THE PLANK MARCH 13, 2009
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There's not a whole lot of good to say about the news, coming out of the Fed today, that Americans lost 18 percent of its net worth last year, or $11 billion the worst one-year decline since the Federal Reserve started keeping track after World War II.
But as the Wall Street Journal notes today, that amount is equal to the combined net worth of Britain, Germany, and Japan. In other words, it's as if three of the world's five largest economies had simply disappeared. And while the current crisis is going to affect us for a long time, Americans are still largely going about their daily business, taking things in stride. True, we may yet see caravans of unemployed Okies heading west. But numbers like these should give pause to the trendy declinists out there who--until recently, at least--believed American economic dominance was about to implode. The simple fact that our economy can absorb what, by any other measure, are nation-crushing losses and keep rolling should be a reminder of just how one-sided the global economic picture still is.
--Clay Risen
27 comments
$11 trillion.
- aawillsher
March 13, 2009 at 10:40am
Should the first line read "that Americans lost 18% of their net worth, or $11 trillion"?
- tnmats
March 13, 2009 at 11:01am
I'm not an economist, but how is 11 trillion disappear. Either the assets were overvalued and came back to reality, or they are undervalued now will rise.
11 trillion doesn't disappear in a year.
- mpatrickhendri
March 13, 2009 at 11:05am
mpatrickhendri is correct. For an individual, the loss is real as it represents the loss of future consumption opportunity. But in the aggregate, it is not. It is a monetary revaluation, a re-distribution away from people who had a lot of investment wealth, and thus could potentially command more of output, to people who own less but have their labor to sell and will now do better. The real assets we had in August, including the housing financed with mortgage-backed securities, are all still there. They have not disappeared. This is not a war.
Collectively, this is actually a good thing in the slightly longer term if our government is successful in curtailing the recession. The revaluation to more realistic levels promises higher future growth and investment and a fairer income distribution. But the adjustment is very painful both in terms of lost income to the unemployed and lost wealth for those with market and real estate investments made lately. For many individuals, especially retirees without the chance to recoup, the outcome can be tragic. This is the crime committed by our government's wilful neglect of its regulatory responsibilities in allowing the asset bubble to form. In a just world, Alan Greenspan would be sent to jail. The losses he has caused to individuals through his stupidity and ideological blindness dwarf Madoff by a factor of 200 or so.
- roidubouloi
March 13, 2009 at 11:22am
The combined GPD of the UK, Germany and Japan. Not combined net worth.
- Simon Greenwood
March 13, 2009 at 11:24am
hendri, I'm no economist either, but clearly the hope is that it's a little of both; that is, formerly overvalued assets are now undervalued with reality somewhere inbetween. This seems to be the basis of the much criticized "rosy scenario" outlook of Obama's budget.
With asset valuation this volatile, though, it's pretty easy to see how $11 trillion could go poof! in a year. Paging roiduboloi!
- thetraytiger
March 13, 2009 at 11:25am
Hah! Right on cue, roid! The individual/aggregate distinction is crucial. 'Hear, hear' on Greenspan.
- thetraytiger
March 13, 2009 at 11:31am
As the resident Okie on this board, I have to comment on your Grapes of Wrath reference. With our newly diverse economy, Oklahoma has one of the lowest unemployment rates in the nations. Seems like the more likely scenario is unemployed Californians heading East. :)
- Brent
March 13, 2009 at 11:45am
Agree with Hendri and Roid,
The real measure of distress is how many productive work hours were wasted on unemployment? How many divorces/suicides/crimes resulted from unemployment? What was the total decrease in GDP? Networth, meaningless.
- acria multa
March 13, 2009 at 11:46am
The correct figure is $11.2 trillion dollars. Ideological blindness, roid? Low interest rate helped mightily to facilitate our present financial crisis and low rates are popular on both the left and the right. The likes of Barney Frank and Jack Reed pushed for loans to low or lower income people. Send Barney and Jack to Leavenworth.
- liberal reformer
March 13, 2009 at 11:52am
Liberal,
Interbank rates are already about zero. My rate from Goldman right now is negative. We are in what is called a "liquidity trap" where monetary measures no longer work. Hence, we need fiscal stimulus.
* * *
Hey in there at TNR, I have tried five times to post something on Noam's blog "Raise your hand . . ." It just keeps disappearing. It is long, but a lot shorter than some things already posted there. Can you please explain what the problem is and what, if anything, we on this side can do to avoid the problem
- roidubouloi
March 13, 2009 at 12:03pm
Roid - Do you think any of these hucksters will go to jail? The guy who threw a shoe at Bush, and missed, has been sentenced to three years. Is there something other than jail time that can be suggested? Some loss of licenses/credentials? What are some realistic penalties for these bastards?
