U.S. Wealth Hits a Record, Typical Savings Plan Is Still ‘Buy a House’

[88m3]

U.S. household net worth climbed by $3 trillion to surpass $80 trillion in the latest data from the Federal Reserve. It’s a number so dumbfoundingly big that it almost invites Americans to celebrate just what a rich country we are. It shouldn’t.

The full balance sheet is a goldmine for data geeks. It’s worth drawing attention to the two biggest components of the $80 trillion: household real estate, with a value of $19.4 trillion, and $19.6 trillion of pension entitlements. That second part isn’t exactly what it sounds like to most folks, so let’s break it down further.

The $19.6 trillion pension total includes $4.9 trillion invested in 401(k) plans (which most Americans don’t think of as “pension entitlements”) plus $3.1 trillion in private pensions and $8.5 trillion in government pension entitlements. IRAs hold another $5.7 trillion worth of securities. (For those counting, the rest of that $19.4 trillion is in life insurance.)

So, basically of $80.7 trillion in household wealth, only $10.6 trillion, or about 13 percent is in 401(k)s and IRAs, the key instruments of middle class wealth accumulation. Decades of effort to get Americans to save, and incentives from both government and companies haven’t worked very well. The $4.9 trillion in accumulated savings in 401(k)s are much less than the pensions of government employees, who make up just 14 percent of U.S. workers.

Add up IRA and 401(k) plans, and the total is still a scant 25 percent more than government worker pensions alone (and some of those IRAs belong to government employees and retirees). Despite constant exhortations to save, the vast majority of middle-class and even upper middle-class workers don’t. Or at least they don’t in the instruments that they’ve been urged to use.

What do most American private-sector workers actually do? Consider the other big component of wealth, that $19.4 trillion in real estate. Except there’s an asterisk here: subtract $9.4 trillion in mortgages, and we’re left with $10 trillion in home equity. That’s about the same as the total in IRAs and 401(k), though that doesn’t quite tell the whole story, because the accumulation of home equity is heavily weighted toward folks in middle-age or older.

The very nice chart below, from the Census Bureau’s economists, gives a very good idea of the median family’s overall financial pictures. It dates to 2011, but the overall situation hasn’t changed much.

That chart nicely reflects the gap between what policy makers wish would happen with middle-class savings, and what really does happen. In the ideal world, the upper middle-class would save lots of money, put it in retirement accounts filled mainly with index funds, and see their savings multiply as the overall economy grows.

In real life, (1) private-sector workers save fairly little, and (2) the main way of accumulating wealth is to buy a house. That house is a highly leveraged and potentially very profitable investment in the early years of your mortgage and as the mortgage is paid down becomes less leveraged and less profitable. This is especially if you believe that, in the long run, the value of housing in most places can’t outstrip salaries and inflation.

So the bottom line is that Americans are not accumulating wealth at anything like the rate we would hope, and not accumulating it in a way that lets them share in a stock market boom. And from a very appealing $80 trillion number we get to a fairly disheartening conclusion.

Correction: The Federal Reserve’s total for pension entitlements is $19.6 trillion. An earlier version of this story at one point misstated it as $19.4 trillion, which the total for household real estate holdings.

http://go.bloomberg.com/market-now/2014/03/06/household-wealth-hits-record-savings-still-lo/

 

[newworldafro]

 

[newworldafro]

http://www.bloomberg.com/news/2014-03-10/debt-exceeds-100-trillion-as-governments-binge.html

Debt Exceeds $100 Trillion as Governments Binge
By John GloverMar 10, 2014 10:42 AM CT

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates.
The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion, according to the Bank for International Settlements and data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S. economy.
Borrowing has soared as central banks suppress benchmark interest rates to spur growth after the U.S. subprime mortgage market collapsed and Lehman Brothers Holdings Inc.’s bankruptcy sent the world into its worst financial crisis since the Great Depression. Yields on all types of bonds, from governments to corporates and mortgages, average about 2 percent, down from more than 4.8 percent in 2007, according to the Bank of America Merrill Lynch Global Broad Market Index.

