Thursday, December 8, 2011

Household balance sheet update

The Federal Reserve today released its Flow of Funds report for Q3/11, and this chart extracts the relevant data for the status of households' balance sheet. Net worth fell about $2.5 trillion in the third quarter, mainly due to the 14% decline in the stock market during that period (the third quarter ended one day before stocks hit their Oct. 4th low for the year). Real estate values increased marginally, and debt declined marginally during the quarter.

I think it's important to note that households have rebuilt their net worth to almost what it was in 2005, just prior to the great housing market collapse. Given the rebound in equities to date, household net worth today is likely very close to its 2005 levels. In other words, despite the massive destruction of home equity values and the meager 2% average annual return on the S&P 500 since the end of 2005, households have managed to regain their financial footing mainly by boosting savings. We would all like to be richer, and millions would still love to again find they have positive equity in their homes, but we are making progress.


Junkyard_hawg1985 said...

Is the net worth data on a constant $ basis? The CPI in October 2011 was 226.4 vs. 195.2 for the 2005 average (+15.9%).

This is the problem with the lousy Keynesian policies: they make you feel good about a number, but the underlying wealth has been destroyed through inflation. Another way to look at this is despite all the work Americans have done since 2005, we have lost about 16% of our net wealth due to inflation. Policies like Cash for Clunkers on a small basis destroy wealth at the alter of "economic stimulus." At least Benji will be happy with these numbers.

Scott Grannis said...

Good point about inflation. A little here, a little there, and suddenly you're talking about trillions of dollars going up in smoke.

Benjamin Cole said...


Actually, I am for prosperity, of the real kind.

Sure, for now I would like some Friedmanite monetary expansionism. Some inflation for next several years would help real estate, and help us deleverage.

I am on record many times for the need to hold federal outlays to 16 percent of GDP.

What I am against is an unhealthy and peevish fixation on inflation, to the detriment of other, more-important economic goals.

Benjamin Cole said...

I think Scott Grannis may have mistepped in his reply here on inflation.

Inflation does not harm household balance sheets--indeed for homeowners with mortgages, inflation is a great friend. (Same for small businesses that own their own property).

Equities rise with inflation.

Gold is supposed to rise with inflation, but seems to go hyper.

Only bonds sink with unexpected inflation. However, bondholders took a risk when they bought, and presumably the inflation risk was factored in.

Bondholders are not a sacrosanct group, anymore than equities-investors or homebuyers or a guy who buys a carwash. No one is guaranteed profit through government policy.

Government policy must favor economic growth, and cannot be sacrificed to protect a favored interest group, such as bondholders.

Squire said...

Prices of household assets go up during inflation. Homes , stocks, rental income, small business inome. But do wages keep up? Does that offset the rise in assets, etc. ?

Benjamin Cole said...


Wages lag inflation. This may be beneficial however, in that inflation can offset something called "money illusion."

in downturns, employers find it hard to cut wages. It is considered a punitive action, for social reasons.

Some inflation accomplishes wage reduction, thus boosting employment.

Inflation in the 3 percent to 5 percent range is a good thing, for many, many reasons.

Junkyard_hawg1985 said...

"Government policy must favor economic growth"

I disagree. I think government policy should favor wealth creation. Usually the two go hand-in-hand, but not always. Here are some recent examples:

Cash for Clunkers: It creates new car sales (economic activity) by destroying usable automobiles (wealth).

Extended Unemployment vs. Keystone pipeline - Despite the claims by Pelosi and Obama that extending unemployment creates more jobs than building the Keystone pipeline, the Keystone pipeline represents wealth. That pipeline will continue to supply oil to U.S. refineries for a long time. UI represents an incentive for people to not create wealth, but rather to consume wealth by receiving a check and not creating any wealth in return.

Paving a good road as part of the "stimulus." I had this conversation with my state representative as to why we were repaving a good road. His answer is that it was shovel ready so federal funds were available. We repaved a road that still had a couple of years before it needed to be repaved. We destroyed wealth (a paved road) to create economic activity that didn't provide any new benefit to society.

I would also argue that most people prefer wealth to economic activity/jobs. If you don't believe me, ask your friends how many of them would keep working if Bill Gates gave them $1 billion. If fact, most people work in order to build wealth so after time they can stop working (retirement). In the name of economic growth, we constantly do stupid wealth destroying stuff to boost economic growth.

Scott Grannis said...

Junkyard: you are right. You can't have true growth without wealth creation.

Benjamin Cole said...


I think you are drawing up a straw man. I have not argued for wasteful federal programs, civilian or military.

I am arguing for an aggressive monetary policy that promotes growth, in balance with moderate inflation. I am not fixated on a "proper" rate of inflation, such as 2 percent. I see no magic in 2, 3, 4, or 5 percent inflation. I see magic in whatever rate corresponds to the highest rate of real economic growth. History suggests 2 percent to 5 percent is fine--see 1982 to 2007.

See Japan 1992 to present for the effects of deflation.

Moderate inflation with growth sure beats the hell out of recessionary deflations.

Squire said...

My first financial controller job was during the inflation in the late 70's. It was hell. I felt like we were running as fast as we could and not getting anywhere. It was exhuasting dealing with the purchasing problems and labor problems.

Fine. Do inflation. I am on board. But when you stop with inflation the economy will fail again without massive radical reforms.

Benjamin Cole said...


The late 1970s was a period of double-digit inflation. It was also a time of OPEC, and the quintupling of a commodity that had been very cheap forever.

The oil shock problem is still a problem, but we have come a long way.

How did you enjoy the years 1982-2007? Those were years in which inflation ran between 2 percent and 6 percent.

Sheesh, I'll take those years anytime. The Dow was up 10-fold. Housing boomed. Innovations galore. The Internet.

