While President Obama condemns inequality in contemporary America, new data from the U.S. Federal Reserve Bank indicate that the disparity between rich and poor continues to get more extreme.
The Fed’s Flow of Funds report for the third quarter shows that the bulk of the quarter’s $1.9 trillion growth in household net worth came from appreciation in assets held primarily by wealthy Americans.
Household net worth came to $77.3 trillion in the third quarter, up from an adjusted figure of $75.34 trillion in the second quarter. (The second quarter figure is inflated by a wholesale revision of economic data, including GDP and other widely used indicators, that was imposed in July and resulted in a massive apparent increase in America’s putative wealth.)
As the financial blog Zero Hedge points out, most of the growth in the third quarter came in assets that are mostly or only available to rich people.
“The reason for this increase, and why we say [the increase only affects] a ‘subset’ [of U.S. households] is because virtually all of the net worth increase was the result of a $1.5 trillion bounce in financial assets (read: capital markets) to a new all time high of $63.9 trillion,” Zero Hedge writes. “As most know by know, the bulk of the exposure to this asset class is held by the ultra wealthy, particularly in the form of Corporate Equities, the category which rose by the single largest amount in the quarter, or $600 billion. Away from financial assets, the remainder, or $500 billion of the increase, was due to a rise in real estate values to $21.6 trillion, still over $3 trillion lower than the all time high for the category reached in Q4 2006.”
The new Flow of Funds report comes a week after Obama gave a 6,300-word speech that was dubbed by The Washington Post’s Ezra Klein, apparently without sarcasm, “the best speech Obama has given on the economy.”
The president’s peroration focused heavily on the country’s growing wealth gap. The word “inequality” appears 26 times in the printed text. By comparison, economy-related terms such as “market” and “wealth” appear only nine and six times, respectively. “Save” appears five times and “saving” a mere three times.
The Fed’s Flow of Funds report is not without good news for ordinary Americans.
The new bubble in real estate prices means that Americans now own more real estate outright — in the form of equity — than they owe to banks in the form of mortgage debt. Taking the “real estate” section from the Flow of Funds report’s “Household Balance Sheet” section and subtracting the report’s “Home Mortgages” figure reveals that a solid 54 percent of real estate owned in the United States is in the form of equity rather than debt.
This is a horrible figure by comparison with the equity portion under President Ronald Reagan — who is still reviled by left-leaning Obama supporters as an inflation-averse tribune of the rich. In 1983, Americans owned more than 70 percent of nominal real estate outright, rather than owing it to a bank.
However, the current equity portion is a substantial improvement over the figure from the third quarter of 2012, when Americans owned just 49 percent of real estate outright. The real estate re-inflation at least temporarily vindicates Obama’s and Fed Chairman Ben Bernanke’s policy of devaluing the dollar in order to create asset bubbles, and it appears to have benefited the (shrinking) majority of working Americans who are titled real estate owners.
Of course, this bubble only helps people who have already bought, and in any event real estate seems unlikely to remain overvalued in this way. Despite the 2007 price collapse, median house prices are still historically over-inflated as a function of median income. In 2011, the U.S. median house price was about 4.2 times median annual income, compared to a range of 1.5 to 3 times median income that held from 1940 until the end of the twentieth century.
The wealth gap is even more pronounced among Americans who do not own real estate. According to a new study from Harvard University’s Joint Center for Housing Studies, about 50 percent of renters are paying more than 30 percent of their income on rent. That’s particularly alarming because 35 percent of U.S. households, about 43 million, now rent rather than own — up from 31 percent in 2004.
As housing costs rise, the effects may be showing up in personal savings rates. According to the Bureau of Economic Analysis’ Personal Income and Outlays report, personal saving has not budged above 5 percent since early 2011 (even though this report also received a “comprehensive revision” in May that added a whopping $159 billion in ostensible monthly savings).
Notably, Obama’s inequality speech made no mention of rent at all, and the term “real estate” did not appear once, although there was a vague reference to households that “rack up mortgage debt.” While it is not clear how well the president understands these nuts-and-bolts personal finance challenges, it is clear that his rhetoric about America’s glaring wealth disparity overlooks one key point: Inequality is growing markedly worse, not better, under his management of the economy.