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America’s Vanishing Net Worth

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Given the former influence of the Occupy movement and the still high number of foreclosures in America, it’s wouldn’t be surprising that median wealth in America is taking a hit. However, an article by the New York Times shows that the problem may be worse than originally thought:

 

The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007, the Fed said. The crash of housing prices explained three-quarters of the loss. This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period.

In just three years, the median net worth of the American family has dropped almost 39 percent. On top of this, despite our near record S+P performance and companies sitting on stockpiles of cash, earnings fell 7.7%. To compound the issue, inflation is still occurring despite attempts to prevent it from the Fed, lessening disposable income.

 

There are two significant counter arguments to consider when reviewing the recent report by the Fed. The first is that a majority of the net worth lost was from the crash of the housing market. I actually feel this doesn’t prove a loss in net worth because many American’s owed significant amounts of money on their property and claiming a gain in worth on something you barely have paid off is honestly pretty stupid. People’s worth should be evaluated on a percentage of the asset they own. Just because someone bought a house for $100,000 and at the peak it was worth $300,000 saying they gained $200,000 in net worth is quite frankly the stupidest idea that was accepted by our culture. Especially considering that many people hadn’t even began to pay the principle amount of their loan. It just leads to the risk of speculative homeownership that happen over the past decade.

 

The second argument is also presented in this article:

 

But one of the rare benefits of the crisis, lower interest rates, has helped to offset that effect. Families also have been able to reduce debt payments by refinancing into mortgages with longer terms and deferring repayment of student loans.

I’ve heard this argument many times and it still baffles me when its spouted out at me. First, low interest rates have been artificially created by the Fed so saying that the lower interest rates are an effect of the declining net worth is unfounded. Actually when people owe a lot of money and defaults/foreclosures are rampant, the theory is that interest rates should rise because there is more risk in lending money in a market filled with delinquent mortgages/student loans. If we hadn’t bailed out the banks and performed the quantitative easing initiative, the credit markets would have slowed lending dramatically and therefore to borrow money you would pay a crazy high interest rate.

 

Second, and almost more important, ten percent of student loans are private and the low interest rates aren’t always going to last. Eventually they will need to go up and when they do this ten percent are going to see their interest rate double or triple.

 

There is a narrative in the media for the middle class to accept their position and suck it up. The problem is that the loss in net worth isn’t remotely fair between classes:

 

The wealthiest 10 percent, by net worth, saw their median income fall 1.4 percent between 2007 and 2010, while families in the middle class saw their income drop by as much as 12.1 percent. The lower-middle class saw their income fall by 3.7 percent.

Despite our GDP largely recovering, Middle Class income has taken the largest hit while the loss of the wealthiest ten percent could mostly be offset by the 2% FICA rate reduction.

 

Whether Obama or Romney win this election, I don’t see either of them every coming close to fixing this issue. They don’t care because both of them are elite plutocrats that don’t feel the pinch of the shrinking American Middle Class. It’s not because they are horrible people either, they just don’t know that life anymore. They have power, money and all their friends are likely wealthy. Why should they care about the middle class, you don’t get them elected. You don’t even share a drink with them.

 

This Fed report should be read but like most important news it has been buried in favor of these top stories.