Wealth begets wealth, or so they say.  But what does that mean exactly?  Well at it's simplest it means if you have money and access to money then you can make money. 

If you have money left at the end of the month, after you've paid your living expenses, then you can choose to save it.  If you put it into a savings account you will earn interest which means you will get a return on the money you have deposited; your money is making money.  The problem is the rate of interest you receive will typically be below the rate of inflation.  So you can save money but it's not quite keeping up with increases in prices.

But saving is good right?  It means you are creating a financial buffer for yourself and the the fact that you can save means you have opportunities to invest in things like a new car, college fees, your retirement etc.  Yes things will probably get a bit tight from time to time if you have children, if you move to a bigger house, if you get divorced etc. BUT you are lucky, you have excess money that you can put to work. 

However to make more money and keep up with inflation you need a higher rate of return than you will get in a savings account.  Which means you need to take on higher risk to get your reward (the classic risk-reward curve).  Higher risk means investing in assets which have a higher potential return such as properties, stocks, bonds, options etc.  Which is where things can become a bit complicated.  You can do your own research and make your own investments and maybe by sticking to lower risk tracker funds you can beat the rate of inflation.  But you're no finance expert and you probably have a day job, which means you lack the time and skills required to select the best investments.

If you have enough money you can pay someone to do this for you.  Many companies offer financial investment advice and will help you invest your money (they will all take a cut so make sure you understand what that is and how it erodes your return).   The thing is, the more money you have, the more risk you can take on and the higher your likely returns.  This is compounded by the fact that financial institutions only offer higher return products available to those with more money to invest.  Turn up to Goldman Sachs with $50k and see what they say, then pitch up the next day with $10m and you'll get a very different response.

So the more money you have, the more you can save.  And the more you have, the more access you get to higher potential rates of return so you are building your wealth.  Which means the rich are always able to get more bang for their back on their savings and investments and the wealth gap is always increasing. 

Now imagine, like tens of millions of people, you don't have any money left at the end of the month and you're maybe having to work two jobs just to cover all your monthly expenses.  You can't save anything and therefore you cannot increase your net wealth, you are living hand to mouth! 

If you then overlay the lens of high inflation you can see that this problem can become acute.  Higher inflation causes Central Banks to raise interest rates.  Once interest rates are increased, higher overall returns are available from a range of asset classes and the rich can take advantage of this.  The double whammy for the poor is that higher interest rates used to reduce inflation will cause economic slowdown and recession, so companies start to cut costs and the easiest costs to cut are people, especially those on lower wage jobs. 

Therefore the gap in wealth keeps getting bigger and the poor become trapped not able to increase their standard of living.

Unfortunately it gets worse.  It's a natural thing to want to pass money onto your children but this then compounds the issue. When people with money pass money onto their children, their net wealth increases and so the cycle continues.  If you are poor you can't pass any money on so your children are also trapped.

It wasn't always this way.  In the post World War II economic expansion there was an economic boom where high levels of investment by Companies and Governments meant it was possible to get a good jobs and move yourself up to a higher level of earning. 

Those times are gone as can be seen by how much wealth is now being held in just a small percentage of the population.  This polarisation in society can ultimately lead to civil unrest hence the idea that governments put in mechanisms for the effective Redistribution of Wealth via taxes, investments etc. 

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