Because the majority are owned by institutions – banks, pension funds and insurance companies – it is hard to trace through the impact of any capital gain to its ultimate beneficiary. One thing worth saying is that, at least in terms of effective wealth, the gainers clearly include those entitled to future payouts from defined-benefit pensions. You can’t sell such an entitlement. But it does offer a guaranteed flow of future income, much like the coupons from an indexed gilt (that’s why DB pension funds are obliged to discount their liabilities using gilt yields and why, in response, they hold significant quantities of government debt). The present value of this income has therefore risen in similar fashion. To the extent they include equities, the value of defined-contribution (DC) pension funds will have performed less well. The third point is that none of this need have any bearing on the distribution of income, as opposed to that of wealth. This is an important distinction. To the extent that asset prices rise because the marginal investor is becoming more patient, lowering the discount rate (Chart 6(a)), this reflects a change in the present value of a given stream of income, not in the stream itself. Things are a little more complicated if interest rates have fallen in response to slower growth (6(b)). In that case, anyone who has locked in a future flow of income (coupons on government bonds, for example) will gain relative to others.
But it’s unlikely the effect would endure for a very long time: the only lasting impact would be on inflation. And, in the real world, that’s not what’s happened – inflation has remained broadly close to target even as real interest rates, long as well as short, have trended downwards. This bears out, for me, that the real task for policy is to understand – and then adapt to – economic forces affecting the natural, or equilibrium rate of interest.13 For a variety of reasons, and over a long period of time, this underlying rate has been driven remorselessly downwards. An official interest rate that might once have been considered inflationary is now contractionary; failing to adapt to these changes sufficiently quickly would have depressed output and pushed inflation below target. And sharp falls in the equilibrium interest rates – which have probably not yet fully unwound – can be thought of as a significant driver of the substantial cuts in interest rates undertaken by the MPC in 2008 and 2009. As I say, those forces seem to have been at work for a long time, before as well as since the financial crisis. Over that time they have had differing effects on the performance of risky assets. During the 1990s all asset classes did well – bonds and equities alike. At least in terms of wealth, that will have benefited anyone who happened already to own long-dated assets, mostly older people. But over the last 15 years, equities have done poorly.