- fougasseu
March 13, 2009 at 12:17pm
"For an individual, the loss is real as it represents the loss of future consumption opportunity. But in the aggregate, it is not. It is a monetary revaluation"
It's real if it changes the investment calculations of the people who hold our debt, principally the Chinese.
The main issue now is one of confidence. If people lose confidence in America's future, they will shift their investment patterns in ways that will restrict our and our children's options significantly.
- teplukhin2you
March 13, 2009 at 12:41pm
fou,
You think that's outrageous? Juxtapose the story belwo to the systemic criminality we're seen on Wall Street.
www.charleston.net/.../sc_man_gets_60_years_stealing_copper
Yeah, you read that right - a dude got 60 friggin years for stealing copper. The banks and AIG get a bailout. Ugh, maybe this talk of "communisn" is upside down.
- mpatrickhendri
March 13, 2009 at 12:55pm
Tep, where else is the Chinese money going to go? They got Euros and they got dollars and not much else (and don't say yen, it is a cold day in hell when the Chinese go there). Wen Jiabao is making a little noise, but lets be realistic.
And I think you should know that a great many of their top economists studied in the United States, the guy who is in charge of their sovereign wealth fund Xi-Qing Gao went to Duke, even sits on their board of trustees.
- blackton
March 13, 2009 at 1:35pm
"Steal a little and they throw you in jail; steal a lot and they make you a king." -- Bob Dylan, "Sweetheart Like You," 1983. The times they aren't a changing much.
- jtshaw
March 13, 2009 at 1:38pm
black - it could go any number of places, including Asian and other emerging markets which they know very well, can influence politically, and which now offer decent growth at attractive prices.
For ex., Brazil is probably the best-positioned national economy in the world right now. They have abundant natural resources incluing vast new oil discoveries, excellent manufacturing companies, a growing service sector, and a decently-managed national government.
We're not the only attractive investment oppty in the world these days, and China would do well to diversify.
- teplukhin2you
March 13, 2009 at 1:53pm
In another thread, roudubuloi told me that the Chinese is financing the net deficit only on our trade imbalace with China. They are not financing any of our internal budget deficit. Is that true or not? Tep, the discussion you kicked off here seems to suggest that China indeed is financing our internal baudget deficits as well our balance of payments deficit to them.
- r-ennis
March 13, 2009 at 2:13pm
Blackton- Have you ever tried to do business in Brazil? The inefficiencies governing business creation are epic and legendary. Last year I heard astory on public radio (it was repackaged as different programs by BBC and Npr) about just how difficult it is to establish a new business in Brazil. I think they mentioned that it held some dubious world record for the time needed to incorporate a business. I know my company has been trying to close a defunct sub there for >2 years and we're still paying monthly fees to auditors and local reps while the pertinent state govt "updates" its computer system to allow wind-downs. Grrr.
- MJMCKAY
March 13, 2009 at 2:35pm
mjmckay, um...no, I never did, although I did patronize a hooker on Ipanema once, does that count? I must admit I did get screwed, but I guess that was the point. I think your posting was meant for Tep.
Tep, the chinese are investing heavily in Australia, Burma, etc. But the scale there is much lower, they simply don't have anywhere near the opportunites. The city of Shanghai has more people than all of Australia.
Even if they could go to Brazil or Argentina, or what have you, they simply lack the experience to do business there. Few Chinese speak Spanish or Portugese (except in Macao) and few Brazilians speak Chinese, and don't pretend that English will bind them together.
- blackton
March 13, 2009 at 2:48pm
Mjmckay: Great post. The statism of most all of the economies in Latin America is appalling, Brazil included. In Peru, it takes - I believe - 180 days to get a business licensed. And the left talks absurdly of the failures of capitalism (of the neoliberal variety) south of the border. Roid: We are facing a $2 trillion demand shortfall in the next two years. Like you, I am for a stimulus. Your post does not comport with what I wrote.
- liberal reformer
March 13, 2009 at 3:35pm
The chinese aren't financing anything, we have to print the money before they can get it.
What the chinese are doing is not spending the dollars they receive. They have no choice but to save in dollars because A) we're the biggest economy in the world, B) No one else lets deficits happen. All saved dollars everywhere ultimately end up in treasury bonds, unless you are literally burying them in the mattress.
Stop sweating the Chinese, focus on our people.
- acria multa
March 13, 2009 at 3:59pm
I guess someone at the Fed forgot to point this out to Wall Street. What a week, eh? How many would have predicted it last Friday?
More recency bias.
Virtually everyone in the mainstream media has the ecomomy deeply embedded in rigor mortis. But as with the financial meltdown and the price of oil, extrapolations from here to there are illusory. No one saw them coming, right? Or very, very few did.
There are some things that can be reasonably predicted. Like, say, the consequences of an asteroid the size of Texas hitting Texas. But predicting what the economy will look like 4 to 6 months from now is a tad more problematic.
It is a huge category mistake to imagine the social sciences and the natural sciences are just two ways of saying the same thing.
