Household Net Worth (as % of Disposable Income)
By Barry Ritholtz - July 26th, 2010, 11:30AM
Interesting chart that Macro Market Musings calls “The Revenge of the Balance Sheets.”
Each of our double peak in assets — dot com stocks and housing — sent the ratio to unsustainable levels and back again.
You may recall at each of these peaks, some idiot was invariably trotted out to discuss how the debt to asset ratio was very favorable, so there was nothing to worry about (move along!). Of course, to reach this conclusion, they had to ignore the simple fact that assets fluctuate in value, but debt persists until it is paid off.
Here’s today’s chart:
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Household Net Worth as Percentage of Disposable Personal Income
click for larger chart
Source: Macro and Other Market Musings
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July 26th, 2010 at 11:42 am
An interesting related chart would be a breakdown of the “nominal” household net worth … equities, household home equity, bonds, cash, insurance cash value and other tidbits of a primarily financial nature, and “stuff”.
July 26th, 2010 at 11:43 am
… and, of course, the aggregate level of household debt, segregated into mortgage debt and “other”.
July 26th, 2010 at 12:00 pm
How would you calculate “disposable Income”? Is it the after tax money that you receive? For example, someonw making $100k per year, would have approx. $60K of after tax, disposable income and are they saying someone making $100k has around $300k of Net Worth?
July 26th, 2010 at 12:51 pm
Student loan debt persists until it’s paid off. Other debt can vanish with a wave of the judge’s wand.
July 26th, 2010 at 12:52 pm
The statement “the simple fact that assets fluctuate in value, but debt persists until it is paid off”
remains true *** UNTIL and UNLESS *** it’s inflated away after to the point of debt becoming totally immaterial amount!
July 26th, 2010 at 1:07 pm
Back to the late 80′s and 90′s!?
How about back to the 50′s and 60′s.
Possible reasons with other links:
http://www.theatlantic.com/business/archive/2010/07/more-weird-metrics-for-elizabeth-warren/60351/
July 26th, 2010 at 1:10 pm
b_thunder, I sure hope that is not the plan. Do you think it is what the Fed has in mind? Is your basement filled with gold bars and copper coated lead?
July 26th, 2010 at 1:12 pm
Cdale_dog — “disposable income” is simply “after-tax” income.
But a person making $100K per year in These United States would have more than $60K left over after taxes.
Let’s do that thing that so few people ever do, and “do the math”:
$100K – standard deduction (you didn’t specify whether it was single/joint, so let’s take the worst case: single) comes in at about $94,300. And your federal taxes on that would be about $20,776. If we add in a nominal state tax rate of a flat 8% (which I think puts you in the top half of the states by tax rate), 8% of 10K comes in at $8K, for a total federal + state of about $28,776. If you want to get really persnickety, and add in the FICA tax, 7.65% of income, or about $7650, for a total tax bite of about $36426.
And remember, this is the worst case — most people will pay far, far less than that. Probably half that, depending upon their marital status, and the lengths to which they have exploited the deductions and credit loopholes in our tax code.
As to how income relates to net worth, that is generally speaking, not at all. Say a person makes $100K per year, and is carrying a debt load of $800K on a house worth $500K, and has borrowed money to buy a vehicle that declines in value far faster than the loan balance does. That person has a net worth that is sub-zero.
OTOH, say a person making $50K has lived modestly, scrimped and saved and made excellent choices in his/her investments — they might well have a net worth of over a half-million bucks.
Doing a personal balance sheet is an exercise that ever person who owns property or gets a paycheck ought to do at least once a year, and yet few ever bother to do so.
July 26th, 2010 at 1:25 pm
Of course the chart shows that my statement about “net worth having little to do with disposable income” is wrong, as there appears to be a nicely defined happy medium of about 5X disposable income going back almost 60 years. Interesting that the only time (so far that we have plunged much below that level was from the 1970s through the 1980s, when we suffered the expense of the Viet Nam war, Johnson’s Great Society social programs, Nixon’s Wage and Price Controls, and the huge oil shock from having our imported oil quintuple in price pretty much overnight.
