Indexes

# Inequality is a strange thing.

There are many ways to quantify inequality.

But outside of the figures, there is no getting around that there is a controversial matter.

We usually associate inequality with poor countries, but unfortunately, macroeconomic central banking policies made us see inequality in western countries taking place in the last twenty years.

The inequality issue is a decision-maker concern, but sometimes, as politicians and central bankers try to fully control the economy, inequality tends to be used as a political weapon, not as much as an accurate macroeconomic serious discussion theme.

## The Gini coefficient

Let’s imagine an economy with three people and three dollars to earn each year.

The perfect even system would have each of these players earn one dollar each.

The income of one person is one dollar. The second person plus the first person equals two dollars. And the income of the third person plus the second person plus the first person equals three dollars.

It’s a perfect X=Y relation in a simple graph.

This perfect world of equality would have a Gini coefficient of Zero. That means everybody would earn the same amount of money.

We could also imagine the opposite.

Three dollars would go just to one person. So it means the Gini coefficient would be One. And it would also mean that the system couldn’t be more inefficient and unequal.

The Gini coefficient from all nations is always around 1.000» Gini »0.000

These coefficients can measure two things: income inequality and wealth inequality.

Income inequality is the fashion one, where we frequently read and see the gap between the middle-class worker and the CEO of a known company on social media.

If CEOs earn gazillions of dollars, they can save more and build more wealth related to a middle-class worker.

However, there are countries, especially in the north of Europe, where social policies are pretty strong and are funded by pretty high taxes.

That’s why if we look at the world bank records on income inequality, all of these nations rank pretty low.

Although we could associate income inequality with wealth inequality, these northern European nations are in the high ranking in what matters the wealth inequality.

These northern European nations have more wealth inequality than countries like the US, Brazil, or India.

Why?

In northern European nations, households are incentivized to borrow up to and over 100% of the value of their home as a mortgage.

If the borrowers can’t pay their mortgage, and the bank can’t get back the money from repossessing the home, it can just get a check from the government for the difference- it’s a risk-free loans game for banks.

Well, regarding households, this means that a good chunk of the population is underwater in their homes, and that’s perfectly fine.

Meaning, the northern European country households, although having a high debt burden, in this macroeconomic framework, all live very comfortable lives.

## Take away

Negative net worth households don’t necessarily mean they belong to a poor population.