The numbers from the Fed's Flow of Funds report for the fourth quarter are ugly: (Via JPMorgan):
1) The showstopper in today's report was the larger-than-expected $5.1 trillion decline in household net worth. The 9% decline in wealth was easily the largest on record and pushes the much-watched wealth-to-income ratio for the household sector down to 4.83, the lowest since 95Q1.
2) Since peaking in the second quarter of 2007, household wealth is down almost $13 trillion. Given where the S&P500 is now (around 740) and recent house price data, we estimate consumers have lost about another $2.5 trillion in the first quarter of the year.
Me: These numbers are absolute death for workers who are more and more dependent on assets rather than incomes for long-term wealth building. This is why the White House can't dismiss the stock market as some sort of mere tracking poll. In terms of wealth destruction, this downturn is already like a half a Great Depression. Take a look at what I wrote in September:
From 1930 through 1933, the U.S. economy shrank by about 25 percent. Now let's say that by doing nothing and letting Mr. Market do his worst, the $12 trillion U.S. economy shrinks by half that amount (12.5 percent), or around $1.5 trillion over four years. (Also, figure a near doubling in unemployment.) But there's also the opportunity cost of not returning to growth, even at a so-so 2.0 percent a year. Doing nothing costs $1.1 trillion more in lost growth. So now we are down $2.6 trillion.
But wait: There's more. Let's assume the stock market drops an additional 25 percent or so. That's $3 trillion more in lost market capitalization. Plus, we are forgoing the opportunity to gain back what we have lost in the market, about $3 trillion. So, add the $6 million in lost market capitalization to the lost economic output, and we are at $8.6 trillion.
Then there is housing, already down $5 trillion, or roughly 20 percent. Let's conservatively say that we lose another $5 trillion by doing nothing. Plus, we forgo a partial rebound, say, $2.5 trillion. Adding together further housing losses (plus the lost opportunity to recoup some losses), and we are talking about a total cost of doing nothing of $15 trillion in four years for the whole megillah.
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