I always get excited when the Federal Reserve releases its quarterly Flow of Funds Tables. I will keep this short, as it is 9:30pm and my husband is about to scream.
First things first: household net worth is stable. A very good representation of the "wealth effect" is seen in the ratio of household net worth to personal disposable income (income net of taxes). This ratio is negatively correlated with the saving rate: as consumer wealth rises relative to income, the incentive to save (spend more now) falls.
As the chart illustrates, the ratio of net worth to disposable income rested quietly between 4 and a little over 5 spanning much of the measured series (1951, not shown, to about 1996); it now sits inside that band, 4.87 in Q2 2009. According to this relationship, spending and saving should stabilize, with households paying down debt and increasing consumption accordingly with income generation.
The point of income generation is not the topic here. But since wage growth is down to record lows (see Mark Thoma's post here), it seems that there is no way to go but up once the labor market turns around.
Households are taking a beating in credit markets, finding return only in the riskier equity markets.
And finally, the federal government owned nearly 15% of all securities in the GSE-backed MBS market. The Fed accumulated 11% of that!
It's going to take a much healthier economy than this one to withstand an unwinding of the Fed's balance sheet. Like I said, not surprising but interesting nevertheless.