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U.S. Wealth Bounces Back … While Debt Reverses Trend

By: Jeff Goble

A recent report from the Federal Reserve shows the wealth of Americans has bounced back sharply from the lows set in 2008 during the Great Recession. Household wealth includes the value of stocks, bonds and real estate owned minus all outstanding debt. The improvement totals $19.4 trillion to date, which will be larger than our nation’s projected Gross Domestic Product for 2013.

Take this a step further and divide the surge in wealth by the number of Americans and you will discover that the average increase in wealth is approximately $65,000 per person. This surge has been a function of three principal improvements: rising real estate values, a sharp recovery in the stock market and Americans paying off and refinancing debt obligations like mortgages, home equity lines of credit and credit card debt.

Unfortunately, this increase in wealth has not translated proportionally to overall debt. As you can see in the Ned Davis chart below, the total U.S. credit market debt is now 345.9 percent of our GDP. The peak in this relationship was in 2008 at 375 percent, and the average over the past 100 years is about 200 percent, or 2:1. I am not sure that we will ever return to the low debt levels seen in the 1950s or even to the average, as Americans appear to rely on debt now more than ever. However, by referring to the chart you will see that the trend is improving slightly.

If you enjoy history, you will appreciate that the debt in the 1930s from FDR’s New Deal was all paid back before WWII. Thanks to this key program designed to return Americans to work during the Great Depression, we now have national treasures like the Hoover Dam, the Empire State Building and the Golden Gate Bridge.

Fed Chairman Ben Bernanke’s solution to our serious economic problems, especially mortgage debt, was four rounds of quantitative easing. This was a monetary tool that had never been used by the Federal Reserve previously, except for a small “twist” operation (selling short term bonds and buying back longer ones) during the Kennedy administration.

I think we will look back on Bernanke’s decision to use QE as one that probably saved our economy from a financial meltdown. It is now time over the coming months to unwind the QE process in hopefully an orderly fashion. As 2013 winds down, I hope you and your bank have had a great year. Happy Holidays!

A special thanks to BankNews for the privilege of writing in this space. Next year will be my 25th year of writing the Investments column and time has really flown by. Thank you also to bankers who read my column regularly and for all of your nice comments throughout the year. I hope I have helped you sleep a little better at night.

Jeff Goble is executive vice president and managing director, investment banking, at UMB Bank, n.a., Kansas City. His email address is Jeffrey.Goble(at)umb.com.

Copyright (c) November 2013 by BankNews Media


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