Wealth-to-Income Ratio

Wealth-to-Income Ratio

I've mentioned this ratio before and I'm mentioning it here again because it's an important metric to determine where the economy stands.

Here is how Richard Duncan describes where the US economy is based on the current ratio of wealth-to-income.

"Asset Prices have never been more inflated relative to income, speculation is rampant, and leverage is very high."

According to Niels Jensen, a very high wealth-to-income ratio is unsustainable for a couple reasons.

One reason is that wealth represents capital, and when capital is growing at too fast of a rate compared to income, then this leads to inequality and too much inequality is unsustainable.

Another reason is because wealth is the total amount of capital available for investment and income is the same as GDP which is the same as output.

Therefore, income and GDP represent output so the higher the wealth-to-income ratio is, the more capital it takes to achieve a return on that capital, therefore, the less return investors will get on their capital resulting in less incentive to invest.

For more information on this, check out this article: https://www.arpinvestments.com/arl/when-r-g