U.S. Households' Balance Sheet and the link to economic policies

De Koning, Kees (2020): U.S. Households' Balance Sheet and the link to economic policies.

Abstract

In the financial accounts as collected by the U.S. Federal Reserve, one Balance Sheet item stands out: “The Household Balance Sheet over the period 2000-2020”. In Q4 2005, the market value of households’ real estate assets was $14.416 trillion. By Q4 2011 the market value had dropped to $8.319 trillion: a loss of $6.1 trillion over five years or a loss of 42.2% over the same period. For all households it took to Q2 2016 before the loss had been recovered when the market value reached $14.488 trillion. This reflects an adjustment period of over 10 years!

The U.S. Federal government tax receipts over the three-year period 2009, 2010 and 2011 totaled $6.573 trillion. Even the government borrowings over these three years together amounted to a smaller sum of $4.169 trillion. The loss on households’ real estate between Q4 2005 and Q4 2011 was equal to 93% of all U.S. government tax receipts, not just for one year, but over three years!

Whilst the Great Recession of 2008-2012 wreaked havoc with U.S. government budgets, but more important was the damage inflicted on households’ economies over these years and beyond.

To counter the 2008 recession, two of the instruments used were the Quantitative Easing (“Q.E.”) program by the Federal Reserve and the deficit financing by the U.S. Federal Government. The Q.E. program focused on buying up U.S. government debt and mortgage-backed securities paper issued by the state sponsored financial institutions, such as Fannie Mae and Freddy Mac. Interest rates were kept at historical lows. The U.S. government debt to GDP level did rise from 62% in 2007 to 135.6% of GDP as per Q2 2020.The four Q.E. programs have pumped in just over $6 trillion into the U.S. economy as per the latest figures.

The current coronavirus crisis can be expected to bring with it a substantial rise in unemployment levels, significant company failures and a greater reluctance by banks to lend to those most in need.

Further increasing U.S. government debt levels might not be an attractive option. More Q.E. directed to funding existing debt levels also has its limits. One solution that has not been tried is to use Q.E. to help households directly in releasing some home equity on a temporary basis. Funding savings rather than debts could be more effective.

A new type of Q.E. will be set out in this paper.

• Item Type: MPRA Paper
• Language: English
• Keywords: U.S. households' balance sheet; Home mortgage levels by income group; Government debt levels. Quantitative Easing and an improved Q.E. method.
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics; D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; D - Microeconomics > D4 - Market Structure, Pricing, and Design; D - Microeconomics > D5 - General Equilibrium and Disequilibrium; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D57 - Input-Output Tables and Analysis; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity

References

Federal Reserve Bank of St. Louis; Total public debt as a percentage of GDP; https://fred.stlouisfed.org/series/GFDEGDQ188S

Federal Reserve System; Recent balance sheet trends; https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

Federal Reserve Bank of St. Louis; Total net worth held by the bottom 50% https://fred.stlouisfed.org/series/WFRBLB50107

Federal Reserve System; Distributional financial accounts; https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/chart/#qu:123;series:Real%20estate;demographic:networth;population:1,3,5,7;units:levels;quarter:123

U.S. Census Bureau; new housing starts; https://www.census.gov/construction/nrc/historical_data/index.html

Reuters News Agency, Toronto Canada; U.S. Housing Evictions; https://www.reuters.com/article/us-usa-housing-evictions-idUSKCN24U394