What can we learn from Piketty’s “R (Return on Capital) > G (Economic Growth Rate)” in Capital in the Twenty-First Century?
It’s a pretty profound question, but I’ve come to the conclusion that my own conclusion is that I should invest in the US stock market.
In this article, I will explain the logic behind the thinking that led me to this conclusion.
Why you should invest
Piketty proved in Capital in the 21st Century that R > G
Here, R is the rate of return on capital, which refers to the return on investments such as stocks, bonds, and real estate.
On the other hand, G represents the rate of economic growth. The economic growth rate is the rate of increase in value (services, goods, etc.) created by the work of people around the world. This can also be rephrased as the rate of growth in wages earned by workers.
In other words, what this law shows is: “Yield from investment > Growth rate of the world economy = Growth rate of workers’ wages”.
Piketty, using a vast amount of data, has proven that this equation has been true from 300 years ago to the present, with the exception of unique circumstances such as wartime.
This has revealed the essence of capitalism, which is that the wealthy are getting richer and richer and the gap between them and the working class is widening.
So, can we, the working class people, only be saddened by this fact?
No, it’s not. The only thing you need to do is to invest your surplus assets and get a return on your assets that is greater than the rate of growth of the world economy.
By continuing to do that incessantly, you will go from working class to capitalist class.
What should you invest in?
Piketty’s inequality shows that the essence of capitalism is that the wealthy should and can become richer and richer, and that we, the common people, should and can also sip their sweet juice.
So, how and in what exactly should we invest?
My conclusion is the U.S. stock market and, more specifically, investing in mutual funds or ETFs that are linked to the S&P 500.
I’ll explain why the U.S. stock market is the best bet, in order.
The strength of the U.S. stock market
According to Piketty’s findings, the global economic growth rate, G, is 1~3% for the world as a whole. R, the rate of return on capital, is 4-5% on average for the world economy.
So what are the G and R of the United States, which has been one of the strongest economies for many years?
While the U.S. economic growth rate G in recent years has been 2.7%, the return on capital R is 8.3%!
That’s nearly double the number of Rs in the world. That’s a staggering number.
Thus, R-G = 5.6%, and the current economic situation in the U.S. is that the gap between the working class that does not invest and the capitalists that do is widening at this rate.
A simple explanation of why the U.S. has the world’s highest rate of return on capital, R=8.3%, is that the average rate of profit of companies is extremely high, and the overall payout ratio is high, creating a strong foundation for investor protection.
Why the U.S. is a strong candidate for future long-term investments
We’ve seen that the U.S. rate of return on capital has been outstanding so far.
So can we say that this will continue to be the case in the future?
Unfortunately, the future is uncertain, so we can’t be sure, but there are several reasons to believe that the U.S. will continue to be strong in the future.
The first is that U.S. GDP per capita has been growing at an exponential rate of 2 percent per year for more than 150 years. Barring any particular reason, this trend is expected to continue for some time.
Second, the U.S. population continues to grow. And for example, although this is from 2014, the average age of Americans is 37 years old, compared to 45 years for Japanese.
This is an ideal demographic mix that is the opposite of a declining birthrate and an aging population.
The GDP per capita continues to increase exponentially, the population continues to grow, and since the demographic composition of the U.S. is dominated by young people in the prime of their lives, the overall GDP of the U.S. also continues to increase exponentially.
This is why I believe that the U.S. stronghold is rock solid.
Why you should invest in the S&P 500, which encompasses the leading US stocks
We have found that you should invest in the United States, which is expected to continue to grow in national power more and more.
However, there are many different types of investments, including stocks, bonds and real estate. Which one should you invest in?
The title spoils the story, but it’s best to invest in stocks. The reason is that we know that over the long term, stocks have been shown to have higher returns than bonds.
This has been shown by the famous Mr. Siegel through many simulations, but that’s not the point, it’s clearer in the following chart.
SOURCE：AAII Journal
This chart shows the evolution of asset values for each asset class in the U.S. over a period of nearly 200 years. According to this, over the 200 years, stocks have scored a high score of 6.7% annual gain.
There are other ways to invest in all U.S. stocks, but the S&P 500 has performed slightly better over the past five years, so we recommend the S&P 500-Linked Index in this article.
However, looking at the period since the Lehman Brothers collapse, all U.S. stocks have performed slightly better, so it will depend on your preferences as to which one you choose.
I invest in the S&P 500 because I believe the top 500 companies would be less likely to crash during a recession.
Summary
I mentioned that Piketty’s R > G inequality is particularly pronounced in the U.S., which means that a long-term savings investment in the S&P 500 is likely to yield the greatest return.
Of course, the future is uncertain, and investing in the stock market, a risky asset, carries the risk of losing principal, so it would be foolish to go into debt.
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