STWR - Share The World's Resources

F Scott Fitzgerald reportedly once said to fellow writer Ernest Hemingway: "The rich are different to you and me", to which Hemingway responded: "Yes, they have more money".

If this conversation were taking place today, Hemingway might have added: they borrow money to get even richer.

Statistics in the US and South Africa show that the rich are increasingly accounting for a disproportionately bigger share of borrowings from banks.

But unlike the middle-income earners who borrow to finance their living costs, the rich often use debt as a financial tool. This is one way in which the gap between the rich and the poor is widened.

Too much inequality is not good for any society, much more so in a country where much inequality is a result of racial discrimination.

Most of the debt owed by the rich is for mortgage bonds on primary or secondary residences. "After buying up second [and third and fourth] homes and funding ever more lavish lifestyles, today's risk-friendly rich are embracing debt as a way to expand their fortunes and fund increasingly acquisitive lives," the Wall Street Journal said in January.

Figures from the Federal Reserve Board's surveys of consumer finances showed that the richest 1 percent of Americans held 7 percent of the nation's debt in 2004, with a total of $650 billion (R5 trillion) of borrowings, up from 5 percent in 1998, the journal said. The survey is conducted every three years to provide detailed information on the finances of US families.

The richest 1 percent are households with net worths, including primary residences, of at least $6 million. Debt for this group grew faster than for any other group in the Federal Reserve Board's survey. It grew 150 percent between 1998 and 2004.

South Africa does not conduct surveys of consumer finances, but data from banks and other sources reveal trends similar to those found in the US.

Take the recent financial results of FirstRand, whose operating subsidiaries include First National Bank and Rand Merchant Bank. For the six months to December, FirstRand granted loans worth R157 billion. Of this amount, R18 billion, or 11.5 percent, went to customers in the financial services group's wealth segment.

FirstRand segments its customers into five groups.

The wealth segment is made up of those who earn R750 000 or more a year and have investable assets of R1 million (or those with the potential to get there). The others are the mass segment (individuals earning up to R60 000 a year), the consumer segment (between R70 000 and R750 000 a year), the commercial segment (agriculture, small businesses and medium-sized companies) and the corporate segment (large corporations). The bulk of the lending to the wealth segment represents individual loans, but there may be a small portion of commercial loans linked to wealthy individuals.

A report published last week by the national credit regulator says banks lent R1.2 trillion as of September, a growth of 67 percent from January 2004. Borrowings by households rose the fastest, gaining 81 percent, or R305 billion, to R680 billion.

Of the household borrowings, 65 percent is accounted for by mortgages, 13 percent by instalment sales and overdrafts, and 11 percent by other loans.

Leases and credit card debt each accounted for 5.5 percent.

The above figures will probably mirror patterns found in the US, with the rich accounting for a disproportionately bigger chunk of the borrowings.

Despite the borrowing binge by the rich in the US, debt still represents a small percentage of their total assets. This is the reason the rich can get richer off borrowings.

Federal Reserve Board data showed that the debt held by the top 1 percent amounted to only 3.7 percent of their total wealth, compared with 24 percent for Americans ranked in the 50 percent to 90 percent groups, the Wall Street Journal article said.

There are no comparative figures for South Africa, but the national credit regulator's report gives a hint. It says that the increase in the value of property between January 2004 and September last year helped improve the balance sheets of property-owning households, "making them more creditworthy in many cases".

The biggest beneficiaries of the higher property prices would have been those who had been owners of property for many years. They would have repaid a substantial portion of their mortgage bonds when prices rose, leaving them with a substantial net worth.

Maybe South Africa's policy makers should take note of how debt can build ever wider wealth inequalities into the system. Inequality is not desirable given that South Africa already has one of the biggest wealth gaps in the world.

Inequality in these proportions is likely to result in sociopolitical instability. It could also result in demands that, in the longer term, would not serve South Africa as an investment destination.

Demands for higher taxes and better distribution of wealth are inevitable if South Africa doesn't ensure equitably access to opportunities for creating wealth.

Failure to do so would leave the vast majority of South Africans no doubt in agreement with Fitzgerald when he said: "I have never been able to forgive the rich for being rich, and it has coloured my entire life and work."
Link to original source

Name

Email

Comment smaller | bigger

Write the displayed characters

I have read and agree to the Terms of Usage.

Add Comment