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The World's Wealth is not deployed productively enough

Summary

The historic link between the growth of net worth and the growth of GDP no longer holds. This is the conclusion of an innovative look at an aggregate global balance sheet of assets by the McKinsey Global Institute. This divergence emerged as asset prices rose — but not as a result of 21st-century trends like the growing digitization of the economy. Rather, a lot of savings have not found investments offering sufficient economic returns and lasting value to investors.

The study suggests that we would need to redirect capital to new productive investment in real assets and innovations that accelerate economic growth. Thus, Globalance's investment strategy is receiving additional economic underpinning by this unconventional perspective.

"All economic actors must therefore ask themselves how we can use our assets more productively and invest them in a future-oriented way. The big issues of our time lend themselves to this: The fight against climate change, adaptation to demographic change and modern infrastructure." Eckart Windhagen, Senior Partner in McKinsey's Frankfurt office and co-author of the study

What is it about

Global net wealth has tripled in the past 20 years to 510 trillion US dollars. This is according to the new study "The Rise and Rise of the global Blance Sheet" by the McKinsey Global Institute (MGI). For this, MGI analysed the global economy with the help of accounting methods familiar from the corporate world, instead of using GDP as is usually the case. MGI has analysed the global economy using accounting methods familiar from the corporate world, rather than the usual GDP.

According to McKinsey, there are two paradoxes associated with this wealth growth: First, at a time when the global economy has become digital and immaterial, two-thirds of the world's net wealth is still stored in real estate. Only about 20 percent is in assets that drive productivity and growth. Second, as a share of aggregate income, the level of assets today is almost 50 percent above their long-term average. This is because asset prices have risen massively faster than general inflation in an environment of falling interest rates.

Why is it important

According to McKinsey, not only is the sustainability of the expanded global balance sheet in question; so too is its desirability, given some of the drivers and potential consequences of the expansion. For example, is it healthy for the economy that high house prices rather than investment in productive assets are the engine of growth, and that wealth is mostly built from price increases on existing wealth? The smartest way forward, then, may be for policy makers, investors and business to work to stabilize and reduce the balance sheet relative to GDP by growing nominal GDP. To do so, they would need to redirect capital to new productive investment in real assets and innovations that accelerate economic growth.

For business leaders, this would mean identifying new growth opportunities. Many corporations today have excess liquidity that they could deploy. Sustainability investments, for instance, could turn from a cost to a growth opportunity if framework conditions such as higher carbon pricing are put in place that require higher investment yet keep a level playing field between competitors.

If this will not be achieved, MGI sais, there is a risk that this long period of divergence may be ending, and high asset prices could eventually revert to their long-term relationship relative to GDP, softly or abruptly, as they have in the past.

The Globalance View

This innovative research by McKinsey is providing important economic underpinning for Globalance's investment strategy. Long-term investing in productive assets in sustainable growth opportunities is the best way to preserve and develop wealth. Furthermore, we agree that financial institutions should help limiting debt creation for asset transactions at ever-rising prices.

We recommend this perspective for careful reading. It is presented by McKinsey Global Institute on this well-designed project-page.

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