Monday, June 11, 2012

The Piggy-Bank Got Smashed: The Collapse of Median Wealth of the American Family

The Federal Reserve just released figures on the median wealth of the American family. 

“The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010” according to the New York Times.

The 2010 is almost exactly the same as it was in the early 1990s when the latter figure is adjusted for rising prices.  The recent financial crisis has, therefore, erased “almost two decades of accumulated prosperity.”

This accumulated wealth reached a peak of around $126,400 in 2007, the Fed said.

The primary culprit for the roughly $50,000 decline? 

Well, the “crash of housing prices explained three-quarters of the loss.”

Over the past fifty years or so, homes were the piggy back of the middle classes.  Most of the income earned by the middle classes went into their homes with little else left over for any other kind of wealth accumulation.  And, the middle class saw their wealth rise over this time period.

Over the past twenty years or so, the federal government tried about as hard as it could to create a similar piggy bank for people with little or no personal wealth and little or very little income.

Now this goal of the government has all come crashing down.  To a great extent, the credit inflation begun in the early 1960s aimed at building up the housing piggy bank has unwound.

The aftermath of the federal government’s great experiment has left a confused and, in many cases, a desperate number of households.  And, this is after three years in which the United States economy has been growing.

Why can’t fiscal stimulus correct the problem as so many fundamentalist Keynesians recommend?

The answer is that the government programs aimed at keeping the price of houses rising, year-after-year-after-year could just not continue to sustain this inflation forever.  There had to be some real earnings supporting the continually rising prices.  Somewhere, sometime the “bubble” had to stop.  The cash flows supporting the increasing market values of the housing stock could not keep up…so the market values of the housing stock had to, at some time, collapse.

The continued credit inflation created by the federal government resulted in a dislocation of resources.  And, where there is a dislocation of resources, the economy must, over time, attempt to return the allocation of economic resources to a less artificial distribution. 

That is what we are going though now.  Of course, some pundits recommend more of the same.  If the credit inflation being created by the government is not “getting things going again” then the government must step up its efforts to produce more credit inflation. 

The problem with this is that constant application of credit inflation cannot continue on forever and forevermore.  The dislocations created by such a policy grow and grow and grow and the amount of credit inflation applied to the economy must also grow and grow and grow in an effort to sustain the dislocations.  The burden becomes heavier and heavier and heavier.

Eventually, the bubble bursts. 

The United States economy is now going through a re-structuring attempting to remove the dislocation of resources created by fifty years of almost steady credit inflation on the part of the federal government.  We are seeing the consequences of this policy, not only in the collapse of the median level of wealth of the American family, but also in the growing inequality in the distribution of wealth in the country.

Unfortunately, these unintended consequences just inform us that “good intentions” do not always produce the results we want.     

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