Click to enlarge.
Here's an explanation of the chart.
I've taken the net worth as seen in "B.100 Balance Sheet of Households and Nonprofit Organizations" and subtracted the state and local government debt and the federal government debt as seen in "L.1 Credit Market Debt Outstanding". I then adjusted that amount for inflation and population growth.
As seen in the red trend line, hello exponential trend failure.
Click to enlarge.
This chart shows the quarterly change as a percentage.
We were hit by inflation, a declining net worth, and increased government debt all at the same time. This wicked combination made the 3rd quarter of 2011 the 2nd worst quarter of the last 50 years. So much for that sustainable recovery theory.
Can't you see?
Source Data:
Federal Reserve: Z.1
St. Louis Fed: CPI
St. Louis Fed: Population
I should probably point out that government debt is not included in the net worth as seen in the Federal Reserve's Z.1 report.
ReplyDeleteI believe this is the theory.
If I borrow a dollar to buy a burger then my net worth will drop as I eat it.
If the government borrows a dollar from me to buy me a burger then my net worth will not drop as I eat it.
Using this theory, the government should therefore buy everything for us and we can all quit our day jobs.
Forehead. Desk. Whack. Whack. Whack.
There is hope.
ReplyDeleteIF we can put an R in the WH next Nov., all will be well.
The R's will make all our problems go away with "Free market capitalism is the best path to prosperity in America", and they won't tax us a cent.
First, they'll send all homeowners (the ones still standing) a property tax rebate check for $1000.00. That's the tax cut part.
Then, state by state, they'll approve industry requested homeowners insurance rate hikes which, when applied to the median priced home, will equal just about $1000.00. That's the "Free market capitalism is the best path to prosperity in America" part.
Circular eCONomy, ECON101 style. It's all in R best interest (or, at least in theiR best interest.) The transfer of real wealth goes on, it never ends.
Greece has shown us the end game for what happens with government debt. It goes poof!
ReplyDeleteIt starts with a 20% voluntary loss for bond holders, then becomes 50%, and I speculate it will become 75% or 100% in the future. In that sense, the burger was paid for by bond holders and was free for the eating. Yum!
OTOH, cheeseburgers may be impractical.
Finally, I've had a pathetic year investing. My non-gold trades have netted about 3% YTD which is not adequate compensation for the risk and sleepless nights. My latest scheme is to buy more TIPS and i-bonds, ultimately paying for someone else's cheeseburger via EBT. Someone shoot me please.
Forehead. Desk. Whack. Whack. Whack.
ReplyDeletePerfect day for that. Corzine tells Congress he had no idea what was going on, but for the folks who are missing @1.2 billion, he says he is terribly sorry.
Not sorry enough to make good on the losses from his own stash, but sincerely, he feels their pain.
Holder, also in front of Congress, says lying depends on what is in the mind of the person lying...or some such. Claims that one border agent killed by Fast and Furious is "unfortunatea" but no need to call him names and be mean...after all, some of those 2,000 weapons will be showing up here for years, so buck up. I am sure he is very sorry too.
ECB won't print or issue bonds...but they are probably sorry too for the Euro mess.
Wall St. is hypothecating, increasing their exposure to Euro failure by 4x previous estimates, so I bet they are sorry too.
In all, a very sorry day.
Excellent charts, exellent song.
ReplyDeleteI should probably point out that government debt is not included in the net worth as seen in the Federal Reserve's Z.1 report.
ReplyDeleteMark,
I'm not sure that's right. In B100under "financial assets" treasury securites, municipal securities and savings bonds are listed. Furthermore, mutual funds and pension reserves also most certainly include Gov't debt (municipal & Federal).
Yeah, we don't have a wealth creation problem, we have a distribution problem.
ReplyDeleteWell, we do have a $500B/yr problem wrt our trade deficit, but this is insignificant compared to the ground rents we pay.
A rather under appreciated element of real-world economics is the role ground-rents play -- as parasitical drags on the productive and as shock absorbers when the economy reverses on people.
"That's my thesis & I'm sticking to it" at least -- I'm rather hopeful all the price/cost shocks coming this decade and next will just end up taking a bite out of housing costs, both rents and land values.
Then again, that's not what the PTB want to see happen, LOL.
Fritz_O,
ReplyDeleteAlex, I'll take "Circular eCONomy" for the repeated win!
Jeopardy? No.
Double Jeopardy? No.
Infinite Jeopardy! ;)
Mr Slippery,
ReplyDeleteIt starts with a 20% voluntary loss for bond holders...
That's where we are smarter. By having -1% real yields on 5-year TIPS we can theoretically spread the pain out over 20 years!
Sigh.
fried,
ReplyDeleteCorzine tells Congress he had no idea what was going on, but for the folks who are missing @1.2 billion, he says he is terribly sorry.
I'm fairly certain the money will turn up once they look under the couch cushions. It's got to be in there somewhere!
