According to statistics compiled by the U.S. Federal Reserve, U.S. households and non-profit organizations had an aggregate net worth of nearly $90.2 trillion as of September 30, 2016. This is a fabulous, almost unbelievably large sum of money. It confirms the United States as the richest, most prosperous nation in the history of the earth.
Time and time again, people have used this statistic to justify higher government expenditures or enhanced Federal social programs. After all, being the wealthiest nation on earth, we should be able to afford nationalized healthcare, a complete overhaul of the country’s infrastructure, free college education or whatever your personal political hot button issue happens to be. Everybody loves a windfall, right?
There is only one problem with the U.S. household net worth numbers. They are a total, complete and utter fabrication. It is a lie of such boldness that all other financial lies must defer to it. The Truth – with a capital “T” – concerning U.S. household net worth is, unfortunately, rather grim.
The U.S. financial authorities, led by the Federal Reserve, have embarked on the grandest monetary experiment ever conceived in human history. For over 20 years now they have repeatedly liquefied financial markets at any incipient sign of weakness. This has been tantamount to a decree that no wealthy banker, hedge fund manager or speculator will be left behind.
This corrupt public policy has resulted in serial bubbles in security and real estate markets throughout the country. Indeed, this misguided experiment has been so compelling that many other nations’ central banks have also joined in, causing stock, bond and property bubbles to become a synchronized, global affair.
At first these bubbles were viewed as an unmitigated good. This is typical of great inflations. The negative side effects only come later, sometimes much later. Unfortunately for the United States – and the rest of the world too – our dark future is beginning to close in around us rather quickly at this point.
And that leads us back to the aggregate household net worth number given at the beginning of this article – that fantastical 90.2 trillion dollar amount. Over the past year this gargantuan sum ostensibly increased by 5.2 trillion dollars. Over the past 3 years U.S. household net worth surged by 14.1 trillion dollars. Over the past 5 years it ballooned by 28.7 trillion dollars.
And yet, in spite of this false prosperity, the U.S. is not one penny richer than it was 5 years ago. In fact, I suspect it is poorer – possibly much poorer. How can I reconcile this dreary assertion with the official, and much more sanguine, numbers staring me right in the face?
To put it simply, I don’t believe the numbers. I actually downloaded the quarterly Balance Sheet of Households and Nonprofit Organizations (B.101) straight from the Federal Reserve website and played around with the figures. What I discovered was illuminating.
First a quick breakdown of how all this household wealth is held. The lion’s share, $73.1 trillion, is in financial assets, primarily bank deposits, stocks, bonds, mutual funds, pensions and the ownership of private businesses. A further $26.1 trillion is attributable to real estate, both buildings and raw land. The final amount, a meager $5.9 trillion is held in the form of equipment, consumer durable goods and intellectual property.
These three categories total $105.1 trillion. Against this amount are liabilities of $14.9 trillion, mostly mortgages, car loans, student loans and other consumer debts. These two numbers net out to the $90.2 trillion U.S. household net worth sum sited above.
But I wanted to have a better idea of what the real picture looks like. So I applied a discount to many of the assets (and liabilities) from the spreadsheet. I effectively assumed that many of these securities are significantly overvalued and will ultimately need to be written down in value in order to be realigned with reality.
So here is what I did. I generously accepted that all bank deposits and U.S. treasury securities are worth 100 cents on the dollar, with no write-downs necessary. I discounted most financial assets, including stocks, bonds, pensions and mutual funds by anywhere from 25% to 75%. These are the securities that are most egregiously overvalued.
I then assumed that real estate is fairly valued at a 20% to 40% discount from the current market value. Most of this price decline would be absorbed by the excessively expensive coastal cities. Flyover country would largely get a bye here.
In order to be fair, I also wrote down the liabilities side of the household balance sheet as well – anywhere from 25% to 60%. If we are realistic, not all those mortgages and student loans are getting paid back in full.
When I ran the final numbers the results were stunning. That astonishingly high 90.2 trillion dollar U.S. household net worth declined to between $47.4 and $66.7 trillion. That is a 26% to 47% household net worth haircut! And I believe I was fairly conservative in my estimates as well. I wouldn’t be the least bit surprised if the final write-downs were even larger than these numbers.
This is ultimately why I urge everybody to allocate a portion of their investment portfolio to fine art and antiques. The global economy is sick to its core. When this singular truth is finally revealed, it is paper assets like stocks and bonds that will ultimately bear the brunt of the resulting financial chaos and panic. The United States isn’t nearly as wealthy as its political and business elite think, but you don’t have to march off the financial cliff with them.
