Monday, September 21, 2009

CNN: Americans are $2 trillion wealthier


"The soaring stock market accounted for much of the gain. Stock holdings rose by 22% to $6.3 trillion, while mutual funds' value jumped 15% to $3.7 trillion, according to a Federal Reserve report released Thursday"

So most of this wealth gain in the past months was because of the stock markets. How do I read this?

Well, it illuminates why America's savings rate is so low (roughly in the low single digits now) - the indicator for "savings" does not account for American money in stocks.

What I want to know is, will this increase in wealth mean more U.S. consumption, which accounts for something like 2/3 of GDP?

Will people forget that just less than a year ago the US financial system was at the brink of collapse?

A snippet at the end of this article gives us an indication of the answer to this question:

"At the same time, consumers continue to pay off their bills. Household debt shrunk by an annual rate of 1.7% in the second quarter, the fourth consecutive decline. Debt loads had never contracted until the current downturn.

Businesses are also pulling back on the debt they carry. Debt contracted at an annual rate of 1.8%, the second decline in a row.

Governments, however, are loading up on debt as they try to prop up the economy. Federal government debt ballooned 28.2%, the fourth straight increase, while state and local governments increased their debt levels by 8.3%"

Two things I see from this:

Debt Decrease = Lower potential for GDP growth
More Government Spending = Crowding out of private investment

Both are not good for the U.S. Economy.

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