For Richer and Poorer--Wealth’s on the Move in ‘90s

A wealth transfer is a wonderful thing--that is, provided you’re on the receiving end.

It’s not nearly so pleasant if you’re on the giving end and your “gift” is essentially being taken from you rather than cheerfully donated.

The 1990s have been about some giant wealth transfers in the global economy, involving many hundreds of billions, even trillions, of dollars.

The givers have included Saudis princes, Iowa farmers, Indonesian laborers and Orange County pensioners.

The receivers have been hundreds of millions of consumers, and tens of millions of investors, worldwide--but mostly those in the United States and Europe.

The rich, in other words, have gotten richer. And you know how the rest of that line goes.

The Great 1990s Wealth Transfer was in high gear again last week, manifested in the wealth-receivers’ favorite symbol: the Dow Jones industrial average.

The blue-chip stock index surged 2.7% for the week to end at 9,159.55. That leaves it a mere 2% rise away from a new all-time high that would eclipse the old peak of 9,337.97 set July 17--before all of the global depression talk came and went.

Reluctantly on the giving end last week, meanwhile, were two groups that undoubtedly feel like they’ve given enough over the last eight years: commodity producers, including oil exporters and U.S. farmers, and U.S. small savers.

How do they give--and how does the Dow, in turn, receive? The 1990s wealth transfer has occurred on three major fronts. Here, a look at what they are and who has lost, and won, in each case:

* Wealth transfer No. 1: from commodity producers to commodity consumers. The price of a barrel of crude oil on New York futures markets ended last week at $12.14. A little more downward pressure and the price will fall through the 12-year low of $11.42 reached June 15.

Imagine your salary or wage reduced to where it was in 1986. That’s the reality oil exporters must contend with as the world remains awash in crude.

Adjusted for inflation, the price of oil is far lower than it was in 1986. Which represents a massive wealth transfer from the oil producers to everyone in America who has to fill a car gas tank a few times a month.

To put it another way: If oil prices had not declined so sharply, each of us would be forced to spend less on something else in order to afford the relative luxury of our national mobility.

Not too many Americans shed tears for the Organization of Petroleum Exporting Countries. But many other commodity producers also have surrendered wealth to consumers in the 1990s.

U.S. farmers today receive 5% less for a bushel of corn than they did on Dec. 31, 1990. In that same period, copper has slumped 39% in price and gold has tumbled 25%.

Not all commodities are lower, but it has been the 1990s trend for quite a few--particularly in the last few years, as supplies of key commodities have ballooned compared with demand.

That’s the nature of commodity markets, of course; they tend to boom and bust, and this is a drawn-out bust stage for many.

It’s easy to say to U.S. hog farmers--who saw pork prices decline last week to 18 1/2-year lows--that they shouldn’t breed so many hogs.

But as long as they’re doing so, people who love pork pay less to eat it, which leaves them with more money for other things--great for our consumer-spending-driven economy and thus great for the stock market.

* Wealth transfer No. 2: from the developing world (and key exporters) to the developed world. Economies of many countries in the developing world are based on raw materials (i.e., commodities such as copper, tin, oil and foodstuffs), which gives this 1990s wealth transfer some overlap with the one described above.

But the Asian economic crisis that began in mid-1997 with Thailand’s currency devaluation multiplied the effects of this wealth transfer manifold.

As East Asian currencies, stock markets and economies collapsed--wiping out decades of accumulated wealth--the initial effect on the United States was largely to increase our wealth.

How? The crisis triggered a plunge in U.S. Treasury bond yields as investors worldwide sought super-safe securities. That in turn pulled other long-term interest rates down at the end of 1997 and the beginning of this year. Especially mortgage rates.

Cruel as it may sound, the fact that millions of Indonesians lost their livelihoods helped many Americans afford bigger and more expensive homes, thanks to falling loan rates.

A second wave in this wealth transfer now is arriving in full force: cheaper Asian goods, as those countries try desperately to export their way back to health.

This wave (along with lower commodity prices) is helping to keep U.S. consumer price inflation at a very low rate, which in turn has allowed the Federal Reserve to ease interest rates without much fear of stoking inflation fires.

True, U.S. wealth also was lost as the Asian crisis became the Russian crisis and then the Latin American crisis beginning in August, sending most U.S. stocks into their worst plunge since 1990.

