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Gone in 1.8 Seconds

posted by Christian E. Weller

A trillion here, a trillion there and all of a sudden you are talking real money. We are getting used to the “T” word. Over the past year and half – from the middle of 2007 through the end of 2008, when the crisis unfolded – the crisis in the housing market and in the stock market has cost American families a total of $15 trillion in 2008 dollars.

It makes sense, though, to put the loss of personal wealth in perspective. In these 18 months, approximately 27 million times the average family’s wealth -- $566,000 in 2008 dollars. Put differently, equivalent of the average family’s net worth disappeared every 1.8 seconds in those 18 months.

In fact, this was the sharpest relative wealth decline in more than fifty years. Over the 18 months since the crisis began, inflation-adjusted personal wealth has fallen by 22.8%. This was the fastest such decline since the Federal Reserve started to collect the information in 1952. The quickest 18-month wealth decline before this crisis was 12.0% for the period from March 1973 to September 1974. We are shattering speed records that nobody ever wanted to break.

Didn’t families build up enough of a buffer because of the bull market in the housing and the stock markets? Apparently not. Family wealth is a buffer for emergencies, insurance for when sources of income like wages disappear, e.g. because of retirement, and a tool to invest in one’s own future through education or starting a business. Hence, it is important to compare current wealth to current income. In the fourth quarter of 2008, the ratio of wealth to after-tax income stood at 483.3%, its lowest level since March 1995. It’s as if the stock market boom of the 1990s and the housing boom of the 2000s never happened.

At the end of the day, though, these declines matter because they leave families in a very precarious situation. Over the years, we have asked families to shoulder an ever greater economic burden. Health insurance coverage and the quality of health insurance have dropped, “do-it-yourself” savings plans have taken the place of traditional pensions, changes to financial aid and rapidly rising tuition costs have meant more and larger student loans, Social Security benefits have already been trimmed, and a whole host of social programs have been cut. Personal wealth today takes on a completely different meaning than it did for previous generations. The money that a family sets aside has to go a lot further than it used to. That’s why the trillions in lost wealth are especially scary.


People don't seem to understand the scope of the economic problems the world is facing in this thing we hope is just a bad recession.

The problems are broad and deep:

From Bloomberg:


Global Financial Assets Lost $50 Trillion Last Year, ADB Says

By Shamim Adam

March 9 (Bloomberg) -- The value of global financial assets including stocks, bonds and currencies probably fell by more than $50 trillion in 2008, equivalent to a year of world gross domestic product, according to an Asian Development Bank report.

Asia excluding Japan probably lost about $9.6 trillion, while the Latin American region saw the value of financial assets drop by about $2.1 trillion, said Claudio Loser, a former International Monetary Fund director and the author of the report that was commissioned by the ADB. The report didn’t give a breakdown of asset declines in other regions.

“The loss of financial wealth is enormous, and the consequences for the economies of the world will unfortunately commensurate,” said Loser, now the Latin American president of strategic advisory firm Centennial Group Inc.. “There are serious economic and political stumbling blocks that may well cause the recovery to be costly and slow to consolidate.”

And from Reuters:


45 percent of world's wealth destroyed: Blackstone CEO

Tue Mar 10, 2009 3:42pm EDT

By Megan Davies and Walden Siew

NEW YORK (Reuters) - Private equity company Blackstone Group LP (BX.N) CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world's wealth has been destroyed by the global credit crisis.

"Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," Schwarzman told an audience at the Japan Society. "This is absolutely unprecedented in our lifetime."

But the U.S. government is committed to the preservation of financial institutions, he said, and will do whatever it takes to restart the economy.

I don't understand how these TV pundits can say: 1) we can't regulate these new financial instruments because it will hurt market innovation, slow growth, blah blah blah; and 2) "why hasn't the new administration fixed the economy yet?"

My wife and I pulled our "Roth IRA" out at the end of last year and we lost like $3k in value. (would have been more much more) Thing is that our "loss" offset our tax penalty for the most part so there was a tiny bright spot. We have a great buffer (6 months of salary) but its all liquid gaining just tiny amounts in interest. We, unlike many other people in this country have to deal with sudden evacuations during Hurricane season so I don't think we can get away with our buffer being tied up. Our jobs are recession proof and even when things are going good we are secure. Bankruptcies don't seem to slack off in the good times. People seem to just overextend.

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