Two factors devouring your wealth: inflation and currency depreciation
There are two ravaging forces that have been chopping hunks of your wealth away for the past couple of years.
One that is perhaps better recognised is inflation – the rising prices that over time make each dollar that you earn, buys less than it used to.
Inflation has been particularly vicious and visible since the pandemic as prices rose much faster than usual and not only reduced purchasing power quickly but also forced interest rates higher, causing significant mortgage pain.
The other force that is perhaps less well recognised is currency depreciation which has been stripping value very directly out of your wealth – for evidence, look no further than the recent rapid hikes in the price of petrol, which are almost all due to the falling Australian dollar.
Since January this year, the Australian dollar has fallen from US71c to just US64c recently.
Falling dollar slamming Aussie wealth
Australians in particular have been hit by the falling dollar, with the recently released UBS Credit Suisse Global Wealth Report showing that the number of Australian millionaires shrank by about 20% in 2022.
The thing to note here is that these millionaires are classified using US dollars, which is why the fall was so precipitous.
Even among the remaining 1.8 million Aussie millionaires, there was a staggering combined loss of more than $1.5 trillion – the fifth biggest national wealth loss by millionaires behind the United States, Japan, China and Canada.
Some countries improving millionaire numbers
Interestingly, there were some countries in which the millionaire class increased their wealth, the largest being in Russia, Mexico, India and Brazil.
So, here in Australia we now house about 3% of the world’s millionaires, down from 3.5% the previous year, with about 59 million being millionaires globally – a fall of 3.5 million compared to the previous year.
The number of US millionaires fell by 1.8 million, Japan fell by 466,000 and the UK by 439,000.
A bad year for wealth
As you can see, in general it was a bad year for wealth – the worst since 2008 according to the report’s authors – but there was some good news when you looked a little broader than simply millionaires.
The hated top 1% actually shed some of their highly unequal share of the world’s wealth, although the fall in wealth inequality still left them in control of 44.5% of assets.
Australia scores well on the millionaire front but it scores even better on the distribution of that wealth.
Australia distributes wealth better
Using the more meaningful mean or “middle” number for wealth, the middling Australian finished 2022 with a net worth of about $380,000 – around $40,000 less than the previous year.
While having half of all Australians both above and below $380,000 might not sound too good, that distribution is much better than many other countries.
The only country with a higher median wealth than Australia was Belgium with $385,000 but we were well above many similar countries such as the UK ($234,000), the US ($166,000) and Hong Kong ($311,000).
Using averages, which are skewed upwards because of the handful of very wealthy people, we drop down to the fourth-richest country behind Switzerland, the US and Hong Kong, with the average Australian adult worth around $765,000, down about $89,000.
Australia’s mix of wealth, including property and shares, has remained steady since 2000 and debt has remained high but stable.
US assets can protect against currency falls
There are a number of ways to protect yourself from a falling currency, which seems to be the situation we face with the Australian dollar which has continued to weaken since these wealth figures were produced.
The main one is to have some of your wealth in US dollar denominated assets such as US shares through an ETF and it is also even possible to hedge cash against currency fluctuations, although in the long term the costs of hedging tend to mitigate against the benefits.
The other way to increase wealth is for the economy to grow and fortunately the analysis estimates global wealth will increase by about 38% over the next four years, reaching about $967 trillion by 2027.
Ironically, this wealth index used to be produced by Credit Suisse which was one of the casualties of the banking crisis in March this year, with fellow Swiss giant UBS performing a rescue merger between the two groups and gaining joint naming rights.
For this reason alone – along with the usual cautions about forecasts – it is wise not to bank too heavily on this or any other prediction of what might happen in the future.