Thursday, February 23, 2017

Ponzilocks and the Twenty-Four Trillion Dollar Question

Twenty-three and a half trillion, actually. But what's a few hundred billion? Here today, gone tomorrow, as they say.

At the beginning of 2007, net worth of households and non-profit organizations exceeded its 1947-1996 historical average, relative to GDP, by some $16 trillion. It took 24 months to wipe out eighty percent, or $13 trillion, of that colossal but ephemeral slush fund. In mid-2016, net worth stood at a multiple of 4.83 times GDP, compared with the multiple of 4.72 on the eve of the Great Unworthing.

When I look at the ragged end of the chart I posted yesterday, it screams "Ponzi!" "Ponzi!" "Ponz..."

To make a long story short, let's think of wealth as capital. The value of capital is determined by the present value of an expected future income stream. The value of capital fluctuates with changing expectations but when the nominal value of capital diverges persistently and significantly from net revenues, something's got to give. Either economic growth is going to suddenly gush forth "like nobody has ever seen before" or net worth is going to have to come back down to earth.

Somewhere between 20 and 30 TRILLION dollars of net worth will evaporate within the span of perhaps two years.

When will that happen? Who knows? There is one notable regularity in the data, though -- the one that screams "Ponzi!"

When the net worth bubble stops going up... goes down.

1 comment:

Lord said...

Growth slows, interest rates fall, asset values rise. If growth returns, values are supported despite rising rates on investment and expectations. If it doesn't, asset values stabilize or decline as assets are consumed. It would be difficult for the Fed to support them in a recession and if they didn't there would be problems.