Fed Brainwashing on Net Wealth in One Picture

Mish

The Fed released its "Z1" report today on Household Net Worth and Domestic Nonfinancial Debt. Let's dive in on wealth.

Please consider the Fed's Z1 report on Recent Developments in Household Net Worth and Domestic Nonfinancial Debt.

Hooray for Bubbles!

"The net worth of households and nonprofits rose to $113.8 trillion during the third quarter of 2019. The value of directly and indirectly held corporate equities decreased $0.3 trillion and the value of real estate increased $0.2 trillion."

The Fed offers an Interactive Chart on Wealth.

Assets vs Liabilities

  • Assets: $130 Trillion
  • Liabilities: 16.4 Trillion
  • Net Worth $113.8 Trillion

Aggregates Mislead

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Median Net Worth

The average net worth is $347,800. The average net worth of those 18 and older is $448,031.

The median net worth of those 18 and older is about $100,000.

The median net worth is skewed by the biggest stock market bubble in history. It's also skewed by a housing bubble.

Unlike Elizabeth Warren, I am not proposing wealth redistribution schemes.

Rather I am pointing out problems with the rosy-looking picture.​

What the Chart Does Not Say

The chart paints a rosy picture. Liabilities are low. Hooray.

But what the chart does not say is where the wealth is and where the liabilities are.

The assets are concentrated in the hands of the top 10%. The liabilities are concentrated in the bottom 90%.

Bubble Blowing Tactics

Most of the country isn't prepared for retirement. And many who think they are prepared do so only because of inflated asset prices, unlikely to last.

This is a result of bubble-blowing tactics ongoing for decades. Escalation took off when Nixon closed the Gold Window in 1971.

For discussion, please see Nixon Shock, the Reserve Currency Curse, and a Pending Currency Crisis.

Nixon Shock coupled with irresponsible Fed policies are to blame for widely reported "wealth gaps".

​Meanwhile, if you do not feel wealthy, then most likely it's because you aren't.

Addendum

ZeroHedge just provided this pertinent picture.

Mike "Mish" Shedlock

Comments (41)
No. 1-13
Bam_Man
Bam_Man

The extreme level of asset inflation we are witnessing is a matter of Fed POLICY and an absolute necessity, given the nature of our debt-based, fiat monetary system.

These over-valued assets provide the collateral that permits the additional borrowing required to keep the "system" going.

Obviously, this cannot go on indefinitely and we are getting close to the end-point, but we should expect asset prices to continue to hyper-inflate until that day comes.

ksdude69
ksdude69

House is paid, no car payments. I work to pay taxes and various insurances. No kidding.

Latkes
Latkes

Assets are concentrated in the hands of the top 0.1% and the top 10% are getting angry and moving politically to the left.

Tony Bennett
Tony Bennett

Census Bureau on Gini Index (Income inequality. Higher number worse):

The Gini index for the United States from the 2018 ACS (0.485) was significantly higher than the 2017 ACS estimate (0.482).

wootendw
wootendw

Still glad Nixon closed the gold window to foreign governments and central banks. Prefer he'd just opened the window to Americans and balanced the budget, but Congress wouldn't have passed it even if Nixon wanted to.

The bad thing Nixon did about the same time as closing the gold window was imposing wage and price controls. Although most of the controls were lifted by early '74, politics kept the price controls on (domestically-produced) oil until Reagan. Ford could have lifted them by vetoing a bill to make changes just before the controls expired, but didn't because the changes were negotiated with Congress by his own energy czar, Frank Zarb.

Felix_Mish
Felix_Mish

@Mish Much as the story about Nixon and the gold window is appealing, I bet that chart at the top of the article shows nothing of note in '72. Nor before or after. Plot those numbers on a log chart as they should be. See if there's a pretty much straight line.

Webej
Webej

Assets depend on their ability to command a stream of income. A shift in technology or demographics can mean formerly valuable estates and capital goods lose their value. Plant the most valuable building in London, Shanghai, or Manhattan in the middle of the Congo, and it's value will be nought. Former castles in France can be had for next to nothing. Land used to be the basis of capital, because it produced food. Desert was never valuable.

Current valuations are predicated on expected future income growth. If it is not realized, all kinds of people will be forced to sell, many will go bankrupt as the "wealth" evaporates. If there is enough social chaos, the ownership of capital may "redistribute itself".

Asset valuations imply a prediction about the future. Predictions fail.

Felix_Mish
Felix_Mish

@Tony Bennett brings up a very good number to use - the Gini index. Useful when you're talking about a 80-20 rule distribution, as income and wealth will always be. Notice: Tony assigns "worse" to higher values. But what is the perfect Gini index for "income"? Certainly not zero. That would describe a world where 18 year olds earn what 55 years olds earn.

Let's ignore those who just fuss about the world being an 80-20 world. They, unlike enlightened statesmen, will always be among us. As the article linked by @Latkes points out, much fuss isn't about 80-20 or 90-10-ness, it's about those guys who are a little more 80 than "me". That's unfair, I splutter!

Felix_Mish
Felix_Mish

Wealth calculations in the modern world are bizarre. They forget the value of people, themselves. Much horror has be loosed on the world because of this oversight. But that's another story.

Let's run some quick numbers.

The US: 300,000,000+ people. If you low-ball (I say, but YMMV) them all at a million bucks a pop, you get wealth of roughly 300,000,000,000,000. So, that 300+ trill in control of somewhere in the 100+ trill range? Sounds OK.

Take a slightly smaller sample: You. Do you feel like you're worth 3 times the stuff you own? More? Less? What?

So, is that 100+ trillion out of line?

baconbacon
baconbacon

These calculations are basically meaningless. US treasuries are counted as assets but they aren't listed as liabilities. Thats a ~10 trillion dollar overstatement of wealth held by the top x%. They also value streams of income like SS at nothing. An annual SS payment of $16,000 has no value in terms of wealth, but an annuity that payed $16,000 a year would have a market value in the hundreds of thousands of dollars. The US tax and transfer scheme directly reduces the measured wealth of the lower economic classes and inflates that at the top, followed by cries for even more redistribution.