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Wednesday, November 10, 2010

Fed's Quantitative Easing Part 2 has destroyed $4.6 trillion in household wealth, all to boost the stock portfolios of the top 10%. (Charles Hugh Smith)

By Charles Hugh Smith
Of Two Minds

The Fed's Quantitative Easing Part 2 has destroyed $4.6 trillion in household wealth, all to boost the stock portfolios of the top 10%.

The Federal Reserve's stated goals in launching QE2 were to trigger a "wealth effect" and boost inflation. The net result of their program is a massive destruction of household wealth. The basic idea is that goosing "risk assets," i.e. stocks, then consumers will feel wealthier and thus motivated to open their wallets and spend, spend, spend. This spending won't be based on any increase in income (household income fell in 2009 despite the massive run-up in stocks) but on the illusion of greater wealth created by a temporarily rising stock market.

(Median household income fell 0.7% to $49,777 in 2009, down 4.2% since 2007, when the recession started.)

The Fed must be aware that the top fifth of households collects 50.3% of all pre-tax income and the bottom two-fifths receive 12%, so the "wealth effect" is in essence another "trickle down" scheme in which the top earners buy more handbags manufactured in China and the bottom 80% of Americans are supposed to benefit by being hired to stock the shelves with Elite goods.

As I often report, only the top 10% of households own enough equities to feel wealthier; so the Fed's central faith is doubly a "trickle down" theory: only the top 10% can possibly experience a wealth effect.

But the destruction of purchasing power as the Fed destroys the dollar is felt by all households--especially the bottom 80%. The Boiling Frog: Effects of QE2 On The Bottom 80% of the U.S. Population.

As I noted in Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders? (November 1, 2010), Quantitative Easing 2 makes no sense. Today I will quantify just how perverse and destructive the Fed's policies have been to U.S. households.

The latest snapshot of the household's balance sheet comes from the Fed Flow of Funds for the second quarter (June 30, 2010). If we measure what has happened to the U.S. dollar and the S&P 500 since July 1, then we can measure the effects on the household balance sheet.

Let's collect a few key numbers from the Balance Sheet of Households and Nonprofits. All numbers are as of June 20, 2010 (Q2 2010).
  •  Real estate: $18.8 trillion, down from $24.9 trillion in 2006 (bubble top)
  • Total financial assets: Q2 2010 $43.7 trillion, down from $50.6 trillion in 2007 (pre-recession)
  • Deposits (cash): $7.55 trillion, down from $7.9 trillion
  • Credit market instruments: (bonds etc.) $4.3 trillion, up from $4 trillion in 2007
  • Corporate equities (stocks): $6.7 trillion, down from $9.6 trillion in 2007
  • mutual fund shares: $4 trillion, down from $4.5 trillion in 2007
Liabilities (debts, mortgages, etc.):
  • Total liabilities: $13.9 trillion, down from $14.4 trillion
  • home mortgages: $10.15 trillion, down from $10.5 trillion
  • Net worth: $53.5 trillion, down from $64.2 trillion, a decline of $10.7 trillion
So mortgage debt decreased by a trivial $.35 trillion, total liabilities decreased by a modest $.5 trillion, and net worth declined by a whopping $10 trillion. Most of the mortgage and debt declines result from write-downs of debt by lenders, not from households paying down debt.

In other words, after suffering a staggering 17% decline in net worth, households managed to write down or pay down a tiny 3.4% of their liabilities. Complete Post

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