It was the best of times; it was the worst of times…

March 7, 2013

As the stock market hits new all-time highs, the AP reports today on the state of household wealth in the U.S…

It took 5 1/2 years.

Surging stock prices and steady home-price increases have finally allowed Americans to regain the $16 trillion in wealth they lost to the Great Recession. The gains are helping support the economy and could lead to further spending and growth.

The Federal Reserve says household wealth amounted to $66.1 trillion at the end of 2012. That was $1.2 trillion more than three months earlier. And it was 98 percent of the pre-recession peak.

Private economists calculate that further increases in stock and home prices this year mean that Americans’ net worth has since topped the pre-recession peak of $67.3 trillion. Wealth had bottomed at $51.2 trillion in early 2009.

Some economists caution that the regained wealth might spur less consumer spending than it did before the recession.

Caution, indeed.  While the total figures look terrific, the details are a little more troubling. And more troubling, as it turns out, than we think…

In a 2011 study, economists Dan Ariely and Michael Norton asked Americans what their ideal distribution of wealth would be. Then they asked what the respondents thought the actual distribution of wealth was. Less equal than their ideal, came the answer.  The reality…

source

Here are the implication for wealth of that reality animated in a short justly-viral video:

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So that increase in wealth– it’s up in that top 20% quartile, most of it, in the top 10%  The balance of folks?  Well, the other breaking news this week is that “household deleveraging” may be over– that”s to say, American households are borrowing again…  this reality is much more democratically-spread.  And it’s frighteningly-scaled…

 source

The same NY Fed report that brings those tidings– ostensibly good for the economy, as more borrowing means more spending– breaks down that debt, paying special attention to student loans– which have effectively tripled over the last eight years, to nearly $1 Trillion.  Note that “Student Loan” is the relatively small red section of each bar in the chart above.  Still, as the Fed notes:

Deferrals and forbearance [borrowers given temporary "grace"]… mask the true delinquency rates on student loans. Overall, about 17 percent of borrowers are at least ninety days past due on their educational debt, but when we remove the estimated 44 percent of all borrowers for whom no payment is due or the payment is too small to offset the accrued interest, the delinquency rate rises to over 30 percent. These student loan delinquencies and overall large student debt burdens could limit borrowers’ access to (and demand for) other credit, such as mortgages and auto loans. In fact, our data show that the growth in student loan balances and delinquencies was accompanied by a sharp reduction in mortgage and auto loan borrowing and other debt accumulation among younger age groups, with the decline being greater for student loan borrowers and especially so for those with larger student loan balances. In addition, we find delinquent student borrowers much more likely to be late on other debts.

(Why have student loans grown so quickly?  Here’s an explanation.)

But surely the fact that most household debt is mortgage debt is an encouraging sign– after all, mortgages are a route to building home ownership equity.  Well, for some they surely are.  But while the numbers have improved a bit since the post 2008 trough, there are still over 27% of all mortgage holder “underwater” in the U.S.– with mortgage obligations that exceed the value of their homes.  There’s no equity there.

Which is all simply to observe that, while the aggregated “good news” that we’ve been hearing this week is better than hearing that everything is down, it’s no cause to celebrate an end to our concerns.  As Ariely and Norton demonstrate, most of believe that income and wealth should be more evenly distributed than it is.  And given that we live in a consumer economy– as or more dependent on “consumptivity,” the ability of the population to purchase, as on productivity– our economic future demands it.

Stocks are up; aggregate household wealth is up– but for way too many, the American Dream is a nightmare.

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