The bottom 50% need not apply. They just get to eat the soaring costs of housing. How the Fed totally blew out the already gigantic wealth disparity during the pandemic.
By Wolf Richter for WOLF STREET.
On Friday, the Fed released the detailed data about the wealth of households by wealth category for the 1%, the 2% to 9%, the “next 40%” (the top 10% to 50%) and the “bottom 50%” for the second quarter, after having released less detailed figures on September 23. You read the stories at the time about how the Fed’s money-printing and interest-rate-repression has enriched American households.
But the detailed data, just now released, show whose wealth jumped the most, and who got left endlessly further behind. It wasn’t households in general that benefited, but only the richest households with the most assets. The more assets they had, the more they benefited.
My Wealth Effect Monitor divides the wealth (assets minus liabilities) for each wealth category by the number of households in that category, which produces average per-household wealth within each category. The wealth of the bottom 50% is reflected by the jagged green line on the bottom, essentially on top of the horizontal axis:
Not shown separately are the truly rich – the 0.01% – and the Billionaire Class. The Fed wisely doesn’t provide any information on them separately, but includes them in the Top 1%.
But according to the Bloomberg Billionaires Index, the top 30 US billionaires are worth on average $69 billion per household currently, having gained on average $2.2 billion in wealth each over the quarter.
The bottom 50% of US households (green line above) – 63.2 million households – are worth on average $47,900 per household. But this includes $25,970 in “durable goods” (cars, phones, furniture, etc.), which for consumers are normally considered consumables, not assets, because their values are declining, and they don’t produce incomes.
The bottom 50% gained $7,900 per household over the quarter, and those gains included $2,085 from purchases of durable goods!
You can kill someone with reckless usage of percentages.
If I give a homeless person $5, and he already has $5 in his pocket, I increased his wealth by 100%. But he still is homeless and still doesn’t have any wealth. Percentage increases are touted as a way to show that the wealth at the bottom increased sharply, when in fact, it increased by only peanuts because the bottom 50% have so little.
But even a tiny percentage increase on $65 billion in wealth is a huge amount of money, and the wealth disparity continues to balloon.
The wealth disparity between the top 30 billionaires on average and the bottom 50% grew by yet another $2.2 billion per household, to $69.2 billion.
There were 126.34 million households in the US, according to the Census Bureau. The 1% by definition make up 1.26 million households. That’s a lot of households, from Musk on down to the regular multi-millionaire.
And the wealth disparity within the 1%, from the average top 30 billionaires to the least wealthy among the 1% also grew by around $2.2 billion to $69.2 billion. Because the bottom end of the 1% still own only peanuts compared to the Billionaire Class.
Since Q1 2020, when the Fed started its crazed money-printing and interest-rate repression scheme, according to the Fed’s data:
- The wealth of the 1% jumped on average by $9.95 million per household to $34.3 million.
- The wealth of the bottom 50% rose by less than a rounding error in terms of the 1%, by $18,600 per household since Q1 2020, to $47,900. Over half of their wealth is in durable goods (cars, phones, furniture, etc.).
- The wealth disparity per household between the 1% and the 50% ballooned by $9.93 million, to a record wealth disparity of $34.2 million.
The reason is that the 1% hold most of the assets, and the 50% own practically no stocks, no bonds, and very little real estate.
For the Bottom 50%, real estate is their largest asset at $68,504 per household. This means that relatively few households own real estate. And they have on average $40,122 in mortgage debt, which leaves them with $23,382 in home equity.
They own practically no stocks and mutual funds ($4,122 on average). And inflating the stock market, as the Fed tries to do, just leaves them purposefully further behind.
But they own $25,970 in “durable goods,” which the Fed counts as assets, rather than consumables. If you don’t count these consumer goods as assets, the wealth of the bottom 50% shrinks to $21,948.
So when asset prices rise, they leave the bottom 50% behind.
This is all part of the Fed’s official doctrine of the “Wealth Effect,” which has been described in numerous Fed papers, including by then San Francisco Fed president Janet Yellen in 2005. “As part of its analysis of demand in the economy, central bank models have long incorporated the wealth effect of house prices and other assets on spending,” she wrote. In November 2010, Fed Chair Ben Bernanke explained the concept of the Wealth Effect to the American people via a Washington Post editorial.
The Fed, which has now embarked on creating a kinder-gentler facade, no longer calls it the “wealth effect.” But the policies haven’t changed: asset price inflation. And the costs are borne by the bottom 50% for whom life just gets more expensive – including housing costs.
The bottom 50% range from getting by OK to the down-trodden.
Among the bottom 50%, there are also large differences. At the top end are households perhaps with a modest house weighed down by a big mortgage, a small 401k, plus cars and other durable goods, minus auto loans, student loans, and credit card debt. But that category also includes the poorest of the poor.
The bottom 50% face the soaring housing costs and other costs that are a result of the wealth effect. Many live from paycheck-to-paycheck and use their credit cards to tide them over. They have on average very little money left over to put aside and buy stocks with.
Fed blows out the Wealth Disparity during the Pandemic.
The Fed’s doctrine of the “Wealth Effect” is designed to enrich the top 10%, particularly the top 1%, particularly the top 0.01%, and particularly the Billionaire Class. The more they have, the more they benefit. This is official Federal Reserve policy.
But during the pandemic, the Fed went all-out: It printed $4.5 trillion in 18 months and repressed short-term interest rates to near-zero, in order to inflate asset prices to the extreme. And it succeeded.
This was the greatest economic injustice committed in recent US history. Congress could shut it down but doesn’t want to even debate it. Members of Congress mostly belong to the top 10%, or hope to soon belong to it (on their Congressional salaries, of course, hahahaha), and that’s why this continues.
The bottom 50% don’t understand what the Fed is doing to them, don’t even know what the Fed is and does, and they are too busy trying to survive in this economy that the Fed has so powerfully rigged against them.
My Wealth Effect Monitor tracks that economic injustice. Below, it shows the difference in wealth between the 1% and the bottom 50%. Asset price inflation is the cause. The more they have, the more they get. The bottom 50% don’t have anything and need not apply. But during the pandemic, the Fed went hog-wild and completely blew out this wealth disparity:
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