“Given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers,” said Branimir Gruic, an analyst, and Andreas Schrimpf, an economist at the BIS. The organization is owned by central banks and hosts the Basel Committee on Banking Supervision, which sets global capital standards.
In the six-year period to mid-2007 global debt outstanding doubled from $35 trillion, according to data compiled by BIS.
Austerity Measures
Marketable U.S. government debt outstanding has soared to a record $12 trillion, from $4.5 trillion in 2007, according to U.S. Treasury data compiled by Bloomberg. Corporate bond sales globally surged during the period, with issuance totaling more than $21 trillion, Bloomberg data show.
Concerned that high debt loads would cause international investors to avoid their markets, many nations resorted to austerity measures of reduced spending and increased taxes, sacrificing their economies as they tried to restore the fiscal order they abandoned to fight the worldwide recession.
“To get out of debt, you need prudence and you need pro-growth structural reforms,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Those are long-term processes. You can’t get out of debt too quickly or your economy collapses, as we saw in Greece.”
Bond Returns
Adjusting budgets to ignore interest payments, the International Monetary Fund said late last year that the so-called primary deficit in the Group of Seven countries reached an average 5.1 percent in 2010 when also smoothed to ignore large economic swings. The measure will fall to 1.2 percent this year, the IMF predicted.
The unprecedented retrenchments between 2010 and 2013 amounted to 3.5 percent of U.S. gross domestic product and 3.3 percent of euro-area GDP, according to Julian Callow, chief international economist at Barclays Plc in London.
Rising debt did little to diminish demand for fixed-income assets. Bonds worldwide have returned 31 percent since 2007, including reinvested interest, according to Bank of America Merrill Lynch index data. Treasury and agency debt handed investors gains of 27 percent, while corporate bonds returned more than 40 percent, the indexes show.
Rating Downgrades
“Total debt levels, the sum of household, government and corporate debt, haven’t declined at all in recent years,” said Ben Bennett, a credit strategist in London at Legal & General Investment Management, which oversees the equivalent of about $120 billion of corporate bonds. “Each time there’s a wobble, the central banks turn on the taps. Either that works by creating growth with asset prices eventually coming into line with fundamentals, or it doesn’t and we’re in for a massive fall.”
Bond investors haven’t penalized sovereign issuers such as the U.S., U.K., Japan and France for losing their top credit ratings. While Standard & Poor’s stripped the U.S. of its AAA ranking in August 2011, Treasuries moved in the opposite direction from what the downgrade suggested and yields touched a record low of 1.38 percent in 2012.
In the U.K., where ratings were cut one level to Aa1 from Aaa in February 2013 by Moody’s Investors Service, 10-year Gilt yields fell 26 basis points to 1.85 percent in the month after the downgrade.
Increasing Indebtedness
Yields on U.S. government bonds have dropped 2.3 percentage points since 2007 to an average 1.6 percent, according to Bank of America Merrill Lynch bond index data. Corporate yields have declined 2.6 percentage points to 2.9 percent.
Faster growth is deflecting concern about high debt loads. In the U.S., the government will borrow less money this year than at any time since 2008, validating the nation’s decision to go deeper into debt to combat the financial crisis as a stronger economy shrinks the deficit, based on a January survey of the Wall Street’s biggest bond dealers.
The government will sell $717 billion of notes and bonds on a net basis, 14 percent less than last year, according to a survey of primary dealers which are obligated to bid at Treasury auctions. Issuance has fallen every year since the U.S. borrowed a record $1.607 trillion in 2010, data compiled by the Securities Industry and Financial Markets Association show.
Unprecedented Stimulus
Helped by the Federal Reserve’s unprecedented stimulus, the Obama administration’s deficit spending has enabled the American economy to recover faster from the first global recession since World War II than European countries that chose austerity.
Faster economic growth and falling unemployment in the U.S. has slowed the build-up of debt as a proportion of GDP to 70 percent, less than two-thirds of the 24 developed nations tracked by Bloomberg. The jobless rate was 6.7 percent in February, government data showed last week, down from 7.7 percent a year earlier.
Higher corporate and individual tax receipts have prompted dealers in the Bloomberg survey to predict the U.S. budget deficit will decline by about $50 billion to $629 billion, the least since 2008.
Smaller deficits may be short-lived because government costs for retirement and health care are poised to surge in the coming decade. Spending on Social Security will rise 67 percent to $1.414 trillion in 2023 from $848 billion this year, while spending on programs including Medicare and Medicaid will almost double to $1.808 trillion in 2023, estimates from the Congressional Budget Office released in May show.
Debt Recovery
Bonds in Europe’s most indebted nations are recovering from the region’s sovereign debt crisis, with 10-year yields from Greece to Ireland sinking last week to the lowest since at least 2010.
The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to an average 2.44 percent on March 5, the lowest in the history of the euro area, according to Bank of America Merrill Lynch indexes. That’s down from more than 9.5 percent in 2011, when the region was rocked by concern nations may struggle to service their debt.

 

[Brown_Pride]

that's some depressing shyt. Seriously though long term how can anyone see this ending in anything other than a shyt storm? It's like building a giant tower out of dry spaghetti, it'll either fall over or fall in on itself.

 

[mcdivit85]

Good article. This is why so many people have been beat down the last few years....because their main source of money and/or lifestyle is tied to their home. Not their savings, not their investments, not their businesses...but their house. That everyone believes "will always go up." And when it didn't go up but went crumbling down, there goes the "lifestyle" they thought they had.

I find it interesting that the very people that are supposed to be the stalwarts of this country, middle class and upper-middle class, tend to not have much to show for themselves outside of their home....for the most part. The hallmark of this sector of the population being that they are home owners whose biggest asset is said home. So, it makes sense that this recession has hit the white collars the hardest.

I think the last few years have really been a wake up call for some. That a house is not a bank account or a retirement plan. That it's simply a house that can increase in value but is not guaranteed to increase in value. That a family cannot base their financial well-being on just that house and the promise that it will maintain their lifestyle.

Peace

 

[wheywhey]

I've never had anything more prestigious than an entry level job and I have never had much trouble saving. However, I don't have children, which I consider a game changer.

I lived cheap, worked overtime, and payed off all of my debts. With only rent and monthly expenses, I was able to live on half my pay and save the other half.

I recommend that initially people only contribute to their 401k if there is a match. Too many people run into hard times and have to pay penalties and taxes in order to get their money in an emergency. They should keep savings in a money market fund and invest in low-turnover stock mutual funds. Once they reach their goal, then they can fully fund 401ks and/or IRAs.