Fun with Fed numbers

Christian A. Gregory christian11 at mindspring.com
Thu Oct 4 13:09:39 PDT 2001



>
> One little problem with the soft landing scenario: Table B.100.e details
> the share of equities for households/non-profit wealth. Assets rose from
> $20 trillion to $40 trillion from 1989 to 2000, but the equity share in
> this figure rose from 14.3% in 1989 and peaked at 35.5% in 1999. No wonder
> the Fed is scrambling for cover.

I wouldn't think this would matter all that much. It only shows that the values of equity rose faster than other assets. The same 20% of households hold about 80 (+/-) % of publicly traded equity as did in 1989, so the fall in asset values only matters to households (ie on the consumption side) to the extent that it affects balance sheets of the rich, and to the extent that these have something to do with spending. But the evidence of a positive or negative wealth effect is pretty slim--after all, the real debt-spending binge didn't really begin until '96, at least 5 years into the 90s bull market (though Greenspan apparently puts a lot of stock in this idea). Which doesn't account for Wall St.'s expectations on the rest of households' real incomes.

I would think the bigger danger is the debt run-up for households that clearly didn't enjoy a "wealth effect" from the 90's boom, but borrowed like they did anyway. There has been a noted increase in state circumvention of usury laws through payday loan centers and other kinds of subprime credit. And many non-rich families don't have the benefit of refinancing their mortgages at lower rates (if long term rates go down) for extra spending or debt consolidation.

Christian



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