Fragile riches

March 12, 2010

This week was a positive one for paper wealth. Forbes reported on Wednesday that the average net worth of the world’s billionaires jumped 17 percent to $3.5 billion apiece. More mundane quarterly data from the U.S. Federal Reserve on Thursday showed that American households’ collective wealth rose 5.4 percent in 2009. Trouble is, governments everywhere are propping up markets and asset values, and recent increases in wealth could easily evaporate.

The newly accumulated wealth is more than usually vulnerable for at least two reasons. First, monetary policymakers the world over have lavished easy money on their financial sectors to limit the effects of the recent credit crunch and recession. That has helped markets and investment portfolios to recover. But inflationary pressures or bond market jitters sparked by massive government borrowing — or both — will before long force interest rates up, removing the monetary punch bowl and potentially sending some markets into reverse.

Click here to enlarge in new window.

Total Debt, Q4

Second, despite talk of deleveraging and data showing household borrowing declining, the U.S. economy in particular is still burdened by a near-record amount of debt. As calculated by economist Steve Keen of the University of Western Sydney, the total government, personal and corporate debt load in the United States stood at 388 percent of U.S. GDP at the end of 2009. That’s just off the record high seen last year, but still well above the previous peak just north of 3 times GDP reached during the Great Depression.

Leverage amplifies gains and losses — and with further deleveraging needed and interest rates having nowhere to go but up, there’s more stacking up on the loss side of the scale. The newly richer may be feeling good about their wallets right now, but it may not last.

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