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It may not seem that way, when considering the relative snail’s pace of the general economic recovery, but America’s total household wealth topped $70.3 trillion by the end of 2013’s first quarter, according to the Federal Reserve Board. This level exceeds the previous high of $68.1 trillion posted in the first quarter of 2007, less than a year before the Great Recession. After a precipitous plunge in late 2008 and all of 2009, the net worth gain has reached its current mark.
In the first quarter of this year, a third of the gain in wealth came directly from swiftly rising values of corporate stocks owned by households. These increases were slightly more than the comeback attributed to recovering real estate values.
There are substantially more households now than existed in 2007. Inflation, as mild as it is, is contributing to household wealth values. Average family household wealth by March 31 reached $613,635. This is still 11% lower than the $690,000 set in 2007’s first quarter.
As could be expected, U.S. real estate assets were hit hardest during the Great Recession, plummeting to the level of the early 1990s. Only in this year’s first quarter have real estate values started moving up solidly. To add a dollop of optimism to household real estate statistics, mortgage debt has been in a reverse shrinking pattern, as foreclosures joined short sales in facilitating this step in reducing mortgage debt substantially.
One disturbing statistic has been the widening wealth gap between the household net worth of the 62 and older age group vs. those under 40. The older household units are heading for the million-dollar mark in the immediate upcoming years, while the 40- to 61-year age group is also on the upswing, just short of reaching $750,000.
The under-40 crowd, many of whom are college graduates — and even many holding postgraduate degrees — are the worst off. They’re in a position that has not improved in 20 years, showing up no better than a $50,000 mark even when given the benefit of the current inflated dollars. Their low average numbers indicate practically little, if any, building.
Heavily weighing on the youngest in the under-40 demographic is the climbing rate of recent unemployment and the huge debt that many in this category carry due to unpaid student loans. Both Congress and the president are now wrangling over keeping the interest rates as low as possible. With cumulative student loans now reaching the incredible $1 trillion mark, this puts the millennial generation behind the eight ball even more.
The under-40 heads of households’ shaky position does not bode well for the longer-term future of a generation that has historically proven to be the key to America’s successful expansion in economics, as well as the nation’s future dynamics of management and political leadership.
Controversy threatens Fed’s longevity
It’s ironic that the Federal Reserve Board’s centennial is beset with the greatest controversy marking its 100 years of America’s central bank existence.
While the usual Libertarian hyper-critics, such as Sen. Rand Paul, R-Ky., and others have been carping about the 100-year-old central bank’s existence, their perennial antagonism has always fallen on deaf ears of decision-makers, where it counts. Unfortunately, Chairman Ben Bernanke’s attempt for maximum transparency likely will conclude his eight-year run at the end of 2013 when the president must make his recommendation for extension or termination. Bernanke, himself, has given indication he’s ready to move on.
What both the administration and Congress fail to admit is that the Federal Reserve’s extensive involvement in the nation’s monetary functioning was due to both the executive and legislative branches failing to come to grips with America’s degenerating fiscal strategies.
Increasingly criticized attempts by the Fed to energize America’s economic recovery attempts through quantitative easings and Operation Twist could justifiably be characterized as overreach. But with the House, Senate and president unable to come to accommodation, Bernanke and his board felt the central bank is the only institution that could inject an economic stimulant into America’s fragile structure of business, industry and consumers without the politicization and lobbying that seems to freeze U.S. government action.
When future historians analyze the role of the Federal Reserve Board and Bernanke’s efforts of keeping the United States from slipping into depression in late 2008 through 2010, the outgoing chairman will surely be lauded for his successful efforts, which kept the nation from falling into an economic abyss.
He pivoted the Federal Reserve Board’s latest financial rescue attempt on its interference into an issue not part of the Fed’s periphery — unemployment. In doing so, he may have provided enough financial stimulation to prevent further economic slippage, as he tried to fill a vacuum created by the president and Congress.
As this case of American economic history may show, the independence of the Federal Reserve banking system in taking on $3 trillion worth of debt to keep federal funds and derivative interest rates at record lows could be the Fed’s eventual undoing.
In joining the long list of historical “profiles in courage,” Bernanke may have provided his legions of antagonists with the fodder leading to the central bank’s future emasculation.
