U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades.
Real wealth is the stock of tangible and intangible capital. If anything, real wealth probably went down last year, because of the pandemic. When people permanently lose jobs, they tend to lose some human capital. When firms go out of business, some of their tangible capital goes down the drain.
So if nominal wealth went up and real wealth went down, to me that means that most of the increase in wealth was artificial. It came from liabilities created by the U.S Treasury and the Fed, which show up as assets on the private sector’s balance sheet. In other words, it came from the helicopter drop. Note that the Fed’s data cover only 2020, before the Biden Administration took off in the helicopter.
I see this increase in paper wealth as very likely to cause high inflation. Suppose that you believe the Fed can and will do something to keep inflation from soaring. I am not sure what that “something” will be, but in order to work it must have the effect of making some of the paper wealth disappear.
In your comments, don’t just tell me that “we didn’t have inflation after 2008” or “the markets don’t expect inflation.” Explain to me the process by which a dramatic increase in paper wealth gets absorbed into the economy with little effect on inflation.
How fast will that $13 trillion be spent back into the economy?
If employment remains high – despite extended benefits ending people seem to be quitting their jobs at a high rate. I get the impression many people are quitting with nothing lined up but have a large cushion and are mostly concerned with burnout. Home and stock ownership (the assets most responsible for gains in wealth) skew top-heavy – the bottom 40% of income earners own 33% of the stock. I think about those working from home in white collar jobs who have the choice between being forced back to the office or quitting.
Rising wages paired with technological changes (kiosks in full service restaurants, telework reducing need for office space, which can be economic hubs in their own right) may cancel each other out – reliance on certain physical infrastructure is declining or shifting, but slowly.
A portion of that wealth will get spent quickly and unevenly, and we might get temporary spikes in specific sectors. But I think a large portion of it will be spent down slowly, as burned out workers quit jobs and use their recent gains (FU money) to fund their living expenses for an extended period. Their spending (say, $40k a year) would remain relatively stable, but the allocation would change. If there is enough variety in spending allocation between workers/non workers and the unemployment level remains high we may not get high overall inflation but temporary, sector-specific spikes and dips that eventually settle.
Sorry Matt, I flatly don’t believe this:
“Home and stock ownership (the assets most responsible for gains in wealth) skew top-heavy – the bottom 40% of income earners own 33% of the stock. ”
https://usafacts.org/articles/homeownership-rates-by-race/
They say home ownership is some 64.9% in 2019 – so the bottom 40% own only 4.9% of the homes — and I’m sure stock ownership is even lower.
I think most of the wealth “created” is just higher valuations of the same assets, because of lower interest rates. That doesn’t actually enable higher spending, if you own stocks that give $100k in dividends a year, you can spend 100k/year whether those stocks are worth 2M or 4M or 10M. If you own real estate that cash flows $100k/year, doesn’t matter if that building is worth 2M or 4M.
Maybe interest rates go back up, and some of that paper wealth disappears. But even if it doesn’t I don’t see why it would necessarily lead to inflation.
“U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades.”
Looking at Federal Reserve data, 2020’s increase was approximately the same percentage increase as occurred 2019 and 2013, and a slower percentage increase than 2004. Meets my expectations for journalism.
“Suppose that you believe the Fed can and will do something to keep inflation from soaring. I am not sure what that “something” will be, but in order to work it must have the effect of making some of the paper wealth disappear.”
Raising interest rates will increase discounting, which all else equal should reduce the price of assets. That’s certainly something they ‘can’ do.
Explain to me the process by which a dramatic increase in paper wealth gets absorbed into the economy with little effect on inflation.—
1. There can be a decrease in paper wealth. Say, dull stock, bond and property markets for next sevetal years.
2. Real production can rise, and I hope it does. Elimination of property zoning on West Coast would lead to a 20- year building boom.
The US should shoot for Fult-Tilt Boggie Boom Times in Fat City.
Elimination of property zoning on West Coast would lead to a 20- year building boom.
And an economical fusion reactor would solve our energy problems and stop global warming.
Also, an anti-aging serum would get my hair back.
I want my hair back too.
But altering manmade laws, and altering the laws of physics, are not the same thing (well, excluding UFOs).
I advocate ending anti-free market property zoning laws.
Agree on #1 but can that be accomplished without frequent recessions which the Fed uses as reasons to push the value of paper wealth back up?
As for #2 i am deeply skeptical. Demographic growth will be weak, productivity is already mediocre at best, and politics shows no signs of anything resembling productivity-enhancing reform (quite the opposite actually when you look at things like our approach to “green” energy).
There seems to be a feeling among economists that the ratio of wealth:gdp is somewhat irrelevant. Or possibly even a sign of progress. I’d be curious to know your thoughts.
First, it seems to me we should distinguish between changes in expected cash flows (proxied by things like GDP, index dividend futures, etc.) and changes in discount rates. Falling discount rates do nothing but “pull forward” wealth and lower expected returns on assets.
