Friday, September 21, 2018

Money goe to money

The Federal Reserve released its latest data on America's finances. The household data show continued increases in wealth, but that is not the whole story. 

Millions of households are left out of the stock and housing booms. Moreover, costly consumer debt such as car loans and student debt are also on the rise, especially burdening those who are less likely to benefit from the run up in house and stock prices in the first place. Asset and debt inequality then reinforce each other, leading to the widespread massive wealth inequality by age, race, and education.

Households build wealth in their houses, retirement plans, and savings accounts. They typically will use their wealth to prepare for the future, primarily retirement, but also for emergencies, to start a business and pay for their kids’ education. In many cases, wealth will have to replace much of people’s incomes in retirement and an emergency, for instance. Economists thus consider the ratio of wealth to after-tax income as a key indicator of how well families are preparing for their future.

Looking just at the overall picture, things look good. The ratio of wealth to after-tax income stood at 691.9% in the second quarter of 2018, the highest on record dating back to 1952. It has trended up, albeit with significant swings, since the early 1970s. It first reached a peak in 2001 before falling sharply. The ratio then increased again in 2007 before it took a nose dive during the financial crisis and recession of 2007 to 2009. Finally, it climbed to its current heights over the past seven years.

Much of the increase in wealth has been due to a run up of stock prices. Most Americans own little if any stock As a result, stock holdings tend to be heavily concentrated among the wealthiest households.

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