U.S. No. 1 investment target
U.S. domestic and foreign policies have been the focus of recent criticism, both at home and abroad. However, major diversified financial institutions, as well as billionaires around the world, have catapulted our country into a global leadership position. The flow of global monetary liquidity has diverted much of its excess financial capability from Southeast Asia, the Middle East, Russia and Brazil.
When both Japan and China participated in funding the huge U.S. debt, approaching the $17 trillion deficit mark, this was attributed to the traditional security of America’s debt repayment, despite the record low return available. The United States has never lost its reputation as being secure in the return of principal.
But with the emergence of the U.S. energy giant (coal, oil and natural gas) as a potential dominator of natural resources, while lurching to the top in exports, the world’s top financiers view our nation as facing the brightest future anywhere among the planet’s top performers.
With a net worth of more than $160 trillion, when combining national resource potential with the household value of its 320 million people, still in an expansion mode, the unacceptable high unemployment level is offset by the rapid advancement of the nation’s technology. Just as important are the unmatched entrepreneurial drive of its independent businesses and the flood of money coming onto American shores, which wastes little concern over the Washington ineptitude. Overseas investors figure that the tidal wave of resources now in motion will eventually right the wrongs that are slowing the development of growth factors that will give our nation its greatest future opportunity.
Leading the U.S.-bound investment charge are the Chinese and Canadians, who are buying up U.S. assets by the billions, including residential and commercial buildings, as both purchase prices and interest rates make for an irresistible combination. This is putting additional steam behind the long stagnant housing sector, while the automotive comeback is equally stimulating in generating consumer demand.
The surge toward the United States also is reflected in the flood of foreign students gracing American shores. According to the Institute of International Education, a record-high number of foreign students, more than 765,000, are now studying at U.S. colleges and universities. Of those exchange students, 70% were being funded by sources outside the United States. It’s believed that many are already contributing to America’s economy.
The Chinese make up 100,000 of these, with many of those working on postgraduate degrees. By their overwhelming participation in America’s leading universities, these Beijing-based students are acknowledging America’s continued leadership in future technological growth.
It’s ironic that despite America’s continuing politically inspired mess, those nations in the know still look at the United States as the one nation with a solid future. The American nation is still at the top of the heap, when analyzed for its future development opportunity.
Long-term debt outlook shaky
With the swollen U.S. Treasury debt coming back into the spotlight as the 2013 fiscal year-end approaches Sept. 30, the greatly reduced deficit of $650 billion, almost half of the four preceding annual balance shortfalls, would seem to be joyful news. Even more so could be an even greater cut down to less than $400 billion in fiscal 2014.
While this short-term great news will engender rave media headlines, the long-term outlook could make the upward reverse near catastrophic, unless marked federal spending changes are combined with a severe jump in taxes starting in 2016.
Sequestration cutbacks in both military and civilian projects softened the blow of exorbitant spending of previous years. But several factors are due to degenerate future deficits more than ever:
- Interest payments will probably move drastically higher in the years to come. The 10-year Treasury note, on which mortgages take their cue, saw federally supported 30-year mortgages jump from 3.5% to 4.5% in less than two weeks in June. Even moderate inflation would easily double current interest rates on treasury debt, causing such creditors’ payments to quadruple in the next decade.
- Both Medicare and Social Security costs will skyrocket in that time period, as more than 10,000 people a day turn 65. This will add 30 million to those over the retirement age limit by 2030 and threaten to bankrupt such retirement plans within that time period.
- It’s estimated that a continued lack of remedial action by Congress and the administration could drive the deficits, compounded by higher interest rates on galloping debt, to $800 billion a year, eclipsing all other expenditure programs with the exception of entitlements. This will result in the crowding out of such urgent expenditures as military, infrastructure and NASA, which laid the groundwork for much of the technology that has vaulted the United States to the world’s current top technological peak.
Today’s momentary benefits of $100 billion in repayment of bail-out funds, disbursed during 2008-2009, and taxes generated by a slowly growing economy will only provide temporary relief.
The current impasse between a politically motivated House and Senate standoff is being further undermined by lack of leadership emanating from the White House to redo the tax structure. Furthermore, the continuation of Environmental Protection Agency hurdles to energy development and unrealistic global warming policies will inhibit revenue generation. It also will drastically undermine the one sector that could dramatically generate revenues, profits and substantial employment increases — fossil fuel production.