It seems the Queen has invested in offshore funds.
The Duchy of Lancaster – an income provider for the British monarch – has apparently squirrelled £10m into operations run in the Cayman Islands and Bermuda, according to leaked documents known as the Paradise Papers.
Details of millions of private files have now been revealed. They’ve blown the whistle on how the world’s biggest rollers in business, politics, entertainment and sport have been sheltering their wealth in clandestine tax havens.
I’m sure it’s all legal – if morally questionable – but today I’m taking a wider view on how the world’s widening wealth imbalances could have devastating consequences. And what you can do to help yourself.
To be honest, the Queen’s offshore move doesn’t seem to have worked too well.
Some of the money backed BrightHouse – which has been accused of irresponsible lending – and Threshers, which later went broke owing a £17.5m UK tax bill.
But the key point here is that the Duchy’s Cayman Islands investment amounts to just 0.3% of the total value of the monarch’s estate.
In other words, the latter is worth…lots.
Media estimates have suggested the figure tops a staggering £500m.
And the royalty’s ‘brand value’ is worth a lot more. But even then, we’re still not talking top tier in the global wealth rankings.
The planet’s richest people have been seriously stashing it away. After a pause in 2015, expansion in billionaire wealth continued last year, according to the UBS/PwC Billionaires insights 2017 report. The number of billionaires worldwide rose by 10% to 1,542. Globally, their total wealth jumped by 17% in 2016 to $6 trillion.
That’s right, six trillion dollars – almost impossible to imagine. These are the elites whose financial dealings have been exposed by the Paradise Papers.
So, how have the super-rich got so much richer?
Central banks’ quantitative easing (QE) programmes, which have printed much more money since the great financial panic a decade ago, have played a major role.
While QE has failed to stoke up consumer price or wage inflation, it’s been very successful – maybe even more than intended – in boosting asset prices.
Stock, bonds, property, fine art, bloodstock…they’ve all benefitted from the extra cash created by the Federal Reserve, the European Central Bank and the Bank of England.
And once our plutocrats have made their money, it’s back to where we started today. They can afford the best tax advice to minimise fiscal liabilities and keep more of their money than the rest of us can.
Top-end incomes have grown fastest
The effects of QE can be seen across the income and wealth spectrum.
Events in the United States tend to set the trend for the rest of the world, and according to the US Census Bureau, real (i.e. inflation-adjusted) median household income has barely increased since 1980 for those at the bottom of the scale, while the top 5% have seen their incomes double.
Meanwhile, the Fed’s triennial Survey on Consumer Finances shows that over the past decade the top 10% have done best with a cumulative median income gain of 8.6%.
Almost everyone else saw drops in real median income over the period, apart from the bottom income quintile that enjoyed a 5.6% increase. The top 10% have seen their net worth grow by almost 27% while everyone else’s wealth has declined.
Now this isn’t about the politics of envy. Income and wealth inequality are facts of life that will never change.
Indeed, a degree of disparity is a good thing because it reflects how wealth-generating incentives really work.
What’s more, income and wealth are only one side of the story. The other is debt.
Here in the UK, the good news is that the aggregate household debt-to-income ratio has fallen somewhat in recent years. But there are surprising aspects here as well.
In fact, in the US “it’s those in the bottom quintile of the income distribution that have the lowest median debt-to-income ratio”, says Paul Ashworth at Capital Economics. “In general, the wealthier a household is, the higher its debt-to-income ratio will be. If anyone is drowning in debt, it is the upper middle- and middle-class, not the poor.”
There are lots of moving parts to this tale. Some will keep for another time. Today I’m making just three conclusions…
First, imbalances in global income and wealth are widening. While most middle-class households are apparently doing alright despite sluggish income growth, these disparities will largely remain talking points for economists and gossip columnists.
But attitudes towards those 1,542 billionaires could soon sour if things go wrong.
That leads to the second point. Household debt-to-income ratios are still too high. In other words, the middle class is both over-borrowed – and also steadily shrinking.
If interest rates rise, a severe recession strikes and the middle class takes the biggest hit – i.e. incomes and house prices fall at the same time as debt costs and ratios increase again – global wealth inequality will be right back in the spotlight.
OK, the elites will also suffer from a recession, but only relatively. They’ll still be more than fine. The middle classes will start to feel like debt slaves once again.
As the Greek philosopher Aristotle noted almost 2,400 years ago, if the middle class diminishes then the poor becomes the majority.
In a democratic process, they’ll vote to take money from the rich. So the latter will try to stifle democracy to preserve their wealth.
It could all get very messy as our lives become subject to more external controls.
But you can do something to help your own finances…because third, household debt-to-income ratios can be improved by bolstering your income as well as cutting debt.
At Agora we can’t exactly help you to repay your borrowings. But we reckon we can give you good advice on the income front.
Click here to see what you can do.