Household Balance Sheets: Surveying the Damage

The Lehmann Letter (SM)

  

Households face a balance-sheet crisis: Asset-values (especially home values) have plunged while debt has barely shrunk, leaving households with substantially less wealth (net worth).

Here's the key question: How can households simultaneously repair this damage, i.e. reduce debt, rebuild net worth and restore liquidity, while at the same time resurrecting the borrowing and spending required to drive the recovery?

Answer: They can't. It's impossible to save and borrow at the same time.

Here are some key reports on the crisis.

Yesterday the Fed released:

“Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances”

http://www.federalreserve.gov/pubs/bulletin/2012/PDF/scf12.pdf

It’s a long report. These are the key sentences from its summary:

“Overall, both median and mean net worth also fell dramatically over this period—38.8 percent and 14.7 percent, respectively. Changes in housing wealth and business equity were key drivers in those wealth changes…..

“Debt fell more slowly than assets over the recent three-year period. Thus, overall indebtedness as a share of assets rose markedly. Home-secured debt fell slightly as a share of total family debt, but in 2010 it remained by far the largest component of family debt…..”

To summarize the summary: Debt rose as assets and wealth fell.

For a less intimidating read, see today’s New York Times for an excellent abstract of the report:

“Family Net Worth Drops to Level of Early ’90s, Fed Says”

http://www.nytimes.com/2012/06/12/business/economy/family-net-worth-drops-to-level-of-early-90s-fed-says.html?_r=1&ref=todayspaper

On Saturday, June 9, an earlier story in the Times – that also relied on Fed data - anticipated yesterday’s Fed report:

“Income and Wealth Are Down in U.S.”

http://www.nytimes.com/2012/06/09/business/economy/as-recovery-drags-on-income-and-wealth-lag.html?ref=floydnorris

 

The article’s second and third paragraphs said:

“Now, however, is the first time in more than half a century that the average American is both earning less and worth less than four years earlier, at least after inflation is factored in.

“The genesis of that fall was, of course, the financial crisis and the sharp decline in the value of homes, the principal asset of most Americans, followed by the sharp drop in stock prices. The crisis led to stubbornly high unemployment that cut income for many Americans and made wage increases harder to obtain for those who did hold on to their jobs.”

This time it really was different, and destruction of balance-sheet values was the difference.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann