How Low Can You Go?
This is not a prediction. Only an observation. From 1952 to 1996, U.S. nominal net worth of households and non-profits tracked nominal GDP pretty closely. Net worth remained pretty close to 15 times GDP. That consistent relationship ended after 1997. In the third quarter of 2007, net worth was nearly 20 times GDP but by the second quarter of 2009 it had reverted to just 17 times GDP. One might argue that it was roughly 15 times what trend GDP would have been at that time.
In the second quarter of 2019, net worth was 21 times GDP or about 28% above the historical norm from 1952 to 1996. To revert to that historical norm would entail a loss of asset valuation of around $32 trillion.
From my point of view if you look at the graph it seems Household net worth and GDP seem to start separating in the mid 1990’s as Sandwichman states. But, if you go to the FRED website and use a more detailed time scale the split between household net worth and GDP seems to actually start diverting in the 1970’s. I am not completely familiar with playing with the FRED data so my interpretation may be off.
Either way, if as Sandwichman states the split started to widen in 1997 then some of the culprits could be China’s influence on globalization, Clinton’s deregulation of finance, or the increasing use of the internet and computers.
If the split occured in the late 1970’s that is in many views when the neoliberal era started i.e. Reaganism, etc.
Seymour Melman’s book Profits without Production details much of the the beginning of the neoliberal era, although to my knowledge he does not call it neoliberalism.
Susan Strange also wrote books detailing the in writing what the graph in the post shows. Two of her books are Mad Money: When Markets Outgrow Governments and Casino Capitalism
Thanks for the post Sandwichman. Explains income and wealth inequality( the Financialization of the Economy or When the US Stopped Making Things) in one graph.
There is indeed a split after 1973 — that goes in the other direction: 15 times GDP rises ABOVE net worth. Simple explanation: OPEC Oil shock. More complex explanation: end of Bretton Woods monetary regime. That split appears even starker if you use “real” GDP and deflate the net worth with urban CPI, which is what I did a few years ago. But then I realized that “correcting” for inflation actually distorted the relationship (think barter) that was much clearer in nominal terms.
Jerry:
It is good to see you back at AB again and engaging Tom a prof at St. Olaf (I think). I read him on manufacturing and his arguments on Lump of Labor. Intriguing stuff for someone who has spent an entire career in manufacturing. I will let you figure out which side he takes.
If you read Minnesota Physician, an article will come out on “Why has measurement mania failed to lower costs or improve quality?” by someone I talk to on Single Payer. Maybe next month or later. Minnesota may pass legislation to create Single Payer on a state level. The topic of the author is one I am interested in as there are numerous articles of pricing running wild in search of more profit.
It looks like the stock market portion of the wealth gap is closing rapidly. US total market capitalization has fallen from 158.9% of GDP on Feb 19th to 133.9% of GDP on March 10th. Give the direction of events, there’s a fair chance of it coming closer to parity in the next few weeks.
https://ycharts.com/indicators/us_total_market_capitalization
Another factor in your discussion of household wealth may be that the IRA was created in 1974 and the 401k in 1978. Another diverging factor is the popularization of online trading in the late 90s. Previously only the wealthiest own stocks and the opening up of markets allowed many more households to shift their wealth into them.
All that being said this wealth destruction is going to be horrific for US middle-class households. The wealthy will take it on the chin, but we could see a desolation for many of a similar scale to the 2008 collapse.
The credit bubble started in 1973. Nuff said. Deregulation is frankly only interesting in the cycle of debt, not the credit bubble. Reagan killed Glass Steagall in 1982 by weakening and widening the amount of intermixing of commerical banking activity and banking profits. This took awhile to blow off, but by the mid-late 90’s it did a bit, then even bigger by the 00’s. Now its even wider as the bubble must go up to service the reserve currency.
But it all started before and was going to rise no matter what. The consumer lending era had begun by the late 70’s, and the frankly the investment phase of capitalism was over by 1925(no matter what Austrian/gold bugs want to admit, it was). Its why they can’t let it die. Breadlines would return and supply lines would be normal. Other types of organization start looking more appealing. Capitalism is the artifact of the industrial revolution. Without its easy debt to growth ratio, it would be dead already.
The Wilshire Index used in the numerator of Michael Oder’s reference above has dropped 20% in the past month.
I haven’t checked them all, but I have not seen any bank’s research department–not even GS’s–announce an expectation of negative global growth for 2020.
That seems optimistic.
Profits share of the pie has shifted to a higher level.
Economic profits ( after tax profits with IVA & CCadj,) averaged around 6% of nominal GDP from 1950 to 2000. Of course there were big cyclical swings from 5% to 8% of NGDP,
But since 2000 this ratio has moved up to a higher level and in the last few years profits have been some 8% to 9% of nominal GDP.
In a way it is only partly because of profits growth that is still near its long run trend of 7.5%. Rather, it is more because nominal GDP growth has slowed from an average of 7.5% from 1950 to 2000 to only 4% since 2000. So from 1950 to 2000 profits share of the pie was fairly constant as both had similar growth rates. But now its share of the pie is much larger.
I believe this shift is the underlying causal factor of the issues you are . discussing.
This link seems appropriate for this disçussion:
“US economy is dangerously dependent on Wall Street whims
The Federal Reserve faces pressure to keep cutting rates to keep asset prices high”
https://www.ft.com/content/ef3539ec-5f96-11ea-b0ab-339c2307bcd4
Run:
Thanks for the welcome back! Although I never left 🙂 I just do not comment on blogs that much. Like most people I read several blogs/websites, but I rarely comment. IMO too many people comment on specific blogs to the point that the blog turns into a sort of old AOL chat room or Facebook.
Thanks for the healthcare info. I will check out Minnesota Physician. And as someone who worked in plastics injection molding for 20+ years don’t get me started on measurement mania!! LOL.