Most Important Measure of Fed’s Economy: My “Per-Household Wealth Effect Monitor” for Q1, Based on Fed Data

How the “Wealth Effect” benefits Americans individually: Peanuts & extra costs for the bottom 50%, wealth for the top 10%, billions for the few.

By Wolf Richter for WOLF STREET.

The Fed released its data on the wealth distribution through Q1 2021 today. It’s a testimony of the effectiveness of the Fed’s monetary policies in expanding the already unimaginably huge wealth disparity in America. The Fed’s data covers household wealth of the 1%, the next 9%, the next 40%, and the bottom 50%. The bottom 50% – half of the US population – are the have-nots and don’t even register on my “Per Household Wealth Effect Monitor” because they don’t have enough.

The 1% of 126 million US households – so 1.26 million households – are the prime beneficiaries of the Fed’s actions. At the end of Q1, their combined wealth was $41.5 trillion, for an average of $32.9 million per household. Over the past 12 months, their wealth increased by $7.9 million per household.

The “next 9%” of the wealthiest households, with an average wealth of $4.3 million, gained on $708,000 per household in 12 months. The “next 40%,” with an average wealth of $725,000 per household, gained $98,000 in wealth.

The 1% are spread across an enormous spectrum of wealth.

At the top are the 30 wealthiest American households, ranging from Bezos to Icahn, with Musk as #2. Combined, the 30 households have a wealth of $2.0 trillion, per Bloomberg Billionaires Index, with an average wealth per household of $67 billion. They’re the total hands-down-winners from the Fed’s monetary policies.

The bottom 50% are the have-nots in a universe of Fed-created wealth that is not for them.

The bottom 50% own essentially no stocks. And only a small portion of them own real estate, and they have very little equity in the real estate they own. But they have a lot of debts. The bottom 50% are not only bypassed by the Fed’s Wealth Effect – they have to pay for it in terms of higher costs.

Their average wealth of $42,000 per household includes durable goods, such as their cars and TVs and washing machines and cellphones. Their wealth gained just $10,000 over the past 12 months, much of it not from the Fed but from the government’s stimulus money, which they saved, paid down their credit cards with, or spent including on durable goods.

Among the bottom 50%, there are also large differences. At the top end are households perhaps with a modest house weighed down by a big mortgage they can barely pay for, a small 401k, plus nice cars and other durable goods, minus auto loans, student loans, and credit card debt. Those are the lucky ones among the bottom 50%. But that category also includes the poorest of the poor.

The chart below shows the wealth of the bottom 50% (red line) on the scale of “the Next 40%” (green line). This “wealth” of the bottom 50% has grown by only $14,000 in 20 years, not adjusted for inflation, of which $10,600 occurred over the past 12 months, thanks to the stimulus payments.

That “wealth” of the bottom 50% is composed of $122,500 in assets minus $81,000 in debt. Mortgage debt used to be the largest portion of the debt, but consumer debt – credit card debts, auto loans, and student loans – overtook mortgage debt in 2018:

The bottom half own nearly no stocks and little real estate.

Real estate at the bottom 50% is the largest asset at $61,500 per household (black line in the chart below), with $39,000 of mortgage debt against it, for a home equity of $22,500. What this means is that relatively few households in the bottom 50% own real estate. On average, those households gained $3,000 on their real estate.

When the Fed’s Wealth Effect policies inflate the housing market, most people in the bottom 50% don’t benefit at all because they don’t own a home. But they’re paying for the Wealth Effect because their costs, including rents, are rising.

Durable goods are the second largest category at the bottom 50%, at $24,000 per household, such as vehicles, appliances, and cellphones (green line), up by $2,500 over the past 12 months as people used their stimmies from the government to buy cars and other things.

Stocks and mutual funds, the smallest category of the assets, amount to only $1,356 per household (red line). The bottom 50% cannot at all benefit from the Fed’s efforts to inflate the stock market. That’s reserved for the top 10%:

The Fed’s Wealth Effect is designed for the top 10%.

The doctrine of the “Wealth Effect” has long formed the foundation for the monetary policies of the Federal Reserve. The Wealth Effect has been described in numerous Fed papers, including by Janet Yellen back when she was president of the San Francisco Fed. Later, in 2010, Ben Bernanke, as Chairman of the Fed, explained the concept to the American people in a Washington Post editorial. In March 2020, Fed Chair Jerome Powell, who wisely chose not to use the term “Wealth Effect” and instead came up with his own terms, took the wealth effect to the most fabulous level ever, as you can see with the green line in the first chart.

To achieve the Wealth Effect, the Fed attempts with its monetary policies to make the already wealthy – the big asset holders – far wealthier, with the expectation that they then spend a little of their gains, such as by buying fancy meals or fancy cars or a yacht and a big house. This spending would then boost the economy, and some of it then trickles down to other Americans. The wealth effect is the capital version of the “trickle-down economy.”

The US population has grown over the years. In Q1, there were 126 million households in the US, according to the Census Bureau, up from 105 million households in 2000. By definition, all categories have grown over those two decades. So yes, the 1% have grown by 210,000 households over those years, hallelujah. But the bottom 50% – the have-nots – have grown by 10.5 million households.

Wealth Disparity balloons.

Over the 12 months through Q1, the wealth of the 1% surged by $7.9 million per household. The wealth of the bottom 50% increased by $10,600. And the wealth disparity between them ballooned by $7.9 billion.

Over the past three decades, the wealth disparity between the 1% and the bottom 50% has multiplied by a factor of 6, from $5 million per household in 1990 to nearly $33 million now, with a huge chunk of it over the past 12 months, thanks to the Fed’s assiduous policies:

This is an astounding but totally-taken-for-granted and totally accepted result of the Fed’s monetary policies. No one is even allowed to question it. It’s accepted because the top 10% like it that way, including Members of Congress who could actually do something about it, and because the bottom 50% don’t know about it, and don’t understand what the Fed is doing to them, and are too busy trying to survive in this disparity nightmare.

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Source: https://wolfstreet.com/2021/06/21/most-important-measure-of-the-feds-economy-my-per-household-wealth-effect-monitor-for-q1-based-on-fed-data/