It is not often that an epigrammatic expression from a spiritual text migrates to the material world to emerge as a popular idiom. The Gospel of Matthew (25:29) states, “For to everyone who has, more shall be given.” The text underlines the spiritual quest to value divine blessings. In 1829, the poet P B Shelley found political context and used it to frame the construct of ‘the rich get richer’. A century later, American sociologist Robert K Merton deployed the sentiments to coin the Matthew Effect to explain the gaps in recognition received by the eminent and the unknown. The concept has since morphed to reflect the phenomenon of those with advantage accumulating greater advantage.
The Matthew Effect is manifest across the global economy—at the individual and institutional levels. Theory has it that inflation and higher interest rates are hostile to wealth creation. That doesn’t quite play out in the real world of financial assets. To quote Shelley, the rich are getting richer. In 2023, the net worth of the world’s billionaires went up by over $2 trillion. And it is rising. The Bloomberg Billionaires Index shows that in the first 100 days of 2024, the wealth of the world’s 200 richest folks went up by nearly $450 billion and the net worth of Indian dollar billionaires shot up by over $75 billion.
The impact is visible in data on inequality—the wealth of the top 1 percent in the US hit a record $44.6 trillion. And it is not just in the US. In the past 12 months, the US Fed Funds Rate—effectively the benchmark for global interest rates—has been around 5 percent. Yet indices in the US, Japan, UK, Europe and India are hovering at all-time highs. The combination of rising stock valuations and higher interest rates are a force multiplier for the Matthew Effect as returns on cash and investments boost wealth.
On Wednesday, when the US Bureau of Labour Statistics released the data on consumer price inflation, it was 8.30 am in New York, 2.30 pm in Frankfurt and 6 pm in Mumbai. A loud thud echoed in markets across time zones. The case for three cuts in 2024 has shrivelled to one or none—indeed, Larry Summers suspects the next Fed move could well be a rate hike. Decoupling from the US theme song of higher-for-longer could threaten currencies—the Japanese yen, for instance, is at a 34-year low, the euro and pound are languishing as the Dollar Index strengthens. Unsurprisingly, the Bank of England and ECB lean on data dependence when asked about rate cuts.
The price for persistent inflation in developed nations is being paid by developing nations. Higher inflation in the US has dashed hopes of an early rate cut in India, too, potentially pushing up the cost of infra investments. While India is better placed in terms of the pace of growth, GDP data shows consumption is hurting, thanks to the higher cost of living. The effect, an IMF report reveals, is worse on the Global South—higher cost of capital and sovereign debt affect financial sector stability.
The expansion of the Matthew Effect is propelled by the role of inflationary geopolitics. The globalisation of grief originated in the developed world in 2020. The cause of inflation stemmed from the trillions poured in as stimulus by the rich world. What worsened it was the delay in addressing it. Aggravation arrived with the invasion of Ukraine by Russia resulting in a blow-up of energy and food prices. While inflation in advanced economies is slowing, that is not the picture in less advanced economies—food price inflation in many developing economies is in double digits as per the World Bank.
The fact that inflation is persistent despite the fastest-paced steepest hikes is again the consequence of fiscal policies afflicted by geopolitics. The return of industrial policy across Europe and the US—effectively reshoring in the guise of supply chain resilience—has resulted in fiscal expansionism. For instance, in the US, the government has spent roughly $50 billion to woo investments via the Inflation Reduction Act—it agreed to fork out $11.6 billion to TSMC and $6.6 billion to Samsung for chip manufacturing. The fiscal deficit in the US is nearing 7 percent, translating into a trillion dollars being added to national debt every 100 days. The privilege of being the reserve currency, again a facet of the Matthew Effect, emboldens this approach.
The revival of industrial policy has triggered protectionism—subsidies for made in Europe or made in America products are effectively non-tariff barriers and there is no running away from the fact that this is inflationary geopolitics. The US, for instance, has continued with Trump era tariffs even in the Biden era. Now, candidate Trump, who called India “tariff king”, is promising reciprocal tariff and across-the-board import tariffs of 10 percent even if it means higher inflation.
The fight against inflation is and will be daunted by rising spend on defence. A good tracker of angst is the price of gold—its recent rise began in October 2023 following the Israel-Hamas war and is now at a historic high of $2,343. This weekend, the world is gripped by anxiety on a possible retaliation by Iran following Israel’s attack on its embassy. Inflationary geopolitics is defining the trajectory of cost of capital and riveting the Matthew Effect.
Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
(shankkar.aiyar@gmail.com)