Background

When I was an undergrad I had an economics professor (for four semesters, this guy knew his stuff) who had us read the Wall Street Journal every day. The purpose of this was for us to find an article to summarize at the end of the week and then write a quick analysis using ideas or models or theories or what have you. The real purpose, I think, was so that as students we would have a continual surface level understanding of everything that was happening in the world. It’s been a while since I last wrote an analysis like that. I enjoyed writing them in college so I figured it would be a good idea to keep on doing these. My end goal in doing this is to keep up with the changing global economic landscape.

U.S. Household Wealth Set Record in Second Quarter

###WSJ Sept. 19th, 2015

###By Josh Zumbrun

The net worth of U.S. households has risen $ 695 billion from last quarter to $ 85.7 trillion, according to a Fed report on Friday. During The Great Recession overall household wealth dropped by $13 trillion. Since then, rising stock prices and home values have risen to a record 30 trillion dollars since 2009. This rise in stocks, bonds, home values and other assets has been fueled in part by ultralow interest rates set by the Fed along with QE. The Fed expected a rise in household wealth would generate a wealth effect and result in increased consumption. While stocks and other assets have risen, economic growth has been lackluster. Household wealth has recorded at 4.8 times the nation’s GDP this quarter. Between 1950 and the 1990’s net household wealth ran between 3 and 4 times as high as GDP. The three times the ratio has risen above 4x GDP was at the height of the dot-com boom, the 2004-2007 housing bubble and over the past 5 years.

There are two parts to the equation of a recover. One part is the Fed setting the funds rate to 0 to allow banks to make loans at lower interest rates. This should provide an incentive for businesses to increase investment (such as expansions, opening new factories etc..). The second part of the equation to a recovery is jobs creation. By creating more jobs (e.g. infrastructure projects), consumption would increase. When consumption increases while interest rates are low, businesses will be more inclined to increase their investments in their businesses and expand. You can’t have an economic expansion by just having low interest rates. If you just have low interest rates, you end up with household wealth running at a rate of 4.8x GDP. These are unsafe levels. GDP growth has been lackluster in general and this has not helped the Fed with their decisiont to try to raise interest rates. The lack of consumption shows that there is still slack in the economy and with a 14.8% poverty rate (a figure little changed since 2009) and a 58% rise in household wealth since 2009, the economy still appears shaky.