Nothing Changes

What follows is a number story.  It is interesting because it makes us think in new and different ways.  One of the new ways is that the world does not work the way you think it does.  Failing to notice that could be expensive.  Failing to notice how easy it is to make logical arguments with numbers is important too.

It appears that the value of financial assets worldwide, is now around $240 trillion.  That is a very large number.  Too large to be meaningful by itself so let is put it into perspective.  Meaning is only derived by comparison and comparison is fraught with risk unless we understand the standard.  Lets ‘s begin.

The population of the world is about 7.1 billion, so the financial assets per person are now $33,800.  While we can argue that the range of assets owned is very wide and averages don’t mean anything, can we argue that it has always been that way?  Let’s say we can.

If I take those numbers and the population of the world as 200,000,000 in year zero, and assume that in today’s money everyone had financial net worth averaging $33,800 then,  the total value of financial assets on year 0, was about $6.75 trillion. (Today’s money value)

Suppose, for support,  I connect up to some other current data on this.  Forbes in 2013, says there are 1426 billionaires with a total net worth of $5.4 trillion.  An average of $3.8 billion each.   That is 2 billionaires for each 10,000,000 of population and 2.33% of the wealth of the world collectively.

So, in year zero there should have been 40 billionaires.  If they had 2.33% of all the wealth, that would be $157,000,000,000 in total and $3.9 billion each.  Pretty much unchanged.  We know specifically of at least one billionaire in Rome.  Crassus had a net worth in today’s value of around $70 billion.

We can see that the average wealth of billionaires has not changed much in 2013 years and so the distribution of wealth in the population probably hasn’t changed much either.  That confirms that per capita wealth hasn’t changed much and the increase in total world wealth is solely because of population growth.

Now the exciting part.  The rate of growth of the population over those many years is 0.1775% and therefore so is the rate of growth of total wealth.

It looks like this:

world wealth graph

The graph is not so unfamiliar.  Some things you could take away from all this:

  • Total wealth does not grow very fast.
    • If you want more wealth you will need to save it because growth is slow
    • You could try to get more than your share.
  • Total wealth is tied to population growth
    • Income distribution hasn’t changed much
    • Per capita income does not change at all
    • The only way to have more family wealth is to have more children

If you believed the conclusions then you need to work on skepticism.  There are several flaws in the argument and you should notice them.

  1. Long geometric averages probably don’t make much sense unless every period is like every other one
  2. It contains end point biases.  Things might be very different if I used a different start point.
  3. We don’t know that the growth in population is necessarily connected to growth in wealth.  It could be a coincidence of the “post hoc” error type.
  4. We are all individuals and we should not be overly concerned about “the others.”  The average.  If our life works, the rest of the people are not relevant in a financial sense.
  5. We believe growth is at a much higher rate than 0.1775%.  There must be more factors.
  6. In this data there is no indication of two or maybe more factors being involved.  a) growth as we expect it to be and b) something that destroys wealth to come back to the 0.1775%.  Something must destroy wealth almost as quickly as it accumulates.  War, plague, misplaced resources, governments, natural disasters and so on.  We really do not know what is happening unless we can assess both factors.

From a planning and management view, there may be value in avoiding the wealth destroyers and maybe not so much in trying to find spectacular growth.  Certainly spectacular growth attracts a lot of government attention these days.  Consider a wider search for wealth building situations and look for more benign governments.

The lesson from all this.  Pay less attention to people who tell you how macro systems work until you know how they captured and organized their data.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  |  Twitter @DonShaughnessy  |  Follow by email at moneyFYI

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