It's tough to keep 1.2 billion in loose change contained within one's pockets.
mab,
ReplyDeleteIn B100under "financial assets" treasury securites, municipal securities and savings bonds are listed.
The treasury securities and savings bonds I own are counted as financial assets. They are increasing the net worth of this country as seen in that table.
So who pays me when the bonds mature? As a taxpayer, I do! So why is my liability not shown in my net worth?
Calculated Risk: Q3 Flow of Funds: Household Net Worth declines $2.4 Trillion in Q3
This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.
In other words, if I was the only person in this country then I should not be able to increase my net worth simply by issuing myself savings bonds.
GYSC,
ReplyDeleteIt's all a part of The Future Council. ;)
Troy,
ReplyDelete...parasitical drags...
In a related story...
December 8, 2011
Citigroup begins layoffs of investment bankers
The equities division, one of the areas expected to be the worst affected by cuts, and other areas such as foreign exchange were expecting to hear yesterday or today.
In other words, if I was the only person in this country then I should not be able to increase my net worth simply by issuing myself savings bonds.
ReplyDeleteMark,
First, I don't know what CR is talking about. As far as I can tell, the public debt held by households is indeed accounted for as an asset.
More importantly, we're not simply issuing ourselves bonds. That's a gross over-simplification. Some Gov't spending is CONsumption related and some is investment related. At the end of 2010, Gov't fixed assets were valued at nearly $11 trillion! Roads, bridges, military hardware & equipment, space shuttles, utilities, medical & scientific research facilities, etc. They all have real value. Not only do they have real value, they enable others to create value. And the $11 trillion doesn't include public lands and mineral rights amongst other things.
I spent many, many years building public infrastructure for many Gov't agencies (private construction as well). Gov't spending isn't nearly as wasteful as many have been led to believe.
There's a role for Gov't and a role for finance. Somewhere along the way, we let finance deceive the public and become our Government.
People were duped into believing that private spending & ownership is always more desirable than public spending & ownership. Look at the results! Finance has morphed into a giant vampire squid - an asset stripping operation. It's a COOKBOOK! They don't call them Gov't Sachs for nothing.
Where personal net worth is concerned, I wonder what the threshold is where a person should be worried about the first chart as opposed to simply treating it as a passing thought.
ReplyDeleteIn other words, if I were 40 and had say $1000.00 in savings I know I should be worried. 40 and $100,000 in savings, still worried. But 40 and $2.2M in savings, maybe not worried so much.
The same feeling would apply to someone at 60 IMO.
Using the spending and savings habits of this blog author as a guide, just what is the amount of savings where a person could no longer be overly concerned about their future?
$150K, $500K, $1M, ..., $10M?
I think what makes this question so hard to answer, at least for me, is this new era of intervention we now live in.
mab,
ReplyDeleteFirst, I don't know what CR is talking about. As far as I can tell, the public debt held by households is indeed accounted for as an asset.
It is. He's not arguing otherwise.
What he is saying is that the $15 trillion in debt that our country has racked up as a national debt is NOT counted against our net worth as seen in that net worth calculation within the table.
Once again, the Z.1 report shows that households only have $13.8 trillion in liabilities (mostly home mortgages and consumer credit).
Here's another way to look at it.
If the federal government simply borrowed a trillion dollars from China and then paid that trillion dollars directly to our individual savings accounts would we really have a greater net worth overall? The Z.1 table would argue that we would. I would argue strongly that we would not.
Fritz_O,
ReplyDeleteUsing the spending and savings habits of this blog author as a guide, just what is the amount of savings where a person could no longer be overly concerned about their future?
I guess it all depends on how well one can predict future investment returns, future taxation, and future inflation rates over the long-term.
Here's the uneasy part. In order to feel safe I must predict all three of them with reasonable certainty (and my predictions must not be dire!).
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)
"...and my predictions must not be dire..."
ReplyDeleteUnderstood.
Further refining my question leads me to this: What I really want to know is where on the Lorenz Curve of Distribution of Family Income do I need to lie before I can be reasonably certain that I've outsaved my lifespan vs. outliving my savings.
I think most people who made calculations in 1980 based on this very notion, and found themselves at the 70% or better level, could have lived another 30 years okie dokey.
Today, with the loss of real returns, I'm not so sure of those who stand in the top 60% or so of the Cumulative Percentage of Income.
Fritz_O,
ReplyDeleteFurther refining my question leads me to this: What I really want to know is where on the Lorenz Curve of Distribution of Family Income do I need to lie before I can be reasonably certain that I've outsaved my lifespan vs. outliving my savings.
You and me both!
When I first turned bearish in 2004 I lowered my "safe" real yield after taxes income expectations to -2%. Back then I think most would agree that I was fairly dire and bearish (optimistic pension funds certainly assumed a LOT higher returns). I tried to set the bar low. I assumed that my nest egg income could just keep up with inflation and I'd have to pay taxes too.