Oh, and there was also the destruction of the S&L industry via rotting from within.
One might reasonably expect our current global economic mess to drive this lower before it gets better, as incomes shrink in the face of deflation while debt persists until it is defaulted, paid off, or devalued via inflation (which seems unlikely, given the lousy utilization and demand data).
July 26th, 2010 at 1:30 pm
Barry, any comments on the article that Neid posted? Taxes are already too high and going higher is not going to help the avg. american family one single bit. If you could tell me that all the increased revenue would be put in the “lockbox” to pay off the national debt, I could maybe sell the idea of raising taxes. However, when we KNOW it will go towards income redistribution projects, it’s a very tough sell.
The dems go down this road, they will assure themselves the loss of both houses come November.
July 26th, 2010 at 1:31 pm
One thing that might also be a factor — maybe or maybe not — is the impact of the aging boomers and retirements, which will eventually happen, whether the boomers want to retire or not. When a person retires, unless they have prepared very thoroughly for it, they will see a decline in income (I presume that for purposes of “disposable income”, pension checks count the same as payroll checks). And their “stuff” that makes up their net worth will (hopefully) tend not to decline in so rapid a manner. So this demographic effect should result in upward pressure on the net worth-to-disposable income ratio.
At least that’s what I think should happen. If we see a wave of bond defaults and the continuation of the housing price declines, I could be wrong about that, with net worth falling faster than disposable incomes for those folks.
July 26th, 2010 at 1:49 pm
Patrick Neil — I don’t believe that the data supports Megan McArdle’s statement that “The typical 1970s family is headed by a working father and a stay-at-home mother with two children”.
At least in my little world of the 1970s, every couple we knew were two income couples, with one parent or the other taking child care leave for as long as their employers would permit before returning to work.
But the conditions described were pretty much the reason why most families were, by that point, two income households, with the stay-at-home Mom becoming a luxury that few could afford.
And sadly, as the things that families spend money on have continued to increase, we now need a THREE income household, in an economy where it is difficult for a lot of two income households to retain both incomes.
July 26th, 2010 at 1:50 pm
@Patrick Neid:
Re: your link to McCardle at The Atlantic:
McCardle/Zywicki don’t seem to understand marginal tax rate, huh? 33% is the rate for 100% of the $67k household earned — really??? How about no. I’ve seen enough of your commentary here to know that you’re a very smart guy and know better than that too.
Also, Zywicki’s analysis completely ignores the increase in education costs which have radically outstripped inflation over the same period. That’s another theme Warren has harped on for a long time.
July 26th, 2010 at 2:11 pm
The chart shows the course of the baby boomers from the early low income years up the ladder – taking more risks and going through wilder swings as the years went on.
July 26th, 2010 at 2:12 pm
“as the things that families spend money on have continued to increase, we now need a THREE income household”
Exactly. Polygamy is the answer.
July 26th, 2010 at 2:34 pm
Not surprising considering that GDP in terms of gold is no higher today than it was when we left Bretton Woods. Growth requires a stable monetary framework which we’ve lacked for almost 40 years.
July 26th, 2010 at 2:47 pm
All the more reason to think interest rates will be kept down even after inflation shows up–which won’t happen for a long time IMHO. As I mention in my report on housing affordability and Barry has said many, many times, low interest rates have allowed asset prices to soar. The problem here is that now interest rates can’t rise, not even a little bit, because it’d be political suicide to push down people’s asset prices–especially after the last two years, when retail investors have been piling in into bonds at such a rapid pace. There is just so much FAIL in the current situation. Homes are the most affordable they’ve ever been but people don’t have the means/credit/jobs to buy them, or already bought in the 2000s, or are scared to enter the market based on seeing people get burnt. Interest rates are as low as they’ve ever been and people are instead deleveraging and buying duration. ugh.
July 26th, 2010 at 3:28 pm
X on the MTA
… but does not Mr Market deliver the most pain to the most people? That might well augur for a rise in rates, perhaps due to a sudden lack of confidence in the Bananamerican dollar — I’m not predictin’, jus’ sayin’ …
or maybe I’ve been drinkin’ from the bear bottle for too long …
July 26th, 2010 at 3:41 pm
The instability of the values charted expresses the effect of money & credit creation [seeded by the central banks of the world] more so than real dependable wealth.
