Asia Times: US wealth in shrink mode

[marmar]

US wealth in shrink mode
By Spengler

The US Congress went into labor this weekend, and gave birth to a gnat. With some cosmetic adjustments, Treasury Secretary Henry Paulson's US$700 billion bank bailout plan will be adopted this week. Markets barely budged on the news, which was punctuated by government bailouts of two giant banks - America's Washington Mutual and Belgium's giant Fortis group. A third rescue, of Britain's Bradford and Bingley, sees it taken over by the government.

Paulson's plan likely will provide temporary relief to the stockholders of some American banks, whose balance sheets do not look all that different from Washington Mutual's. But this has nothing to do with the larger problem, namely the de-leveraging of the American household.

Leverage is the secret of American wealth. The average American family in 2004 had a net worth of US$448,000 on an income of $43,000, according to the Federal Reserve's survey of consumer wealth. Wealth equaled 10.4 years worth of income. In 1989, the Fed survey shows, it was only 7.3 years of income, and just 3.8 years worth in 1962. Measured in years, why should the ratio of Americans' net worth amount to annual income have tripled between the administrations of John F Kennedy and George W Bush?

US individual’s net worth to annual income

Annual Income ($1000's)
6.0 (1962)
26.1 (1989)
43.1 (2004)

Wealth ($1,000's)
22.6 (1962)
189.4 (1989)
448.0 (2004)

Wealth/Income ratio in years
3.8 (1962)
7.3 (1989)
10.4 (2004)


Source: Federal Reserve Survey of Consumer Finances

That is an odd result. It cannot be due to productivity, because productivity should show up in higher income as well as higher wealth. I suppose one could argue that expectations for higher productivity growth in the future than in the past might jack up the ratio, but that is hard to believe that is true after the collapse of the Internet bubble. The answer is leverage. .....(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/JI30Dj08.html

[Warpy]

1. Well, duh

Most of the vast, obscene wealth at the top is fake wealth that doesn't exist anywhere but on paper. It's hedge fund "wealth," meant to maximize earnings by placing bets. That wealth is likely to evaporate, meaning a lot of billionaires are going to find themselves merely multi millionaires as their true wealth is expressed in a stock market that has fully corrected and then some.

The "wealth" at the bottom was a houseful of toys purchased by debt. That wealth is an illusion, too, as people who owe more than they own will be forced into bankruptcy and lose it all.

Nobody is going to come out of this unscathed.