The historical record is that industrial output in the USA from 1982 to 2007 more than doubled!!!!

See this table in the Economic Report of the President: "Industrial production indexes, market groupings, 1962–2010"

For people to insist that moderate inflation is Satanic is just silly. The historical record--the facts--are that we prospered with mild fixation.

When USA production double over a 25-year period, I would call that a runaway success--and it was obtained in a period marked by moderate inflation.

Japan has not fared so well, in sharp contrast.

Junkyard_hawg1985 said...


While you may not have argued in favor of those particular programs, some people have because they were passed in the current administration. That hardly makes this a "straw man." (although you could argue that the current administration is a stram man because it has no brain)

One of the most hideous forms of Keynesian stupidity was farm policy during the Great Depression (and since). We had people desperate for milk, yet it was being poured onto the ground by government to support prices. We had people in need of clothes and the cotton crop was plowed under to support prices. Likewise, paying farmers to not grow food is Keynesian stupidity on steroids.

John said...

@Mr. Hawg:

Nebraska's Republican governor Heinemann and Republican Senator Johanns both asked Obama to block the Keystone pipeline.

Also, I can't wait to hear the Republican presidential nominee come to Ohio and Michigan and bash the cash for clunker program and GM-Chrysler bailout.

Auto industry analysts predicted that if GM and Chrysler had been allowed to fail, it would have taken Ford down, too, because so many of the suppliers would have been forced out of business.

Public Library said...

Junkyard hit it on the head but failed to address the cause of the problem, the Federal Reserve.

The Federal Reserve is a disease in this country worthy of stamping out. Until then, expect inflations, booms and busts, and crony capitalism.

John said...

I'm trying to understand what qualifies as "wealth creation," vs. "economic activity."

If I stick a quarter in a slot and get a $10k payout, is that "wealth creation" or "economic activity?"

If I get an FHA loan to have a contractor build my house, is that "wealth creation" or "economic activity?"

Is there a list somewhere that defines these two terms?

McKibbinUSA said...

The ongoing Main Street depression in America has taken its toll on middle-class family networth -- the middle-class is learning a lesson at the hands of economic elites that will not be soon forgotten...

John said...

Which bar represents "savings?"

marmico said...

Real per capita net worth is at 1999 levels. No doubt, mean net worth rose more than the median as wealth became further concentrated in the upper quintile.

It seems that a lost decade is now a memory as the second lost decade is already underway.

Junkyard_hawg1985 said...

"Nebraska's Republican governor Heinemann and Republican Senator Johanns both asked Obama to block the Keystone pipeline."

John, I concede the point that Keynesian stupidity is bipartisan. Usually when bipartisan things occur, it is a bad agreement. Exhibit A: B.S. Bernanke. He was appointed by Bush, and reappoined by Obama. In my opinion, he is the biggest thief in the history of the world (stolen $1.8 trillion thus far).

Junkyard_hawg1985 said...

"I'm trying to understand what qualifies as "wealth creation," vs. "economic activity."

If I stick a quarter in a slot and get a $10k payout, is that "wealth creation" or "economic activity?"

If I get an FHA loan to have a contractor build my house, is that "wealth creation" or "economic activity?" "

I think the answer to your question is whether something of lasting value is created from the economic activity. The home loan example is a good illustrative case. The loan itself is economic activity. Building the house is wealth creation. At the end of the activity, there is a house standing. This is actually a very good example to distinguish between them.

The house can be built for cash or from a loan. Often for a house built from a loan instead of cash, interest payments will double the cost of a house. Has anythng of vaue been created because someone has paid twice as much on the same house? No. The loan would be economic activity that does not create wealth. Even if someone defaults on the loan, the money at the bank may be lost, but the house is still standing.

Sticking a quarter in a slot machine is economic actiity, not wealth creation. It is a wealth transfer where nothing of value was created.

Some government spending does qualify as wealth creation. A road is an example of this. It has lasting tangible value.

McKibbinUSA said...

Whether we in the US like it or not, the ECB has decided our fate here in the US -- what happened in the EU last week was simply a stage play without applause -- ECB Pres Dr Mario Draghi said what he meant, and meant what he said about not bailing out the Eurozone -- more at:

The net result is that Southern Europe is on its own at this point, which means that Portugal, Italy, Ireland, Greece, and Spain will have no recourse but to cut government spending by upwards of 40%, even if they drop the Euro -- the monetary game is over in Europe -- the human suffering has only just begun.

As for the US, the effects of the ECB's actions will hammer investors holding Euro-denominated investments -- the end result will be the resumption of recession at best, and more likely, depression as global economic activity abates and commodity values plummet -- the potential for economic depression in the US is now very real.

The showcase event will be California, where Gov Jerry Brown will be announcing $2.5 billion in cuts later this week, and will be confronted with the reality of another $10 billion in cuts next year -- California will soon become the center of fiscal and monetary policy attentions as the state begins to face the reality of laying off upwards of 40% of its public workforce -- riots will breakout in cities and towns as public employee unions begin to fight back -- anyone living in California may want to make plans for a temporary residence outside of the state for several years, or until economic stablility is restored.

I maintain that monetary expansion is still imminent -- that's history -- but, the US economy will have to take a detour over the next few years into severe recession, or more likely, economic depression, in route to the future -- be sure to keep guns in your home to defend yourself in the meantime...

randy said...

Dr. McKibbin:

I'm confused. You advise loading up on rent and dividend paying equities, and on guns. Armageddon and great investment environment don't seem to go hand in hand.

McKibbinUSA said...

Hi Randy, note that economic depression is not "armageddon" -- rather, economic depression is just another opportunity to make money and grow one's estate -- keep that front of mind...