Monday, December 10, 2012

Household Net Worth vs. GDP

December 9, 2012
Gongol: Household net worth rises in America

That's good -- it's up to $64.8 trillion. But if the national GDP is $13.6 trillion a year, then we only have a national price-to-earnings ratio of 4.8. On Wall Street, that would be abominably low. Something here suggests that we're not pricing our work correctly, not pricing our net worth correctly, or doing an absolutely abysmal job of managing our household balance sheets. Or perhaps there's some other explanation to be found.

1. He's a bit off on GDP. It's actually closer to $15.8 trillion.

2. GDP isn't earnings. GDP represents economic activity. It's an opinion, but I'd say GDP is more like sales than earnings.

If one sticks with the business analogy, then that puts our price-to-sales ratio at a whopping 4.1 to 1. That seems pretty darned high to me, especially if one factors in our massive debt.

Click to enlarge.

If I was a gambling man, then I'd offer a long-term return to the median theory. Heck, I might even offer it if I wasn't.

And lastly, those who believe that the ratio should be over 4.4 must believe many more economic bubbles are on the way (in addition to the dotcom and housing bubbles which got us there before). High real interest rates would seemingly have little hope of doing it. That ship has sailed.

Source Data:
St. Louis Fed: Custom Chart

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