The disconnect between household wealth and GDP growth

Twenty years of going nowhere! Where are we, Hokohama?

Dear Reader…and anyone who has been paying attention…you already knew there was something wrong. The world’s leading economy, in the most dynamic, inventive period in human history, failed to make people a penny richer.

GDP went up. But real wages did not. In fact, people got nowhere financially — if they were lucky. And many families got caught in the credit/housing bubble. When it blew up they got knocked back…actually losing wealth.

We’ll give you the conclusion before we give you the facts: the “growth” in the last 20 years was largely phony. The wheels on the economy spun around faster and faster. The shopping malls were full. Houses were built on nearly every vacant lot. Wall Street cashed big checks. But, overall, it was an illusion. Compared to a real boom, it was a counterfeit. Nobody got anywhere.

Here’s the story from The New York Times:

Family Net Worth Drops to Level of Early ’90s, Fed Says

WASHINGTON — The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.

A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation.

The new data comes from the Fed’s much-anticipated release on Monday of its Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families.

While the numbers are already 18 months old, the survey illuminates problems that continue to slow the pace of the economic recovery. The Fed found that middle-class families had sustained the largest percentage losses in both wealth and income during the crisis, limiting their ability and willingness to spend.

The share of families saving anything over the previous year fell to 52 percent in 2010 from 56.4 percent in 2007. Other government statistics show that total savings have increased since 2007, suggesting that a smaller group of families is saving more money, while a growing number manage to save nothing.

You might be tempted think that this is just a temporary setback…that when things return to normal the typical household will recover two decades of financial progress too.

Don’t count on it. Household wealth in the US rests on housing and wages. Housing prices might stop dropping; they are unlikely to enter a new bull market. Instead, they will probably track GDP growth, just like they always did. Nor can you expect to see wages rise substantially. Why? Because there are 15 million people who don’t have jobs. It will be a long time — practically forever at the current rate — before they are absorbed into the labor force again. Until this huge inventory of willing and able labor is put to use, don’t expect wages to go up.

In other words, when things return to normal they will be what they are now… The bubble was an illusion. The current, dismal situation is real.

The New York Times continues, pointing out that if the feds had let Mr. Market do his work in ’08/’09 the rich wouldn’t be so rich…

The data does provide the latest indication, however, that the recession reduced income inequality in the United States, at least temporarily. The average income of the wealthiest families fell much more sharply than the median, indicating that some of those at the very top of the ladder slipped down at least a few rungs.

Isn’t that what we’ve been saying? First, the feds made the rich richer by creating a phony, credit-fueled economy, where the amount of credit grew 50 times over the last 50 years. Then, when the credit bubble blew up, the feds stepped in to prevent the rich from losing money. And now the feds moan about the ‘inequality’ in our society…and how they have to do something about it. Haven’t they done enough already?

Bill Bonner
 for The Daily Reckoning