Today’s writeup is centered around a chart that was brought to my attention in a few commentaries written at dlthornton.com:
This chart shows the ratio between total household/nonprofit organization net worth to GDP. Such a metric is interesting to look at because the relationship helps illustrate whether net worth and GDP are keeping pace with one another in growth. The data in this chart goes back to the 1950s, and so it provides a nice long term view of this ratio. From the 1950s through the late 1990s this ratio remained capped at 4. Thus, net worth was less than four times nominal GDP for this entire time period. Things changed at the turn of the century, however. Leading up to the dot-com bubble bust this ratio spiked to 4.4. This indicates that net worth grew more rapidly than GDP. A majority of this growth in net worth is no doubt attributable to the massive stock market run up during this period, but in the end, economic fundamentals reestablished themselves and the stock market came down. This resulted in a greatly reduced overall net worth of households and brought our ratio of study back under 4. Next in the gloruious history of bubbles was the run up to the 2007-08 financial crisis. This time around real estate was the catalyst that spiked net worth, but as was the case in earlier years, economic fundamentals reemerged. Real estate values plummeted and down went net worth as well. Once again, the ratio reverted back below 4. This catches us up to current times: the net worth to GDP ratio is once again at all time highs and its phenomenal run up is showing signs of exhaustion.
Sure, these two prior examples of boom and bust in this ratio don’t demand the same outcome this time around, but we should consider the context of our current situation. Nothing has been structurally changed in our economy. We are still drowning in debt and using a broken model to create policies to “fix” (completely sarcastic) our problems, asset prices of all types have surged since the financial crisis despite extremely lackluster real GDP growth, and our government is essentially bankrupt (This isn’t hard to surmise when you learn that we’ve spent so much that in a few short years the majority of government payments will be spent on interest and welfare program payments).
I do not write these articles to be a constant downer on everything. Rather, I write these things because this is the reality we face, I want those I know to be informed and because I want to see change. The only way ALL—not just the prividleged few—Americans will be able to prosper again is if we deal with these problems in front of us. Very rarely do government officials admit how serious our issues are because they are completely aware of the consequences of correct actions. Much of what needs to be done is political suicde. For example, our government must shrink because there simply won’t be money to pay for many of the programs that Americans today take for granted! We can either choose to solve this problem now ourselves or risk having it forced upon us in the form of no choice but default.
Anyways, I got a bit off topic, but the point I want to make is that the current net worth to GDP ratio is severly unsustainable. Either GDP will need to rise sharply or net worth will fall. I can’t imagine GDP is going to accelerate the necessary amount, so this leads to the conclusion that net worth will necessarily fall as economic fundamentals eventually come home to roost. Whether that happens fast or slow is still a mystery, but I believe it is coming. Please understand this, and please take it to heart.