But for many investors, most of that stock market loss now has been recouped--just in time for the holidays, so that those same investors can feel financially confident walking into Wal-Mart to load up on value-priced Asian exports.

Even for developed Asian exporters, particularly Japan, the 1990s have been about a loss of wealth, or slower growth of wealth, versus the financial gains made in the stock markets of the United States and Europe, and the personal gains of many consumers in those economies.

* Wealth transfer No. 3: from savers to investors. The Fed, in cutting its key short-term interest rate (the federal funds rate) by a quarter-point last week to 4.75%--the third rate cut since Sept. 29--obviously has made Wall Street happy again.

And there is little question that the Fed and other countries’ central banks had to take the offensive with interest rates as the global financial crisis of August, September and early October threatened to destroy confidence in the world financial system.

But small savers, including many pensioners who can’t take stock market risk and instead depend on income from bank CDs and other safe accounts, once again feel as if they’re subsidizing Wall Street.

Nationwide, the average national yield on one-year bank CDs has slid from 4.92% on Sept. 29 to 4.45% now, according to CD tracker RateGram.

That may not seem like much to equity investors, but it certainly makes a difference to a pensioner on a fixed income.

Many CD-dependent Americans probably pine for the late 1970s and 1980s, when small savers were rewarded handsomely for taking relatively little risk with their money. Even as recently as Dec. 31, 1990, a one-year CD paid 7.35%--a yield that must look spectacular to today’s savers.

As savers have given up substantial interest income in the 1990s, stock prices, of course, have mushroomed: The Dow index has risen 248% in price alone (not counting dividends) since Dec. 31, 1990.

The story has been much the same in Europe, as equity markets there have surged while interest rates overall have fallen sharply.

So wealth has, in effect, been transferred from savers to investors, and for reasons that make perfect sense to academics. For one, inflation has fallen, which in turn should reduce the inflation “premium” in interest rates, especially in rates on virtually risk-free accounts (such as CDs).

Lower rates, in turn, make stocks more valuable on their own, and give companies more financial freedom by lowering their borrowing costs.

But that doesn’t make savers any happier about earning less.

Naturally, from equity investors’ viewpoint, this wealth transfer--and the other two--ought to go on forever. They have been interrupted in the 1990s on a few occasions, but not reversed, or at least not for very long.

But it’s wise for the receivers of these wealth transfers to realize both how much they’ve benefited from them--and how much it could hurt if the wealth flows were somehow reversed.

Payback, as they say, is hell.

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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The Great 1990s Wealth Transfer

Commodity prices and interest rates have slid in the 1990s, and the fortunes of developing Asia and other major exporters have weakened. Their losses have been the developed world’s gain-as reflected in the latter’s stock market gains.

INTEREST RATES/COMMODITIES

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Investment/security Dec. 31,1990 Now Change Money market fund yield 7.16% 4.73% -2.43 pts. 1-year bank CD yield 7.35% 4.45% -2.90 pts. 30-year T-bond yield 8.24% 5.22% -3.02 pts. Corn (bushel) $2.32 $2.20 -5% Gold (ounce) $394.20 $296.20 -25% Copper (pound) $1.18 $0.72 -39% Hogs (pound) $0.49 $0.30 -39% Oil (barrel) $28.44 $12.14 -57%

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STOCKS: DEVELOPING WORLD/MAJOR EXPORTERS

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Investment/security Dec. 31,1990 Now Change Australia (All Ord.) 1,279.82 2,703.60 +111% Taiwan (weighted) 4,530.16 7,380.53 +63% Indonesia (composite) 417.79 461.56 +10% S. Korea (composite) 696.11 452.93 -35% Japan (Nikkei 225) 23,848.70 14,779.94 -38% Thailand (SET) 612.86 371.93 -39%

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STOCKS: DEVELOPED WORLD

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Investment/security Dec. 31,1990 Now Change U.S. Nasdaq composite 373.84 1,928.21 +416% U.S. S&P; 500 330.22 1,163.55 +252% Germany (DAX) 1,398.23 4,911.88 +251% U.S. Dow industrials 2,633.66 9,159.55 +248% Britain (FTSE 100) 2,143.40 5,717.50 +167% France (CAC) 1,505.10 3,802.70 +153%

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Source: Bloomberg News; Times research