America: Now $8-to-$14 Trillion Poorer

The Federal Reserve's Flow of Funds report for first quarter 2009 [pdf] puts total U.S. household net worth at $50.4 trillion, down $1.3 trillion dollars from fourth quarter 2008.  This is the seventh straight quarterly decline, CNN notes. Green shoot version: Bloomberg says the rate of decline has slowed since the fourth quarter of aught-eight. More coverage.

Just how much has household net worth dropped since the peak? Calculated Risk calls it $14 trillion, as does CNN, which refers to an "all-time high of $64.4 trillion in the second quarter of 2007."

Those figures don't seem to agree with the historic data in previous FOF reports, which indicate that the peak came in the third quarter of 2007.

First quarter 2009 [pdf]:

Household net worth--the difference between the value of assets and liabilities--was an estimated $50.4 trillion at the end of the first quarter of 2009, $1.3 trillion dollars less than at the end of 2008.

Third quarter 2007 [pdf]:

Household net worth--the difference between the value of assets and liabilities--was at an estimated level of $58.6 trillion at the end of the third quarter of 2007, $0.6 trillion dollars more than in the preceding quarter.

If I'm missing/misreading/misinterpreting something, please deliver swift kicks in the comments. Comparing these two, it looks like household net worth declined only $8.2 trillion since the 2007 peak. But what's $5.8 trillion in post-capitalist America?

Flow of Funds figures don't get a lot of attention because they arrive three months after the fact, but they are an interesting tool for guessing the size of the bubble and the depth of the bust. The American people are now worth about what they were worth in 2004, but the value keeps dropping. And there are reasons to think the value can go a lot lower: In many regions, nobody's buying houses at all, so how do you really value real estate holdings there? Even without that wild card, the sum of "real estate holdings" is subject to revision: The equity share of total real estate owned now stands at only 41.4 percent, down from 42.9 percent in the fourth quarter. One in five Americans now owe more than their house is worth.

So it comes down to when you think valuations of everything -- real estate, stocks, bonds, savings -- started going out of whack. The end of the 2001 recession? The beginning of the century? The beginning of the dot-com bubble? The Reagan era? I'm working on a thesis that it all started going south for the U.S. economy when Ohio became a state; it's just taken a while for the effects to become clear.

In any event, the FOF's claim to putting a price on the entire U.S. economy (which itself should be viewed with skepticism) makes the quarterly report valuable for handicapping. You may believe the price of all that stuff out there is at or near its low point; or you may think the country is moving back to a state of nature. Either way, it's worth a look.

Comments

[SIV]

Fuck 'em.I'm up.

[Fake it till you make it]

Fuck 'em.I'm up.

Yeah, so's my dick, but it don't mean diddly

[SIV]

Somebody else is poorer too

http://www.asianews.it/index.php?l=en&art=15456&size=A

http://www.lexpansion.com/economie/actualite-economique/le-mystere-des-134-milliards-de-dollars-saisis-a-la-frontiere-suisso-italienne_183110.html

[Hazel Meade]

This notion of valuing net worth in terms of stock prices is nonsensical. If everyone sold their shares simultaneously, the price would of course plummet. It's not a very good measure of anything.

If the market value of your house falls, it's only a net loss to you if you were planning to sell it in the immediate future. The house itself has not changed.

[Syd]

The difference is government bureaucrats covering their asses. In this case, it doesn't make much difference anyway. Both figures are terrible.

[Max]

@Meade:
Yes and no, but it depends on the real worth. Would you buy a house even in the future for a high price, if you know you would inherit a debt of several houses? No? Well, guess that is the poblem and not that the price is at the moment small =)

[Conspiracy Nut]

I'm working on a thesis that it all started going south for the U.S. economy when Ohio became a state; it's just taken a while for the effects to become clear.

Fool. Everyone knows Ohio was never really admitted to the union, gold fringe on the flag means we're under martial law, the Air Force used a particle beam weapon to destroy Paul Wellsone's plane and Elvis was in WTC #7.

[robc]

The equity share of total real estate owned now stands at only 41.4 percent

Woo hoo! Im approximately 9 percent above average!!!

[Xeones]

Woo hoo! Im approximately 9 percent above average!!!

What about the 50% of people who are below average, huh? Won't you think of them, you inconsiderate fatcat?

[John Davis]

Sadly, this news does not come as any big surprise!

