McKinsey: Inflated Asset Prices Leave Economy And Net Worth Vulnerable

A 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.

Image Source: Pexels

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.