The front page article on today's WSJ (below the Madoff pictures) provided the bottom line on the massive 18% ($11.2 trillion) decline in 2008 household wealth. I'll provide some explanation on how that measure is composed and where the declines hit hardest.
The big picture is that the 2008 (and fourth quarter) plunge is the largest loss since the Fed started tracking wealth over a half century ago. The $11 trillion size is truly astounding as the WSJ compared it to the combined size of the German, Japanese and U.K. economies. Moreover, the plunge accelerated through later 2008 as the Q4 decline doubled the Q3 decline which tripled the Q2 decline.
Net worth ($51.5 trillion in Q4) is simply the difference between household assets ($65.7 trillion in Q4) and liabilities ($14.2 trillion in Q4).
Assets span from home and equity holdings market value, financial deposits and credit holdings to pension reserves. Liabilities are largely debt owed on mortgages, consumer credit and bank loans.
In the fourth quarter the largest decline was in stock prices which provided a powerful $1.7 trillion drag on assets. The plunge in the stock market left life insurance and pension funds $1.5 tln lower as lower home prices added another $0.9 tln decline. Depreciating consumer durable goods (e.g. autos, appliances, etc) provided a small decline to the drop in mutual fund shares. In sum, the $5.1 tln Q4 decline amounted to 9% of household net worth.
Wealth provides the ability to invest in very big ticket items-- a new house, college tuitions and retirement for example. Unlike the shorter term spending implications of income growth or the unemployment rate, wealth provides a longer term outlook and a better read on the standard of living -- depending, of course, on how you measure that. The biggest implication is that reduced wealth will spur demand for savings rather than the other alternative -- spending -- which feeds economic growth.
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