Krugman: Decade at Bernie’s (our false perception of wealth)
Posted by nithi.vivatrat on February 16, 2009
Paul Krugman’s NYT column yesterday discusses how, for the past decade, we have been living under the illusion that this was a period of great wealth creation. Unfortunately for us,
Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.
At this point, I think that illusion is fairly well shattered. Much of the growth in our economy was fueled by consumption enabled by personal leverage on real estate assets. Now that the run-up on asset values is gone, that leverage-based consumption is impossible — and our economy must contract. Further, much of that debt (secured by assets with newly-lowered values) is still there, an albatross for many consumers for some time to come.
To continue moving through the vicious cycle: the perception of our wealth drives our consumption, as well as the valuations of assets such as real estate property. As I argued in a previous post, we will need to see this perception fundamentally turn around before we see a general all-around growth in real estate prices. I think there is a long road ahead of us before we see this happen.