RT
http://www.privacy.alturl.com

[pat]

Sorry about your commenters. You write a serious piece and they just piss and moan. Calculated Risk and CNN really screwed up.

In real terms the "official" decline is almost 20%. My guess is that the correct decline is greater. Unlikely that FofFs has attempted to measure the declines in the values of mortgage related instruments.

[Xeones]

You write a serious piece and they just piss and moan.

Dude, it's the INTERNET.

[phalkor]

I personally feel that California makes a better scapegoat than Ohio these days. It used to be New Jersey, but America is bleeding out too much to worry about her smelly armpit.

[R C Dean]

Unlikely that FofFs has attempted to measure the declines in the values of mortgage related instruments.

Very true. There's something like a quadrillion dollars of OTC derivatives sloshing around the global financial system. Nobody knows what they are worth, but . . . .

[Kwillcox]

I think things began to go south with increase in home equity loans, massive increase (up to half a quadrillion dollars) of derivatives, and manipulation of oil prices, all in G. Bush's term. I like the guy, but he was asleep at the switch.

[Ten]

Obviously, this mess is an adjustment for monetarily leveraging everything to the teeth ever since roughly FDR. The question is how does such leveraging end, how, why, and to what degree.

You can't eat imaginary wealth and live in stacks of notes forever. After all these years the Fed is scared shitless as well it should be. Apparently money doesn't grow on trees.

[P Brooks]

Apparently money doesn't grow on trees.

Of course not, silly. You cut the trees down and grind them up into pulp first.

[brotherben]

from the article: "Bloomberg says the rate of decline has slowed since the fourth quarter of aught-eight. "

This tells me that President Obama's plan has us moving in the right direction. Everybody needs to calm down a bit and give it a little time. The social stench of screwing the fat broad doesn't just fall off once your sober ya know. (domo, I'm lookin at you)

[T]

Dude, it's the INTERNET.

Apparently, it's serious business.

On a more serious and topical note, they're still making loans of up to 105% of the home value, because I was offered one in the course of getting my refi. So some people still haven't learned.

[Kris]

What happens when a quadrillion dollars of imaginary wealth goes back to where it came from? Why the Fed just prints up a quadrillion new greenbacks to compensate. Right? Right? They can do it, right?

[Jennifer]

A lot of that money never really existed anyway. How much money "vanished" from the Dutch economy when the tulip bubble burst and a single bulb could no longer be traded for the cost of a mansion?

[P Brooks]

Estimated valuations are fun.

I'm a millionaire.

[Celebrim]

There are plenty of people to blame and to cast blame, but not alot of people to take responcibility.

If you really want to get back to the root of it, it's LBJ's 'Great Society'. Everything has been going south since then. Nixon made things worse with his love of price controls. Carter made things worse in just about every way. Reagan made things worse by not capping the budget debt. Bush Sr. made things worse by returning to the 'big government' outlook. Clinton made things worse by starting the whole cycle of massive liquidity bubbles while talking smack about 'fixing the economy forever'. Bush Jr. just followed in the footsteps of all the former ones, and Obama is just Bush Jr. only bigger, blacker, and faster.

[T]

I'm a millionaire.

You'll never get anywhere thinking small like that. Why aren't you a billionaire?

[R C Dean]

A lot of that money never really existed anyway.

It was just as real as any other currency circulating in the global economy.

How much money "vanished" from the Dutch economy when the tulip bubble burst and a single bulb could no longer be traded for the cost of a mansion?

A lot of people went for-real broke, I know that.

[Jennifer]

It was just as real as any other currency circulating in the global economy.

Then avoid semantics by replacing "money" with a term like "value." Most housing bubble values were unrealistic and unsustainable. Look at those California neighborhoods (for example) where the bubble reached its frothiest levels -- if you have a town where most households make $50K per year, and a $100K salary puts a household in the local elite, a crackerbox three-bedroom ranch house on a quarter-acre of land is not "worth" three quarters of a million dollars, because such a local economy simply can't sustain such outrageously high home prices.

The only reason the houses sold for such prices is because a debt bubble propped up the prices. But it turns out that, while a $50K or even $100K family might "qualify" for a $750K mortgage from stupid bankers, the family never had a chance in hell of repaying the loan. The house never should've been valued so high anyway. So the house drops in price -- and has to drop still further, to actually be affordable. The "value" it lost never really existed.

Pets.com was never really worth a zillion dollars a share either, or whatever ridiculous price it sold for at the height of the dot-com bubble. This current "money loss"is just an economywide price correction.

