Friday, March 13, 2009

Record wealth loss in 2008; saving rises

Yesterday the Federal Reserve released the fourth quarter flow of funds report. This is a massive report with stock and flow data across all sectors of the U.S. economy, including households, businesses (financial and nonfinancial), and government. First, let's look at the headline: the household. From Bloomberg:
U.S. household wealth fell by a record $5.1 trillion from October to December, almost twice the decrease in the previous quarter, as home values and stock prices plunged, Federal Reserve figures showed.

Net worth for households and non
-profit groups decreased to $51.5 trillion, the lowest level in four years, from $56.6 trillion in the third quarter, according to the Fed’s quarterly Flow of Funds report yesterday. Wealth dropped $11.2 trillion in 2008 from the year before, the biggest annual decline since the government began keeping quarterly records in 1952.
The chart illustrates annual growth in net worth (quarter over quarter from year ago) since 1952, which clearly illustrates Bloomberg's record - biggest annual decline since 1952, -14.5%. It should probably be noted that Q1 (first quarter), Q2, and Q3 of 2008 also broke that same record, so wealth really posted its biggest annual decline since Q3 2008.

Since its peak in Q2 (second quarter) of 2007, $64.4 trillion, household (and nonprofit organizations) net worth has declined 20%, or $12.9 trillion. This is massive wealth destruction, and probably the biggest catalyst to the recent surge in personal saving.

The scatter plot relates the ratio of net-worth (wealth) to disposable income, measure of the wealth effect, and the level of personal saving since 1980. There has been a fairly strong and negative relationship between wealth and saving, suggesting that the recent destruction in household wealth has caused consumers to increase saving (i.e., reducing consumption). And furthermore, the level of saving will probably rise until equity and house prices stabilize.

The wealth effects on consumption were strong in 2008. Clearly, there are other factors here that affect personal saving; but nevertheless, the destruction of wealth is probably a dominant force dragging down real consumption for two consecutive quarters (Q3 and Q4, see Table 8 on the personal income report).

Rebecca Wilder

1 comment:

  1. Although the nominal value of net worth peaked in 2007 Q2, the buying power of dollars held by Americans has declined every year since 2000.

    Thus, the $64.4 trillion household net worth figure is illusory.

    Because Americans held their net worth in U.S. dollar denominated assets, their true worth has been much lower.

    The 20% decline in nominal net worth reflects a decline in prices of things of worth expressed in U.S. dollars.

    In short, with the burst of the biggest bubble in history, fewer bids for things of worth have happened.

    To meet debt obligation, persons have sold off assets at prices that reflect market action.

    Americans were not as rich as they believed they were.

    Once persons stopped renting cash from credit cards, mortgage refi's (using houses as ATM machines) and flipping, the upward spiral of nominal prices stopped.

    This stopped the growth of nominal net worth.

    All disposable income not spent or spent on physical assets become saving. After all, an asset is a thing of worth that have can fetch cash at some street price. We call such things, wealth.

    Had someone held his or her saving in things not denominated in U.S. dollars, e.g., in gold, silver, crops, energy; his or her net worth would be higher today, substantially.

    Thus he or she could buy much cheaper U.S. dollars and live well.

    On a side note

    The Bloomberg reporter confuses worth and wealth.

    In one phrase, the reporter claims net worth has fallen (correct) and in another phrase that wealth has fallen (incorrect).

    Wealth cannot get destroyed unless bombs fall from the sky wrecking buildings, gear and crops.

    As long as things of worth exist, which persons are willing to trade money to get, such things are wealth and remain whole.

    Merely, persons have changed their belief about their money value (price) of those things and hence those things have become worth less.

    Bloomberg reporters ought to take a course in remedial English or at least learn the bedrock of English.