Friday, September 16, 2011

Households' balance sheets continue to improve

The Fed recently released flow of funds data for the second quarter, which includes an update to Household's Balance Sheet. The decline in real estate prices has reduced the value of real estate holdings by about $1 trillion in the past year. However, this loss was more than made up for by a $5 trillion surge in the value of total financial assets and a modest decline in liabilities, resulting in an increase in net worth of $4.4 trillion over the past year. Most of the gains in financial assets have come, not surprisingly, from equity holdings and pension reserves. Despite the fact that the equity market at the end of June was still down about 15% from its 2007 highs, financial assets were only down about $2 trillion from their highs, or about 5%—a testimony to household's ability to add significantly to their savings.

It's also interesting to note that over the past year, households have reduced their holdings of Treasury securities from $1.15 trillion to just $0.84 trillion, despite the $1.3 trillion increase in Treasury debt over the same period, reflecting the important role that foreigners have been playing in financing our huge federal deficit (which, if Treasury yields rebound, may prove to have been a wise move on the part of households, and an unwise move on the part of foreigners). Another important story here is that households have been deleveraging—liabilities have declined by almost $1 trillion over the past four years—as they have been forced to adjust to lower home values, and it has been very painful. Nevertheless, it is encouraging to see that households' equity as a % of real estate holdings, which peaked at almost 60% in 2005, was unchanged in the second quarter at 38.6%, suggesting that most of the downward adjustment is complete.


Benjamin said...

So many elements in place for a great equities, real estate rallies, and economic boom.

Just need a catalyst.

Jake said...

The main buyer of Treasuries was the Fed (they purchased more than 100% of all new issuance for the 2nd straight quarter), rather than foreign buyers. Section F.209 ( shows foreign buyers purchases 1/6 of all Treasury issuance in the first half of this year, the lowest amount in at least 5 years (the table goes back to 2006).

Bill said...

I don't understand the last sentence: households' equity as a % of real estate was unchanged, and this measure was 60% in 2005 and is now 38.6%.

But, there has been a surge in the value of total financial assets while households reduced the value of real estate holdings. So, shouldn't equity as a percent of real estate be higher today?

Junkyard_hawg1985 said...

"Just need a catalyst." - Benji

A recession is when your neighbor lose his job. A depression is when you lose your job. Recovery is when President Obama loses his job. Now that will be a catalyst.

Benjamin said...


I suspect you may be right, but not for the reasons you think.

When we get a GOP president, the right will drop its stance that monetary stimulus is a bad thing.

So then we will get a recovery.

For that reason, I support Romney. If the GOP foists that bilious knave Rick Perry on us, I will waste my vote on Ron Paul.

Bill said...


I like the quote from Ronald Reagan at the Statute of Liberty in 1980 when he made the statement using Jimmy Carter's name of course. Let's hope Obama's out although a year is an eternity in politics and I can't help but worry that if the economy is doing a little better in 2012 (because the QE2 stimulus is finally circulating in the economy) and the Republicans nominate a fool, then Obama might just get re-elected.

septizoniom said...


Dr William J McKibbin said...

Hi Benjamin, I'm not sure the Republicans will turn to monetary expansion when they take power after 2012 -- my guess is that they will repeal Social Security, Medicare, Obamacare, and impose universal conscription in order to free up tax revenues for their grand design -- the conservatives will then lead America into a multi-front war that could include Iran, Afghanistan, Iraq, and possibly Northern Africa -- I'm sure conservatives will want to militarize the Mexican and Canadian borders as well -- millions of infantry will be required to fulfill military missions here at home and around the world -- once war is underway, the GOP will be able to finalize Federalization, eliminate states, and create an American empire in their own image -- elitism is now winning against populism, as well as Obama's version of pluralism -- I would not be surprised to see a return to gangster capitalism at at all levels of Federalism, including the bureaucracy, courts, legislature, and even the White House -- the important question that most Americans should be asking now is not how to stop elitism, but rather, how to survive and thrive in the chaotic world of Main Street USA -- if you want to be a Lord in the new society, better to own lots of equities and world-class skills (as in doctorates, fluency in foreign languages, patents, Olympic medals, trophy wives, SuperBowl rings, and the like) -- the world is about to get wild again...

