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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