On June 11, the Federal Reserve released its triennial “Survey of Consumer Finances.” OK, so this news is a little stale, but if the Federal Reserve can take 18 months to release the data, I can be forgiven for taking a month to comment.
The report was anxiously awaited, for it’s the first such snapshot of family finances since the onset of the Great Recession that began in late 2007. As expected, it’s not a pretty picture. As reported in the above-linked article, the median net worth of American families in 2010 fell to $77,300 from its peak of $126,400 in 2007. Most of that decline was the result of fallling home values since, especially among the middle class, most of their net worth is tied up in the equity in their homes. But “most” isn’t all. Median incomes also fell, from $49,600 per year to $45,800 per year over the same period. Most Americans grew way poorer in the three years from 2007 to 2010. Only the top 10% of wage earners fared better over the same period. Their median net worth rose to $1,194,300 in 2010 vs. $1,172,300 in 2007.
OK, that was the aftermath of the Great Recession. It’s no surprise that net worth declined. This edition of the Federal Reserve’s survey only reports data back to 2001. You’d have to do a lot of digging to see how this data fits into the longer range perspective. Don’t bother. I’ve done the digging for you and crunched the data to convert it to 2010 dollars to make it comparable to the new report. Here’s a chart of the data (an update of Figure 1-14 on page 27 of Five Short Blasts):
Not only did the median net worth fall from its peak in 2007 (a peak fueled by a bubble in the housing market), it fell to a level one third less than the previous peak in 1976. In fact, it fell to less than the median net worth in 1969.
Since Americans’ median net worth peaked in 1976, it has enjoyed only two occasions when it has risen: during the dot-com bubble of the 90s, culminating in 1998, and during the housing bubble leading up to the onset of the financial crash that began in late 2007. Take away those two events – the “irrational exuberance” of the dot-com bubble in the stock market and the equally irrational exuberance in the housing market leading up to 2007 (fueled in large part by government regulators turning a blind eye to outrageous lending practices) – and Americans’ net worth has been in steady decline for 36 years.
It’s no mere coincidence that 1976, the year that Americans’ net worth peaked and then began its decline, also marked the beginning of a 36-year run of consecutive trade deficits. Of course Americans are growing poorer. Their jobs have been sent overseas through misguided faith in flawed trade policy that fails to account for the role of extreme population densities among some trade partners like China, Japan, Germany and others in driving huge trade imbalances. The resulting glut in the labor force is driving down wages and benefits.
All of this is exactly what the inverse relationship between population density and per capita consumption would predict for our economy as our effective population density rises far beyond our actual density, through free trade, combining our economy with the economies of grossly overpopulated nations. It’s also easy to predict that, failing to change trade policy and immigration policy, it’s going to get worse. At the onset of the decline in housing prices, I told a realtor friend that it wouldn’t end until the median house price fell to a level affordable on the median income. And the median income continues to decline. So don’t look to a recovery in housing to boost your net worth.
In fact, the bubble scenarios that could be used to mask the effects of population densities that have grown far beyond an optimal level have probably been exhausted. It’s difficult to envision another dot-com style bubble in the stock market. There is nothing on the horizon to drive it. High tech? Been there and done that. Health care? Impossible in today’s environment. We’ve moved on from the stock market bubble to the real estate bubble and are now locked into a bond market bubble. But no one’s getting rich from this one. At current yields and rates of inflation, people are actually losing money in that market, figuring that at least they’re not losing as much as they could in other markets.
Americans will continue to grow poorer until trade and immigration policy change. Making that bet is a sure-fire winner.