On the one hand, my safety buffer was rather large. I'm earning a real net yield that exceeds it. I locked in long-term real yields fairly well. Inflation has been relatively tame. Taxes have not gone up.
On the other hand, if I had to reinvest my entire investment portfolio back into TIPS and I-Bonds at today's prices then I would definitely change my semi-worst case -2% real yield assumption to something like -3%. It is the trend that is concerning to me. 5 years from now will I be thinking -4%? In 10 years will I be thinking -5%? How can I really know what to assume?
Charting the War on Savers
In the charts that follow I'll be comparing the "safe" investment returns of World War II to the "safe" investment returns of today. Here's one reason for the comparison. Just look at that World War II debt.
I'm generally a worst-case planner who likes to be pleasantly surprised to the upside when worst-cases end up being average-cases. As it relates to "safe" investment returns, I don't feel all that pleasantly surprised right now. Let's just put it that way.
mab,
ReplyDeleteYour comments occupied my head as I slept. Here are some things I was thinking about.
Thought One
When I calculate my net worth I do it just as the Federal Reserve has done. I count my savings bonds as assets. I do not factor in my portion of the national debt though.
That said, I do not ignore my portion of the national debt. I consciously reduce the amount of my net worth as our debt goes up. I feel that at some point I will (or at least should be) required to pay for some of it. One way I expect to pay for it is in the form of higher taxes and/or lower investment returns. So while the national debt is not factored directly into my net worth on the liability side, it is being factored in indirectly (stealth pain).
Savings bonds are listed as an asset of mine. I earn interest on them.
The national debt is not listed as a liability of mine (in my own net worth calculations). However, I am taxed and part of those taxes go to pay interest on the national debt. I do consider it to be a liability. I just don't know how much it will hit me personally vs. how much it will hit some other American (or future American such as our grandchildren).
Thought Two
I don't consider the absolute value of the net worth per capita as seen in the chart of this post to be all that informative. I agree that our government has many assets and I'm not including them. As you point out, I'm making no attempt to account for them. They do exist and they are real (and should therefore be counted as part of our real prosperity).
That said, the long-term trends are what matter to me and I think the chart captures some of them.
I'm watching our national debt rise. Am I seeing more government assets rise too? Let's see.
Is NASA expanding or shrinking?
Are the national parks expanding or shrinking?
Is our country's infrastructure generally getting better or worse?
Is each bullet fired and bomb dropped overseas increasing my overall net worth or decreasing it?
I'm not really liking the answers to any of those questions all that much.
I would really like to see a tally of all the government's inflation adjusted assets and chart that too. Perhaps I am wrong, but I have an uneasy feeling that they are not growing as they once did. Another exponential trend failure?
Put yet another way...
ReplyDeleteIf you could tell me that the government's net worth was not shrinking as its debt was growing then I'd find it a lot easier to be confident about our future.
I consider the government's net worth to be indirectly tied to my net worth. The worse the government's finances look into the future, the worse I expect my personal finances to do.
As an example, my state has been a big fan of raising sales tax rates and increasing the number of roads/bridges with tolls. That's been especially true once the economy began to flounder.
I wonder what would have happened if the government had sent each taxpayer a bill to pay for all the banking bailouts instead of borrowing money on our behalf. Wouldn't that have been something?
Mark,
ReplyDeleteBingo! The only point I was trying to make is that if you are going to create your own accounting method it should be consistent. If you're going to count Government "debt" as a household liability then you should also count the $11 trillion in Gov't assets (minimum) as part of household assets.
When it comes to Government debt, people have been pre-CONditioned to think in certain ways (not an accident!). CR's analysis shows this. CR lists types of household assets that are included and then (unknowingly?) switches gears and starts warning of debts that are clearly not a part of household balance sheets. Goofy. I see this all the time. And the worst part is you can't reason with most of these know it all types.
mab,
ReplyDeleteIt is difficult to present this data in a way that makes the most sense.
My government bonds are my assets but the government's debts are also ultimately my responsibility. It feels like I owe myself money.
If I was the *only * taxpayer and I was also the only person in government then I would have to tax me in order to pay myself when my savings bonds mature. That's the part that interests me.
Alternatively, I could sell a small public bridge to the Chinese I suppose. In turn, they could make it a toll bridge in the hopes I drive over it. In that situation I would also feel myself getting poorer though.
If I felt that government assets were climbing as fast as government liabilities then I wouldn't even consider doing a chart like this. We have trillions in new debt and not much to show for it. That's the part that's bugged me over the past few years. Has my net worth really risen? I don't think so. I'm being ****ed on and told it's raining, lol.
I'm mainly trying to show in this post what the combination of falling real household net worth (as calculated by the Federal Reserve) and rising real government debt is doing to our long-term future. Perhaps my intent would have been more clear had I not combined the data in a single line, but that's what goes on in my head as I think about it.
In short, if household net worth climbs $1 trillion but government debt climbs $2 trillion then I don't feel the need to celebrate.