By James Saft
March 6 Americans are richer than ever and
increasingly willing to take on a bit of extra debt and yet the
overall atmosphere, and the economic recovery, are surprisingly
That's because the rise in wealth is highly concentrated,
consumer debt is often going towards maintaining living
standards in the absence of adequate income and, perhaps most
importantly, businesses are simply not investing, very likely
because they have a keen grasp of the first two points.
Household net worth rose nearly $3 trillion in the fourth
quarter, up 3.8 percent, registering a 14 percent gain for 2014,
according to Federal Reserve data released on Thursday. ()
This was all courtesy of an 11.6 percent annual gain in
housing wealth and a whopping 12.6 percent rise in households'
financial assets like stocks and bonds.
While the gain in household wealth is an all-time high, if
you adjust for inflation, financial assets are up 10 percent
from their pre-recession peak but real estate assets are still
7.8 percent below where they were before the bubble burst.
That's important because homeownership is more widespread
than the owning of financial assets, which is very heavily
concentrated among the wealthiest.
While we are getting a wealth effect from what very well may
be a bubble in financial markets - indeed that effect is one of
the main aims of quantitative easing - there are only so many
Jimmy Choo shoes and beachfront houses a one-per-center needs.
Given that so many would-be buyers of housing are shut out
of financing markets due to what may be absolutely sensible new
guidelines, the potential for continued appreciation of real
estate, which would spur economic growth, is limited.
A deeper look at the data shows a willingness to take on
more debt, with overall household liabilities up 1.2 percent in
the quarter. That debt, however, is concentrated in consumer
debt, notably student loans, with the amount of outstanding
mortgage debt actually falling by $10 billion in the quarter.
And yet, despite record wealth and growing debt, we are
looking at a spluttering economy, still growing well below its
long-term trend and potentially in the latter, stale stages of a
recovery. And though there has been lots of talk about fiscal
retrenchment (and arguably a need for stimulus) what we've
actually had is just a slowdown in the growth of official sector
debt, which rose 2.8 percent last year, the slowest rate since
STUDENT LOANS FOR RENT?
The amount of student loans outstanding has more than
doubled since 2008, standing now at $1.1 trillion. And yet there
are growing indications that many borrowers are spending the
money on things other than education, an issue explored by a
piece in The Wall Street Journal this week which showed
anecdotal evidence of people simply borrowing to live. ()
The data is also disturbing. About 25 percent of students
taking out loans in the 2011-12 school year borrowed at least
$2,500 more than their share of tuition, according to
And a report by the Inspector General of the Department of
Education found lapses in lending to students in distance
learning programs. ()
At the eight programs audited by the report more than $220
million in loans were made to 42,000 students who didn't earn
An economy divided between asset owners spending a slice of
their bubble gains and hard-up people taking out student debt to
live is clearly not sustainable.
Returning to the Fed report we see clear evidence of why we
find ourselves with such low growth: sparse investment by
corporations. Corporate capital expenditure minus internal funds
was negative $159 billion during the fourth quarter, meaning
that rather than borrowing to invest as they usually do in
expansions companies are piling up cash. This marks the 20th
straight quarter of this behavior.
That cash hoarding and low investment create a natural cap
on the potential rate of expansion in the economy.
There are a number of competing explanations for why this is
happening. It's possible that executive compensation programs
make longer-term investment less attractive to those making the
decisions, or it seems equally possible that after a damaging
recession and given the general low spirits in the economy
managers are simply being cautious.
Two things seem clear from all of this. First, extraordinary
monetary policy, while it may have been needed in the throes of
the crisis, has long passed the point of diminishing returns.
We could pump the market up another 15 percent, but we'll
just get more WhatsApps, not more genuine growth.
Second, just because it is no longer working that well
doesn't mean it won't cause pain when we take QE away.
Next year's report may very well show less wealth but leave
us with pretty much the same debts.