U.S. debt spent on, and do the benefits of this added debt outweigh the costs?

Related Topics:united states income inequality wealth inequality net worth

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Markets

Visualizing the Rise of the U.S. Dollar Since the 19th Century

This animated graphic shows the U.S. dollar, the world’s primary reserve currency, as a share of foreign reserves since 1900.

Creator Program

Published

22 hours ago

December 4, 2023

Dorothy Neufeld

Visualizing the Rise and Fall) of the U.S. Dollar

Visualizing the Rise of the U.S. Dollar Since the 19th Century

As the world’s reserve currency, the U.S. dollar made up 58.4% of foreign reserves held by central banks in 2022, falling near 25-year lows.

Today, emerging countries are slowly decoupling from the greenback, with foreign reserves shifting to currencies like the Chinese yuan.

At the same time, the steep appreciation of the U.S. dollar is leading countries to sell their U.S. foreign reserves to help prop up their currencies, in turn buying currencies such as the Australian and Canadian dollars to help generate higher yields.

The above animated graphic from James Eagle shows the rapid ascent of the U.S. dollar over the last century, and its gradual decline in recent years.

Dollar Dominance: A Brief History

In 1944, the U.S. dollar became the world’s reserve currency under the Bretton Woods Agreement. Over the first half of the century, the U.S. ran budget surpluses while increasing trade and economic ties with war-torn countries, expanding its influence as the world’s store of value.

Later through the 1960s, the U.S. dollar share of global foreign reserves rapidly increased as political allies stockpiled the dollar.

By 2000, dollar dominance hit a peak of 71% of global reserves. With the creation of the European Union a year earlier, countries such as China began increasing the share of euros in reserves. Between 2000 and 2005, the share of the dollar in China’s foreign exchange reserves fell by an estimated 15 percentage points.

The dollar began a long rally after the global financial crisis, which drove central banks to cut their dollar reserves to help bolster their currencies.

Fast-forward to today, and dollar reserves have fallen roughly 13 percentage points from their historical peak.

The State of the World’s Reserve Currency

In 2022, 16% of Russia’s export transactions were in yuan, up from almost nothing before the war. Brazil and Argentina have also begun adopting the Chinese currency for trade or reserve purposes. Still, the U.S. dollar makes up 80% of Brazil’s reserves.

Yet while the U.S. dollar has decreased in share of foreign reserves, it still has an immense influence in the world economy.

The majority of trade is invoiced in the U.S. dollar globally, a trend that has stayed fairly consistent over many decades. Between 1999-2019, 74% of trade in Asia was invoiced in dollars and in the Americas, it made up 96% of all invoicing.

Furthermore, almost 90% of foreign exchange transactions involve the U.S. dollar thanks to its liquidity.

However, countries are increasingly finding alternative options than the dollar. Today, Western businesses have begun settling trade with China in renminbi. Looking further ahead, digital currencies could provide options that don’t include the U.S. dollar.

Even more so, if the U.S. share of global GDP continues to shrink, the shift to a multipolar system could progress over this century.