A Staggering Amount of Wealth Creation

The Great Financial Crisis decimated the balance sheets of most Americans.

How could it not?

Housing prices were down by nearly 30%. The stock market crashed almost 60%. The unemployment rate hit double-digits.

It was the worst economic period most of us have ever lived through.

The collective net worth of American households reached roughly $66 trillion by the end of 2007. The 2008 crash wiped out $11 trillion in wealth, falling to $55 trillion by early-2009.

Today, Americans are worth more than $154 trillion (and yes this is netted out for debts). We’ve gained $100 trillion over the past 15 years.

Since the first quarter of 2020, households have added $50 trillion in wealth.

This is a staggering amount of wealth created in such a short period of time.

These wealth gains have not been distributed evenly as this chart shows:

When asset prices rise, the people who hold the financial assets tend to see the biggest gains.

But this time around the bottom 50% has experienced extraordinary gains too:

While the stock market and overall net worth numbers bottomed in the first quarter of 2009, the net worth for the bottom 50% kept falling into 2011. From a high of $1.5 trillion before the crash, the net worth for the bottom 50% plunged all the way to $236 billion by Q1 of 2011.

The Great Financial Crisis basically completely wiped out the bottom 50%.

From there, it climbed all the way back to $1.9 trillion by early 2020, then went up another level during the pandemic, hitting a record of more than $3.8 trillion in the latest reading.

On a relative basis, the bottom 50% has seen the biggest wealth gains:

Stocks, housing prices, net worth, home equity — everything is at all-time highs and the gains over the past 4+ years are unlike anything we’ve ever experienced in the modern economic age.

So what does it all mean? What are the potential consequences?

Some thoughts:

The wealth effect. Bloomberg notes in a recent piece that higher-earning households have seen their spending levels rise twice as fast as low-income earners since 2018:

Many people don’t feel the need to save as much when the market values of their financial assets are so much higher than expected.

Why do I need to save more when my house is up 50% since 2019 and my stock portfolio has never been larger?

The result is you spend more money.

Bigger margin of safety. The wealth effect is one of the big reasons we never got the economic slowdown so many people predicted in 2022.

Higher levels of wealth can’t keep us out of an economic slowdown forever. Obviously, net worth levels will fall during the next recession.

But households have a far bigger margin of safety in the form of home equity, higher bank balances and more savings.

Unless we get some exogenous event that completely changes the game, many American households have the ability to ride out a storm.

Anger. Yes, the bottom 50% has indeed experienced enormous wealth gains but the share of wealth is still very low.

Inequality has improved this decade but it’s still a huge problem. The top 1% controls 30% of all wealth in this country. The top 10% makes up two-thirds of the collective net worth. The bottom 50% has just 2% of household wealth.

Most of the gains for those outside of the top 10% came from some combination of fiscal stimulus from the government and the bull market in housing prices. We can’t realistically expect those trends to continue.

It doesn’t matter to many households in the middle class how well they’ve done this cycle if those gains begin to dissipate. People are going to get fed up if the rich keep getting richer, regardless of the gains we’ve experienced this cycle.

Further Reading:
Why People Don’t Save Enough For Retirement