Bubble-Sizing the Economy — The Fed Has Done It Again!
Well, it's official. Figures released by the Fed last week indicate that the total net worth of U.S. households has set an all time record in 2013 in terms of both nominal and constant dollars. In 2013 alone , total net worth climbed by $10 trillion from $70.86 to $80.66 trillion, the largest annual increase in household wealth in U.S history. More to the point, in 4Q 2013 household wealth adjusted for inflation -- i.e., the constant-dollar value of financial assets plus the value of residential real estate net of all debt owned by U.S households--shattered the old record set in 1Q 2007 at the height of Greenspan's bubble economy.
In the past year this asset bubble has been led by the skyrocketing stock market which has set record highs. Over 2013, the value of household-owned corporate equities increased by 34% to a record $14 trillion and mutual fund shares increased by 27% to a record $7 trillion. Even housing prices rose by 11.6%, adding another $2.3 trillion to household wealth. This artificial wealth bubble has been induced by the Fed's policy of flooding financial markets with money while maintaining interest rates at super-low levels. It has failed abysmally to stimulate consumer spending, job creation, and economic growth via the "wealth effect" beloved by Greenspan and Bernanke. Ironically, what Fed policy under Bernanke has done is to put the U.S. economy in the improbable position where another financial crisis appears likely to occur without first producing even the illusion of prosperity and economic growth among the average American.
Meanwhile Janet Yellen denies to all and sundry that there are bubble-like conditions developing in asset markets. The world's super-rich do not appear to be listening, however. Last week it was reported that the 167,669 ultra-high net worth individuals (UNHWI), a category covering those people who have accumulated over $30 million in net assets excluding their principal residence, experienced an increase in their combined net worth to $20.1 trillion in 2013, up from $19.5 trillion in 2012. In 2013, the UHNWI, most of whom are from Asia or the Middle East, were busy plowing their wealth into global commercial real estate. They spent a combined $11.2 billion on hotels, office buildings, warehouses, and shops, up from $7 billion in 2012. The average price of an office property rose from $63.9 million in 2012 to $162.7 million in 2013. The latter price is more than double the price of an office property at the height of the bubble in 2007. Unlike our bubble-denying Fed chairman, the super rich are giving us a hint at where the growing asset bubble will manifest itself next.