Second, if you believe (as i do) that owners of wealth of politically powerful then you can see how a central bank might paint itself into a corner. If the “velocity of wealth” were to increase it would be inflationary. The Fed would need to either destroy wealth (higher real rates are effective) or accept above-target inflation. That puts the wealthy vs the “median consumer” directly at odds with each other. Unclear to me to “wins.”
It’s easy to see why the young are disenfranchised. You’ve pulled forward wealth to a very high degree and as a result you now need to accept lower asset returns and possibly inflation…all as a means of preserving current wealth.
To try an alternative analysis – what would the mechanism be such that wealth creation occurred? And if it worked once, would it work again? Did people not waste money on fruitless entertainment or pointless commutes? Did they invest massively in home maintenance and repair? Did they re-evaluate their lives and move to places they better enjoy?
The Fed’s Flow of Funds Accounts go through Q1:2021. Real household wealth rose to another record high.
There are two approaches to measurement. One, which you seem to prefer, is the BEA estimate of the real capital stock. Inflation doesn’t change the real capital stock, only investment and depreciation. Problem is that a lot of capital, such as human capital or organizational capital, are excluded from the official measure.
The other approach is taking nominal wealth and dividing by a price index. I think Fischer Black favored this approach. Household wealth includes the total value of equities, which is a market value which includes all intangible capital held by firms. Of course, equities also value monopoly profits.
Do consumers boost spending if real wealth rises, as life-cycle consumption function suggests?
If dollars fall from heaven, and consumer prices rise, but the nominal value of assets rises more, isn’t that good? If CPI rose 3% per year, and the nominal value of my net worth rose 10% per year, I would be happy. I am not saying inflation is good. I am saying that rising real wealth is not some illusion.
“Real wealth” can easily be an illusion. Take an (extreme) hypothetical. We mint a $10trillion coin and give it to Bill Gates who puts it in his drawer and forgets about it. The statistics show us being much wealthier. He finds the coin 10 years later and converts it to consumption – all of a sudden we have inflation and realize we were fooled the entire time.
This is obviously a silly example, but is it really that different from our current system which combines massive wealth inequality with a low propensity to consume by the wealthy?
From the crisis of 2008 to the present, federal government intervention (setting the reserve requirement of banks to zero, and thus the money multiplier to infinity) and the continuous acquisition by the Fed of huge amounts of both equities and bonds have totally changed the game we call the economy. They mean that neither interest rates nor stock prices convey any real information anymore; both are being manipulated to preserve the illusion of a healthy marketplace that no longer exists.
The Consumer Price Index has been similarly phony for even longer; while the real estate market, which has gotten noticed lately over huge acquisitions by Bill Gates and by Blackrock, has not been a “real” free market since the introduction of urban planning a century ago. What’s different now is that the deliberate shortage of homes that urban planning exists to create has become so bad that we now have a permanent homeless class, and individual homeowners are being forced right out of the market by predatory companies.
We need to either pursue constitutional change to bring back a free market, or stop pretending that one exists and embrace the horrors of the Great Reset.
Does the fed buy “equities?” Usually for lay people equities = stocks. I know the fed bought bond etf’s last year (not that much?) But equities?
-“setting the reserve requirement of banks to zero, and thus the money multiplier to infinity”-
The money multiplier isn’t a real thing. Reserve requirements are set to zero because they no longer have any function. Banks have tons of excess reserves and aside from that, regulation of liquidity is now done via liquidity coverage ratio requirements.
Increases in wealth driven by global trade.
Billions of people were granted access to world markets in the past 30 years. We have o my just begun reaping that bounty. It will save us from the helicopter drop syndrome.
Add on:
Actually, real wealth is people working (including managing) and investing.
As long the the number of people employed in the US rises at all, and productivity increases, then the US is richer.
Paper wealth, and debt, are fictions in a way.
I don’t know about the inflation part. Regardless, Kling is correct that the increase in government debt should be deducted from household wealth. That government debt has to be repaid by someone. US households in the aggregate face implicit higher tax liabilities from the government debt.
Was all of the 13.5T from government debt though? Some may have come from declines in discount rates. Is that an increase in “real” wealth? It seems equivalent to owning property in a foreign country that increases in value in domestic currency due to a change in foreign exchange rates.
There has never been a consumer “hyperinflation” without shortages in consumer necessities like food.
I’m sure we won’t have hyper inflation without food shortages, and the productive availability of food means that food producers continue to strive for market share thru … low prices.
For years we’ve had hyper asset inflation – shares of stock going up faster than 10% /yr, and nice-house prices going up.
I believe this won’t continue “forever”, but don’t see the process which makes it stop in the next 5 years.
The Fed raising the discount rate, which raises the interest rates, could hugely reduce such asset inflation, but with a fear of a real recession that reduces employment.
One constraint on any gov’t printing too much money is that their exchange rate changes to make their currency lower – good for exports, bad for imports. But US imports are often the export/job creators in other countries, who do NOT want a cheaper USD to reduce that countries exports.
None know what happens next. Random walk down Macro lane.