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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

JPM Household wealth report

Posted by WARREN MOSLER on September 20th, 2012

The unemployment line is the evidence the federal deficit is too small given conditions.
This at least partially explains why the full employment deficit is much larger this time around:

From JP Morgan:

Executive Summary

Households lost $16 trillion worth of wealth during the crisis from late 2007 to early 2009, but they have recovered 70% of the loss since then.

However, the recovery has been uneven across wealth groups. The wealth of the top 10% has fallen back to 2004 levels, but median wealth has fallen back to 1992 levels, in real terms.

As a result wealth inequality has increased sharply after the crisis, which may have some effect on the upcoming elections.

Across age groups, the 25- to 44-year old group has experienced the most significant wealth losses after the crisis. This has been primarily due to house price declines, as younger households are more leveraged in housing.


House prices are not expected to revert back to pre crisis levels in real terms for a very long time. If younger households decide to rebuild their lost housing wealth, this will have long term growth implications.

We estimate that the 25- to 44-year old group has lost $2 trillion housing wealth and rebuilding this lost wealth over 10 years implies that GDP growth will be 1.3 %-pt less than it otherwise would be.

This may explain the slow demand growth we have experienced following the crisis.

13 Responses to “JPM Household wealth report”

  1. Dan Lynch Says:

    Great data, Warren. It confirmed my suspicions.

    Reply

  2. ESM Says:

    So they’re using the completely unrealistic home prices at the height of the bubble as their baseline? A bit arbitrary isn’t it?

    Reply

    John O'Connell Reply:

    @ESM,

    Choosing the baseline is always arbitrary. I would have figured some sort of long-term trendline, and try to see how long it would take to return to trend, not to the top of the bubble.

    There does seem to be some validity to the idea of an affordability index, relating average home prices to average incomes. That’s better now than during the bubble, but I’m not sure it’s good enough, given the numbers who are still underwater.

    Reply

  3. Tom Says:

    Im guessing this isnt good either?

    http://www.marketwatch.com/story/household-debt-climbs-at-fastest-rate-in-4-years-2012-09-20-12103741

    Reply

    ESM Reply:

    @Tom,

    Actually, I think it is good. It means that a) people are increasingly willing to borrow to spend, and b) people are increasingly able to borrow to spend. This is the state of things in a normal economy.

    So far, government deficit spending has kept the economy growing, albeit slowly. To have a truly robust recovery, you need private sector credit expansion. It’s been happening with car loans, and when it starts happening with home loans, we’ll be out of the woods.

    Reply

    Tom Reply:

    @ESM,

    I thought that too….but could it mean that people are being forced to use credit again because of a lack of income?

    Im trying to be an optimist though and see it how you did.

    Reply

    Ed Rombach Reply:

    @ESM,

    A good read on the housing mortgage bailout, QEs, derivatives, Agencies and all that jazz.

    http://www.thedailybell.com/4323/Catherine-Austin-Fitts-QE3-Pay-Attention-If-You-Are-in-the-Real-Estate-Market

    Reply

    John O'Connell Reply:

    @ESM,

    Driven by student loans and car loans. Didn’t say how much of each. The student loan situation is probably the next bubble to burst. It’s true that the numbers are like those in a good economy, but the composition of the new debt is not so good.

    Reply

  4. John O'Connell Says:

    “We estimate that the 25- to 44-year old group has lost $2 trillion housing wealth and rebuilding this lost wealth over 10 years implies that GDP growth will be 1.3 %-pt less than it otherwise would be.

    This may explain the slow demand growth we have experienced following the crisis.”

    Do ya think?

    At the height of the bubble, demand was heavily fed by refinancing of mortgage loans and spending the proceeds. The deleveraging will take a very long time, unless it proceeds by increasing numbers of foreclosures, or some form of mass forgiveness of the debts.

    Reply

  5. chuck martel Says:

    … the most significant wealth losses after the crisis. This has been primarily due to house price declines….

    Wealth and prices are synonymous? A bushel of corn is a bushel of corn. A barrel of oil is a barrel of oil. A three bedroom house is a three bedroom house. The problem was, and is, that buyers of homes expected them to appreciate indefinitely. No one has that expectation with any other consumer purchase. Banks and other financial entities didn’t set the prices of houses, the buyers did, just as they’re doing now and as they did during the tulip mania and the ostrich plume madness. Why does anyone care if someone made a mistake when they bought a house for more than it was worth? And what about those who sold at the top of the market? Maybe they should have to give the money back.

    Reply

  6. Adam Eran Says:

    Per Prof. L. Randall Wray of UMKC:

    “. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. . . .

    “. . . The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. . .”

    Reply

    WARREN MOSLER Reply:

    this is straight from the late Fred Thayer’s paper on my http://www.mosler.org website

    Reply

    chuck martel Reply:

    @Adam Eran

    The “Panic of 1893″ didn’t have anything to do with a decreasing government deficit.

    Reply

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