The Have-Mores

In the past few years the City of London has contributed to about a third of all UK economic growth. As they say, London is the capital of capital, at least 50 billionaires now call Britain their home. For better or worse we are living in historic times. It has not been since the 19 century that there has been such a great opportunity for some people to accumulate an incredible amount of wealth.

At least 30,000 Brits now earn at least half a million pounds a year since 2006 and 4,200 city executives took a bonus of one million pounds or more, during this period. Amongst the hedge fund industry, 150 alone have been adding more than 20 million pounds a year.

“The only other period in history when we have seen similar accumulation of wealth was during the industrial revolution”, said Dr Philip Beresford, Compiler of the Sunday Times Rich List. In the Victorian age many Victorian industrialists made massive fortunes very quickly. But that wealth was created over a 40 to 50 year time frame.

This period of massive wealth creation has been within the space of approximately 10 years. Such a tremendous amount of wealth created in so short a time, yet these peoples lives are completely distinct from the rest of the population. The super rich, those with several billion pounds drive around in armoured limousines with security guards watching over their shoulders. Frankly, congestion charge for these high rollers is ideal, with the serfs priced off the roads, they have the roads free to themselves. They can quickly get to a near private airfield and jet off to keep an eye on their far flung operations, which are part of their empire.

But how did these people accumulate billions of dollars in such a relatively short period of time?

Well, unlike in the Victorian era, it hasn't been about finding new resources or exploiting new technologies. The link between increasing productivity and wealth creation, in this latest bonanza of wealth creation, has been broken.

The answer lies with money itself, access to loads of easy cheep money and what they did with it, which is to speculate.

The new billionaire brigade were helped by a sharp fall in the cost of money itself, which was engineered by the US Federal Reserve. As we all know, the Fed is probably the world's most powerful unelected institution, controlling interest rates for the US and in many ways probably the entire world.

After the bursting of the dotcom bubble and 911, former Fed Chairman Alan Greenspan kept interest rates unusually low, jut one percent. What happened then? The supply of credit exploded because large exporting nations like China and Japan were generating huge surplus through their exports. This in turn got recycled through the banking system and lent to the West.

Since finance is global, it became cheap to borrow money anywhere, particularly for tycoons and business corporate executives, so they went on a frenzied shopping spree, which sent the value of houses, entire companies, equities, bonds and many other assets soaring.

People then borrowed more against the inflated value of their assets, for example their properties, art collections, portfolio of shares etc.

Borrowing vast sums for investment was the route to massive wealth, in other words they made high leverage investments.

Let me explain what this means in layman terms.

Imagine you purchase a property valued at 110,000 pounds and say you put 10,000 pounds down as a deposit and borrow the remaining 100,000 pounds. Assuming the property rises to 120,000 pounds you have made 100 percent profit, since with your 10,000 pounds of capital you made another 10,000 pounds.

So the more you borrow the greater your profits, when the market rises. In other words, if you are high up the food chain with easy access to cheaply available credit, under this type of system, you can become even more prosperous. “The past five years have been unprecedented in terms of cheap debt, have we benefited from that absolutely, I would rather be lucky than clever every time,” said Tom Hunt, West Coast Capital, with a private wealth of one billion USD.

So the power to leverage and cheap credit, engineered by the Fed is what made high rollers even wealthier.

But there was also another necessary ingredient, that being a favourable tax system.

There was a time when British Prime Ministers were hostile to the idea that tax rules should favour the supper rich. Remember Gordon Brown 30 September 1996 speech, “The Labour Treasury will not permit tax relief to millionaires in off shore havens,” But in government Brown changed his mind. Why?

The fear was that the supper rich would flee Britain if they had to pay taxes like everyone else. “We want the best people in the world to come to Britain, the multiplier effect of them building businesses is phenomenal,” said Hunt. So consequently, the super rich are now paying less tax than their servants.

Private equity funds making billions out of cheap money. Hedge funds borrow huge amounts of money and leverage to generate spectacular profits. The hedge fund market is massive in size and many times bigger than the primary market. These companies are not regulated and are all in off shore jurisdictions. Philippe Jabre, who manages Jabra Hedge Funds (personal wealth 200 million pounds sterling) said, “You are allowed to make a mistake once, but if it is a bad one you are out”. You are the ultimate risk taker,” he added. Using funds from a few wealthy clients and also borrowing massive amounts of money, colossal fortunes in profits have been made by some hedge funds. In 2006 approximately 10 of them made more than 500 million dollars each.

Perhaps this is the new era of debt fuelled financial excesses?