July 26th, 2010 at 4:07 pm
Transor Z :
That whole link ended up being apples to oranges and should have been off thread as they say. It really had nothing to do with BR’s post. Furthermore the link inside the Atlantic piece doesn’t link to the highlighted area that Megan used to point out some areas of dispute with Ms Warren.
Thank you for the compliment but I would never want to be mistaken for someone who knows anything about tax schedules. Perhaps that why I favor a flat tax with no deductions. I do realize it is a fantasy and as such I never talk about it except to vote yes in silly polls.
Megan is still a great read however.
July 26th, 2010 at 4:10 pm
@constantnormal
Well, yes, of course. I didn’t make the point on my comment because I figured it was understood, but this is not all an accident. Prices are low because people can’t buy and interest rates are low because the fed is loose because people won’t borrow. Prices wouldn’t have been high if people hadn’t been sold to the idea of buybuybuy. I do, however, stand by my point that raising rates will be political suicide, and so we are likely to see eventual above-average inflation once the economy starts growing again, and the people hurt the most will be pensioners, etc, because even if the steepening makes the borrow-short lend-longs (i.e. banks) hurt, they’ll get bailed out while the people trying to buy safe instruments will lose, and that’s just not progress.
Last week, for example, there was this BoA issued, FDIC insured 20yr CD that went out. It paid the (30yrCMS – 2YCMS – 0.875%) x 4. (~9% @ issue, callable after 1 yr). Against what I thought was my better judgment, i saw a guy buy $2MM, ignoring me and thinking he was going to get a sweet 9% fdic insured. If interest rates continue on their current path, though, that’s going to turn to zero after that first year is over, and he’s going to be stuck with it for another 19 years. for every point the curve flattens he’s losing four, and barring some serious inflationary expectations (which i see no risk of in the next few years), there ain’t going to be a lot of steepening going on. even worse, when we do get steepening, BoA will just call it back.
People are retards that love reaching for yield, but people are also being tricked. they are being robbed of their savings and it’s not just a matter of buyer beware, we are not talking micro cap equities here, we are talking about a CD that’s designed to exploit information asymmetry to systematically rob people who want a safe, FDIC-insured investment of their hard-earned money. That’s just a bad way of doing business.
look it up, CUSIP: 06051vtg1
July 26th, 2010 at 8:16 pm
What’s all the bearishness about? To get back to the 1974 low only requires a 14% drop in household net worth. Is BR still 100% in cash?
July 26th, 2010 at 8:54 pm
@X on the MTA: Intelligence asymmetry would be more accurate. The smarts are taking the stupids to the cleaners. What else is new? And the Fed is not elected, so political suicide is not relevant. The Fed has raised rates sharply in the past (1980, 1994), and hurt people in the process, and there is no reason to think it won’t do so again in the future. The Fed is a bureaucratic committee of mainstream economists and bankers. As such, its primary concern is to avoid doing something that could be faulted by other mainstream economists and bankers. Thus the Fed will follow its charter, and raise rates as necessary to stop inflation. The huge private sector debt overhang and the inflated asset prices simply means that controlling inflation will be easy, since rate hikes will have an amplified effect on the private sector. Compare with the 1970′s, when there was much less private sector debt, so that rate hikes had little traction.
July 26th, 2010 at 11:56 pm
@bonzo
touche, sir. I guess my main concern is for the fed to be unduly influenced by Washington, which is a totally separate problem. I do wonder if reflated asset prices will lose enough value to create slight problems for the banks, but not a lot, since–as you correctly mentioned–they kinda run that game. I guess the only thing one can do is play your hand so that you don’t expose yourself to the risks that would most gravely affect you, and let the others play their own hands however they want.
July 27th, 2010 at 8:23 am
“However, when we KNOW it will go towards income redistribution projects, it’s a very tough sell.”
I got your income redistribution project right here.