The Fed has released its Flow of Funds data for the first quarter, and there are several notable developments, as summarized in the chart above. For starters, households have been deleveraging since 2007 (reducing net debt by almost $1 trillion), yet the economy has failed to implode as the doomsters were predicting. Financial assets have made a full recovery back to their 2007 high, thanks mainly to a $1 trillion addition to savings deposits and a rally in the equity and corporate bond markets. The value of households' real estate holdings has recovered to 2010 levels, but is still down over $6 trillion from the 2006 highs. Finally, despite all the turmoil of the past decade (housing market collapse, financial market collapse, worst recession in generations, slowest recovery in generations), households' net worth has risen at an annualized rate of just over 4% since 1997, almost double the rate of inflation.
This is a testament to the resilience and inherent dynamism of the U.S. economy. We have managed to weather almost unimaginable storms; most households have endured wrenching and painful adjustments; nevertheless, things are getting back to where they should be, slowly but surely, thanks to hard work and savings. A good deal of this progress has come despite the headwinds of excessive government spending and regulation, despite extreme gyrations in monetary policy, and despite the huge growth in federal borrowing which has raised fears of a significant increase in future tax burdens. If monetary and fiscal policy can get back to a more stable, sustainable and predictable path in the future, and I think they can, then the outlook will brighten even more. (See John Taylor's excellent summary of what needs to be done here.)
Improvements in Europe & China would cause an outflow from the dollar, Treasuries, utilities and corporate bonds. The stock market would rally nicely. Add to that fiscal and monetary responsibility and U.S. stocks will be all the rage again.
ReplyDeleteIt is a matter of changed psychology. Investors will be looking out further into the future for a rate of return. They know it will take awhile but the rotation will be obvious, steady, and unrelenting.
It is just a matter of when.
Looks like all is well for households in America...
ReplyDeleteSo the Fed, printing endless amounts of paper backed by nothing but a promise, sends out reports on assets values they intentionally try to inflate, and we are supposed to feel good about it?
ReplyDeleteIt is obvious which asset class is contributing the most to 'Net Worth' and the one most susceptible to an utter collapse stemming from CB ineptitude and hubris.
Public Library
ReplyDeleteYour comment just reinforced how an individual's basic principals and beliefs influence how one interprets facts, the conclusions one reaches, and therefore how one invests, etc.
Scott, is deleveraging behind this anemic recovery? Household debt started growing in the 1980s boom. Did the boom cause an increase in debt, or did the increase in debt fuel the boom? Same for the 1990s and the Bush years. I've been taught that debt is not necessarily bad if used for productive purposes that include servicing the debt; i.e. rental real estate. Can we have a booming economy without increasing debt, and is deleveraging now a good thing?
ReplyDeleteWell stated, Mr Library!
ReplyDeleteDid anyone noticed that the debt level is back as well?
In the defense of the bulls, we are seeing much more activity in commercial construction this year..
But then the industry has all but collapsed in the past five years...
I think Public Library is right. Four+ years of money printing in an attempt to reflate the bubble and make everything look hunky dory does not happen without consequences.
ReplyDeleteWith the US annual deficits of $1 trillion as far as the eye can see, how much longer do you think we can maintain effectively 0% long term rates? What happens when the bond buyers go on strike. I'm afraid it will be very unpleasant.
This comment has been removed by the author.
ReplyDeleteWilliam,
ReplyDeleteYou simply cannot print your way to prosperity, issue more debt to resolve a debt crisis, and absolve failed institutions of their failures. The consequences are disastrous; more painful than the original medicine given to the patient. I think history will eventually record this quite accurately. Libertarians clearly understand where this is headed even if it takes longer than expected to get there.
Interesting reading from MarketWatch:
ReplyDelete"The Obama Spending Binge Never Happened" (But, he's constantly blamed for it anyway.)
"What people forget (or never knew) is that the first year of every presidential term starts with a budget approved by the previous administration and Congress. The president only begins to shape the budget in his second year. It takes time to develop a budget and steer it through Congress — especially in these days of congressional gridlock.
The 2009 fiscal year, which Republicans count as part of Obama’s legacy, began four months before Obama moved into the White House. The major spending decisions in the 2009 fiscal year were made by George W. Bush and the previous Congress.
http://articles.marketwatch.com/2012-05-22/commentary/31802270_1_spending-federal-budget-drunken-sailor
I wonder how that chart would look if we did it on the basis of something tangible. Instead of dollars, show the household balance sheet in terms of ounces of gold or silver. I think the artificial money printing makes it look good in dollars, but terrible in something tangible.
ReplyDeleteFortunately, my networth has not followed the common household path...
ReplyDelete@John Perhaps you have not been following the story closely enough, but since the Nutting story was released it has been thoroughly debunked. The 2009 budget was submitted by George W. Bush but never passed into law. Obama added a $1 trillion "stimulus" to the budget and it subsequently passed. That 2009 budget became the baseline budget to which subsequent spending was compared.
ReplyDeleteShort explanation: Nutting article was complete fantasy. Obama's $1 trillion deficits belong to Obama.
Coincidentally, here is another perspective on household balance sheets. Perspective is everything. This perspective is aligned with those worried about the "growing divide" between the haves and have nots. Still, it is what it is.
ReplyDeletehttp://www.nytimes.com/2012/06/12/business/economy/family-net-worth-drops-to-level-of-early-90s-fed-says.html?smid=pl-share
The recent financial crisis left the median American family in 2010 with no more wealth than they had in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.
This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period.
Unsurprisingly, the report is full of grim news, and although it is news from 18 months ago, fresher sources of economic data make clear that most households have since seen only modest increases, at best, in wealth and income.
Income declines 8%; net worth declines by 40%...
ReplyDeleteWhy is 2012 even on this chart??
http://www.calculatedriskblog.com/2012/06/fed-survey-from-2007-to-2010-median.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
Who does one believe anymore?
Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances
ReplyDeleteFrom the Board of Governors of the Federal Reserve System--Federal Reserve Bulletin, dtd. June, 2012.
Spain's household balance sheets have also dramatically improved over the weekend. Bullish!
ReplyDelete