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NFIB Chief Economist Warns "Bubble In US Net Worth Has Reached Unsustainable Heights"

Excerpted from William Dunkelberg's Op-Ed in Bloomberg Briefs,

The relationship of U.S. net worth to GDP appears to have reached unsustainable heights recently, by historical standards.

American consumers have about $14 trillion in debt and a net worth of over $80 trillion, according to the Federal Reserve. Net worth is the sum of the values of all assets, real and financial, that consumers own, less their debt, including mortgage debt, leases, credit cards and the like.

The wealth we hold is a way of storing purchasing power. You can sell your shares of Apple and buy “stuff”, goods and services. Ultimately, for most consumers, that’s what our wealth is used for, to acquire “stuff”. Some of our assets provide services directly, such as our houses and cars.

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The broadest measure of “stuff” is the gross domestic product, the total value of final goods and services produced in a given period. Constructing the ratio of net worth to GDP illustrates the fluctuation of claims on output per dollar of output produced.

Not surprisingly, this was a fairly steady series for 25 years (maybe longer) from 1970 to the mid-1990s, as gains in nominal wealth were matched with gains in nominal output, averaging about 3.5 dollars in claims on output for every one dollar of GDP. Then came the dot-com boom and Fed bubble-blowing...

 

 

Each peak in this relationship was followed by a recession, the last one the worst in modern history. And now the ratio has once again reached 4.7 dollars. History suggests that the ratio will collapse again, probably toward the 3.5 dollar level. This can be accomplished by a massive increase in GDP (unlikely) or a massive decline in the value of assets, net worth (more likely).

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The adjustment might be accelerated because of widespread short covering and record high margin credit and other leverage.

Logically this seems unavoidable, unless you believe that we are truly wealthier now, even with an economy that is delivering a rather poor performance (historically weak output and sales growth) in real terms. It would seem not to be “whether” we will adjust but when.