Megaflation? Inflation and Ultra High Net Worth

We're seeing companies like Groupon selling for billions of dollars.  It now costs $300 Million+ for a really nice yacht.  The 20th anniversary Louboutin shoe runs $4k at Barneys (and it's kind of ugly).  This is a special kind of inflation.  It's not a mere multiplier of the previous value of the dollar, but the value of the dollar to a narrow band of consumers - the ultra-rich.  If you sell commodity chicken breasts - the kind you find in every grocery store - there is a limit to what you can charge.  Too high, and you won't sell enough chicken breasts to pay your electric bill.  But if you're selling ultra-luxury products, it's almost suicidal to sell them at prices the masses can afford - the ultra-rich luxury shopper wants exclusivity, and the only way to get it is to put products beyond the means of the masses.  Dollars inflate in context.  The dollars of the wealthy are a unique context.  By ultra-rich standards, millionaires ARE the masses.

The World Wealth report takes an annual snapshot of the wealthy.  Their 2011 report - as listed on their website - doesn't seem to define their current meaning of the terms High Net Worth Individual (HNWI) and Ultra-HNWI, so I don't know if the minimums have changed, but wikipedia cites the 2007 Wealth Report as defining HNWI as millionaires and Ultra-HWNIs as those with assets greater than $30 Million. "Global HNWI population and wealth growth reached more stable levels in 2010, with the population of HNWIs increasing 8.3% to 10.9 million and HNWI financial wealth growing 9.7% to reach US$42.7 trillion. The global population of Ultra-HNWIs grew by 10.2% in 2010 and its wealth by 11.5%."  Wikipedia cites the 2007 Wealth Report, indicating 3.3 Million HNWIs in North America, and 41,200 Ultra-HNWIs.  That would include the Bill Gates' of the world, whose billionaire status makes the common millionaire a mere slumdog, but American billionaires number in the hundreds, not the 10s of thousands.


MeasuringWorth.Com takes a few different approaches to comparing inflation over time.  Instead of using a mere CPI multiplier, they offer additional approaches, including "Economic Power," or wealth as a share of GDP, intended to convey how many adjusted dollars it would take to have roughly the same influence.  Comparing a WWII millionaire against today's dollars, MW comes up with:  "In 2011, the relative value of $1,000,000 from 1945 ranges from $10,200,000.00 to $67,700,000.00."  The $10.2 Million figure uses a GDP deflator*.  The $67.7 Million figure represents how many current dollars it would take to have about the same level of influence or power.  To enjoy the same economic status or prestige, however, would cost only $30.4 Million 2011 dollars.  Yet the CPI Inflation calculator tells us only that $1 Million 1945 dollars are equal to $12.5 Million 2011 dollars*.  It depends what you're buying.  Chicken breasts are one thing.  Supra-human rights and influence are something else altogether.  George Soros cracked the top 10 on Forbes 400, and I don't think he had to break a nation's currency last year to do it.

So next time your mind boggles at the idea of the Facebook boy being "worth" Billions, take it with a grain of context.  John D. Rockefeller was a billionaire (with a B) in 1916, back when that was real money.  In 2007, the NY Times estimated that Rockefeller's inflation-adjusted net worth would be about $192 Billion.  Interesting, most of the 30 Wealthiest Americans Ever in the NYT article made their money facilitating American production/exports (coal, oil, railroads).  Compare that to the top 30 on Forbes' 400 list today - software, Walmart, hedge funds/investing, casinos, media, retail, candy... I'll grant, software can facilitate production, but most of the rest are either making money by shuffling money around, or selling people crap they don't need instead of selling tools/materials for creating durable goods.  In our modern economy, the money isn't in the steak, it's in the sizzle or in the e-mails and databases tracking the steak or the sponsored ads, newspapers, and magazines selling the steak.

The Forbes 400 starts with Bill Gates @ $59 Billion and ends with a 4-way tie for 397th place @$1.05 Billion.  The ranks of the billionaire club are still pretty durn small.  Their combined net worth is about $1.5 Trillion.


* CPI is especially a joke in the context of the ultra-rich.  In explaining why it makes sense for the CPI to use the price of hamburger when steak price increases would push "inflation" measures up, BLS said: "Thus the index does not reflect the fact that consumers can and do, to some degree, insulate themselves from the impact of higher prices by adjusting their spending to favor relatively lower-priced goods or services. Consequently, the current CPI, when compared with a measure that reflects this substitution effect, tends to overstate the rate of price increase consumers experience." Because I'm sure the ultra-rich totally trade down from Mercedes to Honda and from First Class air to staycations, right?

The thing to remember about CPI is that many government-contract inflation adjustments are pegged to the CPI.  By tweaking the CPI to understate inflation, the government reduces the cost of inflation-targeted obligations like Cost of Living Adjustments.  They have a huge vested interest in underestimating inflation.