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john_sall

Staff

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May 27, 2014

Not Really an $11 Trillion Hole

The front page of the Wall Street Journal on March 13 highlighted an "$11 Trillion Hole" and said "Americans See 18% of Wealth Vanish." I looked at the chart, and the 2008 number indeed looked as if it had fallen off a cliff.


But then I looked at the rest of the curve and remembered the two big bubbles that were going on, the Internet Bubble in the 1990s and the Housing Bubble in the 1990s and 2000s. I thought I should just exclude those points from the long-term trend.


So I got the data from the Federal Reserve's Web site and tried to reproduce the Wall Street Journal plot, adding a trend line that excluded the bubble points.


So how does our current net worth look with respect to the long-term trend? Not bad at all. We are not in a $11 trillion hole but are back on track after some roller-coaster years.




Legend:

green = used to estimate the regression line, 1985 to 1996

red = the points in the bubbles

blue = the current value that was the subject of the Wall Street Journal article


I don't want to deny in any way that we are in an economic crisis. But I do want to remind everyone that portfolio valuation drops are not quite as bad as they seem if you consider that the last few years of huge yields were somewhat artificial, and just returning to normal valuations will look like a crash.


Sources:


  • Flow of Funds Accounts of the United States, 1985-1994 [PDF]
  • Flow of Funds Accounts of the United States, 1995-2004 [PDF]
  • Flow of Funds Accounts of the United States, 2005-2008 [PDF]
  • Balance Sheet of Households and Nonprofit Organizations, March 12, 2009 [PDF]

  • 3 Comments
    Community Member

    Anonymous wrote:

    Prior to the housing bubble, house prices roughly followed real inflation rates. ~2003 house prices began to skyrocket enormously (more than double real inflation rates). Shiller considers this an "irrational exuberance" in the housing market and what is happening now is as you say, a correction in the markets.

    Regardless, while it may appear that wealth may be "on track," consumer confidence has been affected severely. This is something which cannot be corrected so easily.

    Community Member

    Douglas M Okamoto wrote:

    Year Net_Worth

    1985 14227.6

    1986 15686.8

    1987 16708.3

    1988 18204.0

    1989 19893.7

    1990 20231.6

    1991 21806.2

    1992 22805.1

    1993 24174.6

    1994 24949.4

    1995 27698.9

    1996 29747.6

    1997 33282.2

    1998 37137.3

    1999 42116.7

    2000 42018.8

    2001 41749.1

    2002 40522.3

    2003 46372.8

    2004 51873.9

    2005 58098.0

    2006 62299.6

    2007 62689.8

    2008 51476.9

    Community Member

    Douglas M Okamoto wrote:

    Fitting a simple exponential smoothing model to all household net worth data from 1985 to 2008, using the Modeling option for time series, yields a Forecast Plot in which the trend fitted for the 12-year 1985-1996 time period appears to be extrapolated. Itâ s almost as if household net worth went off-track during 1997-2008 and the $11 trillion dollar loss experienced in 2008 was a mid-course correction. In 10 years, household net worth of $60 trillion dollars is projected with 95% confidence limits from $30 to $90 trillion dollars in 2019.

    In order to view the Forecast Plot in JMP, Iâ m providing the JSL for fitting an autoregressive Integrated moving average, ARIMA (0,1,1), model to household net worth data as follows:

    Open(.JMP BlogNet Worth.JMP"; Time Series(X( :Year), Y( :Net Worth), Number of Autocorrelation Lags(2), ARIMA(0, 1, 1), SendToReport(Dispatch({}, "1", ScaleBox, {Scale(Linear), Format("Fixed Dec", 0), Min(1982.5), Max(2010), Inc(5), Minor Ticks(1), Show Major Grid(1)}), Dispatch({"Model: IMA(1, 1) ", "Forecast"}, "1", ScaleBox, {Scale(Linear), Format("Fixed Dec", 0), Min(1985), Max(2035), Inc(10), Minor Ticks(1), Add Ref Line(2008, Solid, Blue), Show Major Grid(1)}), Dispatch({"Model: IMA(1, 1) "}, "Residuals", OutlineBox, Close(0)), Dispatch({"Model: IMA(1, 1) ", "Residuals"}, "1", ScaleBox, {Scale(Linear), Format("Fixed Dec", 0), Min(1982.5), Max(2010), Inc(5), Minor Ticks(1), Show Major Grid(1)})))