[P Brooks]

I have always liked the notion of "money Heaven". When the valuation of XYZCorp goes from $100.-/share to, umm, three, where does that "money" go? It goes to money Heaven. And your broker is on line two.

[R C Dean]

Then avoid semantics by replacing "money" with a term like "value." Most housing bubble values were unrealistic and unsustainable.

When any single overpriced asset crashes, somebody loses a ton of money. That somebody is jocularly referred to as the "last fool." For Pets.com (or any other company that collapses), it was whoever bought the stock at the peak. They paid cash for it, and that cash is gone from their wallet, not to be recovered.

So, when single company crashes, a lot of people lose actual money. When a whole sector crashes, a lot of people lose actual money; what they lose is the actual money paid for the now-valueless asset.

Now, whoever got out at the peak has made their money in his/her pocket. So where does the global loss come from?

It comes from the idea that the purchase at the peak was an equal exchange. The seller gets cash, and the buyer gets an asset worth just as much; if you bought Pets.com for $1mm, after the sale the seller has $1mm worth of cash, and you have $1mm worth of stock, so the total in the system is $2mm. When the asset loses value, then the total in the system goes down.

Maybe it was "never" worth that much (although I would probably disagree), so that the system was "never" worth $2mm, but you are still just as broke.

[Jennifer]

Maybe it was "never" worth that much (although I would probably disagree), so that the system was "never" worth $2mm, but you are still just as broke.

Oh, I'm not denying that; I'm just opposed to the idea that this money "lost" from the economy is something that needs to be somehow replaced. Nope; housing price drops are a GOOD thing in light of how stratospheric the bubble was, and the inflated home values vanishing from the economy is also a good thing. It wasn't real value; it was just hallucinatory bubble value.

[david]

FoF data get revised every quarter... you have to use the current release

[R C Dean]

Oh, I'm not denying that; I'm just opposed to the idea that this money "lost" from the economy is something that needs to be somehow replaced.

Oh, sure. Unfortunately, much of the money was lost by politically powerful people and groups, and so it will be replaced by tax money.

We aren't deleveraging the economy (letting the lost value go up in smoke), we are shifting leverage from the private sector to the public sector.

[Hazel Meade]

So, when single company crashes, a lot of people lose actual money. When a whole sector crashes, a lot of people lose actual money; what they lose is the actual money paid for the now-valueless asset.

Yes, but you don't take everyone who owns stock, multiply it by the drop in the stock price, and declare that all those people have lost that amount of money.

Because the vast majority of them did NOT buy at the peak. Only a tiny fraction bought at or near the peak. Some of them probably havn't lost any money at all, because they bought at some earlier point before the run-up.

Similarly, a lot of those peiople bought their homes before the bubble, watched the market price rise and fall, and lost nothing as a result.

[Hazel Meade]

Oh, sure. Unfortunately, much of the money was lost by politically powerful people and groups, and so it will be replaced by tax money.

Zoink. CRUCIAL POINT.
Because the peak value was insured by AIG in a credit default swap or some similar instrument. And AIG has since been bailed out by the government.

You realize what this means right? It is a formula for guaranteed gains. You wait for the stock price to rise, and then instead of selling, you insure it against a decline in value. Then, you don't have to worry about it falling, you just wait until it falls and collect the insurance.

In a normal world, this would, of course, drive the insurance company into bankruptcy, or any insurance company dumb enough to insure something against declines in the market price. But in our brave new "too big to fail" reality, the insurance company gets bailed out by the taxpayers. So you can pretty much guarentee that you'll never lose any money, ever.

This is why the AIG bailout is so damn scandalous.

[Invisible Finger]

I saw were going to drop to at least the level of 9/10/2001. You know, the last day America was a somewhat functional democracy. Everything after that day was WERE AT WAR AND WE GOTTA PUMP UP THE ECONOMY AT THE SAME TIME BY HOOK OR BY CROOK pushed by both parties.

[P Brooks]

"Unrealized gains" are not the same as "money" where I come from.

[Hazel Meade]

"Unrealized gains" are not the same as "money" where I come from.

They are if you insure your unrealized gains with a taxpayer-funded insurance agency.

[chartsandcoffee]

Weekly Market Analysis From Charts and Coffee Blog is up - http://chartsandcoffee.blogspot.com/2009/06/sunday-night-coffee-61409.html