At the moment I am writing about why I think the industrial system is breaking down as its main components are no longer functioning properly and sustaining each other. In particular I wrote about the growth and increased concentration of wealth and its relationship to our present day democracy. Today I want to suggest another aspect of the changes in wealth and how it relates to the allocation of capital.

Let us start with a look at what the components of the financial asset side of private wealth look like overall (based on Federal Reserve data, in 2013 Billions)

What stands out are the growth of equities and pension claims which together account for almost ¾ of all private financial assets. Financial assets in turn make up 70% of all personal assets with the remaining 30% consisting primarily of real estate.

Now as we saw in the previous post on wealth and voting, the bottom 90% in the US have only 25% of the total wealth and the bulk of their holdings are pension claims. Conversely this means that almost all of the equity ownership is held by the top 10% of the population. Within the top 10% in turn the bulk of ownership is concentrated in the top 1% of the population (in fact, the top 0.01% alone seem to own as much as 10% of all equities).

Now as I have argued separately, we are living in a deflationary world largely due to the impact of information technology on the economy. Let me be quick to point out that by this I mean a world in which “real” prices are declining based on supply and demand for goods and services. This does specifically not consider some massive potential monetary change, which one cannot rule out given the tremendous amounts of money created.

In such a world we should expect to see many more speculative bubbles. Why? As it gets harder to make money by investing in productive capacity, returns are sought out in temporary price movements even when those are known not to be sustainable. This is entirely rational behavior as each of these bubbles is a redistribution opportunity between those who have better timing and those who don’t. Each bubble itself is a zero sum game though.

Now there is strong anecdotal evidence of this. We had the dotcom bubble. Then we had the housing / mortgage bubble. As it turns out this increased volatility shows up very clearly in the overall private wealth data. Here is a chart that I put together based on the same Federal Reserve data with a measure of 10 year volatility

The volatility measure is the sum over the absolute year-to-year changes for the preceding 10 years divided by total wealth that year.

For the time being I expect more volatility ahead given the reasons above. My point here is not that we should address speculation or the problem of wealth and voting each in isolation. Quite the opposite, I am suggesting that all of these are connected to each other and are part of the breakdown of the industrial system.