Dr William J McKibbin said...

PS: Now is the time for "we the people" to acquire new skills and buy equities "on sale" -- I have never seen so many opportunities all around me as I see today... said...

This analysis is spot on, same as last year 2nd Quarter, high from the 2007 peak, each 2nd Quarter, respectively, although net worth slid from late April-Early May both in '10 and 11, We are somewhat better off than 2Q '11 vs. 2Q '10, and bottoming in late August-September each year. Next year, I'm going to lighten up (sell in May and go away?), in the 2nd Quarter. Have continued to pay down debt, at lower rates.

If the ChiComs, and other buyers of UST's want to lend us money at 2-4 percent, while U.S. equity investors earn 6-8 per cent per annum over the long run, over time, BRING IT ON! Maybe we aren't so far behind the curve as all the naysayers contend.

Charles said...

It would be interesting to see the per capita, inflation adjusted trends in net worth broken down by age groups. That might tell us how much longer we will see a desperate need to save in the absence of investment opportunities.

In this environment government should do everything in its power to foster authentic investment opportunities that are not driven by consumer spending. These opportunities would be limited under the best policy mix. As it is, the government is hostile to investment.

Benjamin said...

Dr McKibben:

Actually, the strengthened border along Mexico is a structural impediment--keeps labor out.

Tell William Fisher, pin-brain and Dallas Fed Chief.

Rick said...

Scott- since the data in your chart lags by one quarter (your chart indicates as of 6/30/2011) and QE2 had just finished its last liquidity injection during the same month, how do you project the same data as of 9/30/2011 now that the prices of equities are likely to be lower by 10% or more?

Frozen in the North said...

Stats came out a few weeks ago showing the amount of real per capita housing equity as of early 2011. It is back to it 1978 level

Take it leave it, but that's not such a positive figure.

Dr William J McKibbin said...

What is the generally prescribed macroeconomic remedy for an economy that is experiencing long-term declines in growth, long-term increases in unemployment, and long-term low to moderate inflation?

a) Do nothing
b) Monetary expansion ("print" money)
c) Austerity (tax increases and/or spending cuts)
d) Default

Junkyard_hawg1985 said...


We have run these options several times in America's history. Here are some of the responses and result. You also need option E) Increase taxes and increase spending and option F) cut taxes and cut spending.

Panic of 1837: From a federal level, it was option A (do nothing). From a state level, it started as option E, until they spent too much and ended up with option D - Default.

Panic of 1857: Ended in the civil war and option B - Print Money.

Panic of 1873: A - Do nothing

Panic of 1893: A - Do Nothing. Yukon Gold rush helped end depression.

Panic of 1907: A - Do Nothing. Economy rebounded quickly.

Depression of 1920: F - Cut taxes and cut spending. Economy rebounded quickly.

Panic of 1929: E - Increase spending and increase taxes. Hoover increased marginal tax rates from 25% to 63% when the economy started rebounding in 1930. This turned a depression into the great depression. Ended in World War 2.

What can we learn from these past example? Option F - Increasing taxes and increasing spending have failed miserably. This is the Obama plan that fortunately he has not been able to fully implement.

Similar to the Yukon Gold Rush, we have the ability to have a "black gold" rush if we get the government out of the way to allow drilling in ANWR and off-shore.

Option B (print money) is a bad choice as most previous panics leading to a depression coincided with a change in money values:

1837 - Species circular. Federal government no longer accepted paper money, but only gold for land purchases.
1857 - Elimination of the large cent and half cent. Went to small cent (debasement).
1873 - Coinage act of 1873.
1893 - Run on gold supply due to overabundance of silver coinage (16:1 ratio unsustainable).