And it becomes more illusory still when ecclesiastics and ideologues insist the same sort of correlations can be broached [and then instantiated] with respect to the way things are and the way they ought to be. Indeed, many insist there is a direct cause and effect relationship here.
The human mind doesn't get much shallower than this.
george walton
- iambiguous
March 13, 2009 at 7:25pm
Brent is right. The NYT had an interactive map on "The Geography of the Recession" a week or two ago: www.nytimes.com/.../20090303_LEONHARDT.html
The change in the unemployment rate over the last year shows the Great Lakes region, the South and the Northwest taking the biggest setbacks, while the states of the plains, from North Dakota all the way down to Oklahoma, held up best. (Wyoming, Arkansas and West-Virginia seem to be holding up well too.
The December '08 unemployment rate seems highest in swathes of the Pacific coastal states, Alaska, Michigan and the Carolinas. The lowest, again, in a wide band of counties from North Dakota down to Oklahoma and Texas.
So yep, looks like it would be Californians and Oregonians moving East this time ...
- jobeek2
March 13, 2009 at 9:16pm
acria:
Stop sweating the Chinese, focus on our people.
george:
Do you have any idea what would happen to "our people" if China carried through with its off and on threats to liquidate tits enormous holding of US treasuries? You say they won't. But you say this as though you have an intimate inside source over there who can confirm this. Nobody knows for sure how this global economic crisis will unfold, let alone end.
Over at The Spine, Marty and his claque go on and on about Chas Freeman facilitating the Tiananmen Square repression in China. But it never even occurs to them that no one has facilitated China's crony capitalist government policy more than the crony capitalists American government.
Does anyone in here actually believe that, if China committed another T Square tomorrow, anything would change in our "most favored nation" relationship with them. These guys don't give a shit about "the people"---not here or there. It's just more cleverly hidden in our own government.
george walton
- iambiguous
March 13, 2009 at 10:06pm
r-ennis,
First, everyone should understand that US dollars cannot leave the US unless they are in the form of currency, and the amount that can depart that way is trivial. Plus, when money leaves the system as paper, it is effectively no longer money, just paper. The money supply consists principally of US dollar deposits in US banks that are converted into paper for transactions and then converted back to deposits. When we buy stuff from, say, the Chinese, they take title to a portion of those deposits, but the deposits are still right there in the US banking system. They cannot leave because there is nothing else for them to turn into. If someone sells them to buy a foreign currency, the bank of deposit may change, but the deposits remain in the system.
Since there is little return on deposits, and the amount of insurance is limited, big holders like the Chinese buy Treasury bonds instead. If they buy them from the Treasury, the money supply has been reduced by that amount as deposits transfered to the Treasury are no longer money. The Treasury takes title to a bank deposit and uses it to offset the bank's reserve account, so the money is destroyed. Since we presumably had the amount of money in they system that we wanted, the Treasury then goes out and buys back some bonds from the market, monetizing them, and the money supply is restored. The net effect of these transactions is that Americans used Treasury bonds to pay for net imports. No net imports, no foreign holdings of Treasury bonds. Those Treasury bonds cannot be used a second time to finance the budget deficit any more than you can use a single loan of $1 to buy things worth $2. Accordingly, foreign holdings of US Treasury debt finance the trade deficit, not the budget deficit.
The Chinese could sell those bonds to someone else and recoup dollars, but then they are back where they started from. The only point in having the dollars is to spend them, and that would be a good thing. If they sell the bonds, all that has happened is that someone who owns title to US bank deposits transfers that title to the Chinese and takes title to the bonds. From the standpoint of the real economy , nothing has happened. Of course, if they try to sell too many of them at once, the price will drop, but then, what would they do with the dollars? And the effect would be temporary as even the addition of the Chinese holdings to the outstanding bond float would not make that big a difference. All in all, this should be the least of our worries.
As I said above, the best thing the Chinese could do for themselves, and us, and the world is to spend their hoard on US goods and services. Once a hoard reaches these proportions, it really ceases to be of any value as it cannot be liquidated for any purpose other than consumption over an extended period.
- roidubouloi
March 13, 2009 at 10:53pm
Tep,
Of course, people's spending and investment behavior can be affected by loss of wealth -- the "wealth effect." We see that at work now with the contraction of demand. But demand for investment is a derived demand, because the purpose of investment is ultimately to produce goods and services for consumption in order to earn a profit. When consumption demand recovers and capacity gets tight, investment demand will recover. I think it highly unlikely, given the size of our financial system, that business would be unable to finance that investment in a growing economy. Besides, we have just come out of a period of far too much money chasing too few investment opportunities that produced a huge bubble. It is a little premature to start worrying about not enough money chasing too many investment opportunities. People have short memories or we wouldn't have gotten into this fix.
- roidubouloi
March 13, 2009 at 11:07pm