A Crisis Is an Opportunity, but Only for the Rich
By: Ben Le Fort
Tags: Inequality, Wealth, Money, Economics, Society

A Crisis Is an Opportunity, but Only for the Rich

Albert Einstein once said, “In the midst of every crisis, lies great opportunity.” These are true and wise-words; when a crisis strikes, there is an opportunity to change things for the better.

However, when it comes to an economic crisis such as the one we are living through in 2020, whether or not there lies great opportunity depends largely on your financial position heading into the crisis.

For the rich, a recession is an opportunity to build future wealth; for everyone else, it’s just a crisis.

Recessions are a catalyst for economic inequality

During an economic crisis, two things tend to happen that present an opportunity to build future wealth.

Asset prices fall. Interest rates are lowered.

That means it’s possible to buy stocks and real estate at low prices and ride their recovery to future wealth. That sounds like a pretty great opportunity, and it is, if you are in a position to take advantage of that opportunity.

Here’s a few other things that end to happen during recessions.

People lose their job. Then they pile up debt. They struggle to pay the bills.

Since it is lower-income workers that tend to get hit the hardest during a recession, they have no funds available to them to take advantage of low asset prices.

High-income earners tend to be less likely to lose their jobs, which means they can take advantage of the opportunity to invest while prices are low or even borrow additional money to invest at low-interest rates.

That’s exactly what happened in the wake of the financial crisis

In my writing, I frequently discuss why you don’t want your home to make up too large a share of your overall net worth. In a nutshell, if your entire net worth is tied up in the place that you live, it becomes very difficult to access that equity should you need it.

Research from the St. Louis Federal Reserve illustrates that home equity accounted for a much larger share of black and Hispanic households compared to white households heading into the financial crisis.

Access to homeownership helped many minority communities begin to (slowly) close the wealth gap with white households between 1989 and 2007. Since so much of their wealth was concentrated in their homes, when the financial crisis hit and foreclosures skyrocketed, 20 years' worth of progress was erased in two years.

In the decade following the financial crisis, the stock market went on a historic bull run, with the S&P 500 increasing by 263% from February 2009 to December 2019.

Higher-income families, whose wealth was not overly concentrated in their home, could take advantage of that bull run, while lower-income households saw their wealth stagnate because they did not have surplus money to invest.

COVID-19 has been an accelerant for inequality

A lot of people have referred to COVID-19 and its impacts as a “change agent,” but in reality, it’s simply an “accelerant”; speeding up trends that were already taking place prior to 2020.

People were already beginning to shop online more.

More people were watching Netflix at home rather than going to a movie theater.

Economic inequality was already growing.

The nature of this recession and the COVID-19 crisis has taken trends that were set to play out in the economy over 10 years and made them happen in 10 weeks.

In 2020, during the most severe recession since the great depression, the stock market and housing prices are at all-time highs. There are a number of reasons for this. If you were to ask 10 different economists, each might give you a different explanation.

The asymmetric impact of this crisis

Here is a simple way to look at it.

One of the reasons that asset prices are at historic highs during this crisis is that high-income earners, AKA “the people who have money to buy these assets” have been relatively unaffected by the economic shock compared to low-income earners.

This recession will be an accelerant for economic inequality due to the disproportionate impact it has had on low-income workers.

The type of jobs that people could easily do working from home skewed heavily towards high-income earners. While low-income jobs in the retail and service sectors were absolutely hammered.

When the stock market cratered in March, those who were lucky enough to work from home saw their income remain stable, and their personal spending drop dramatically.

That meant they had more surplus money than they have ever had to invest while stocks were cheap. As the stock market has come roaring back, so has the wealth of the high-income earners.

As one of the lucky people who easily transitioned to working from home full time in 2020, I speak from experience. While 2020 has presented many difficulties, financial troubles have not been one of them for me.

To articulate how unaffected people like me have been by this crisis, allow me to share my biggest financial regret of 2020; the stock market recovered too quickly.

If the stock market had taken a longer time to recover, I could have invested more while prices were low and benefited even more from its eventual recovery.

High-income earners who have been working from home are living their best financial life.

Income is up.

Expenses are down.

Wealth is up.

Mortgage rates are down.

The morning commute is gone.

While at the same time, many low-income earners have been dependent on government emergency response programs and have been more likely to pile up debt.

A research letter from the San Fransisco Federal Reserve showed that workers in the bottom 25% of earnings made up half of the job losses during this recession.

If you are a retail worker in 2020, you were probably much more worried about paying your rent than buying stocks while the market was down.

So, yes, an economic crisis presents enormous opportunities for those who are in a position to take advantage of it. For everyone else, a crisis is just a crisis.