Wealth Bubble Leaves U.S. Economy in Uncharted Territory
There have been numerous signs that the U.S. is likely to go through another major recession at some point. And regardless of when or if a recession happens, it won’t change the fact that the U.S. economy is already in hot water.
At MarketWatch, the “hot water” is explained in terms of a U.S. “wealth bubble” that reveals a peculiar pattern:
Today the United States sits in the midst of the largest wealth bubble in post-World War II history, as measured by household net worth (or wealth) relative to gross domestic product. As I showed in detail recently in the Journal of Business Economics, only two other postwar bubbles come close, with peaks in 1999 and 2006, just prior to the tech stock crash and the Great Recession.
The largest wealth bubble (household net worth relative to GDP) is shown in a chart from the same article. (Shaded areas are recessions):
As you can see at the bottom, the wealth bubble is “5 times the size” of the GDP.
But notice how the wealth bubble “pops” just before the 2000 and 2008 recessions. If you look at the end of the blue line, it appears the largest wealth bubble since World War II may already be popping.
Also notice how the green line dips before the 2000 tech stock “recession,” and the red line before the 2008 recession (caused mainly by subprime mortgages).
But according to the MarketWatch report, there’s another crucial detail to point out:
In both prior bubbles, the crashes led to a drop in the value of net worth to about 4 times GDP. Even that level remained high relative to prior history, since in no single quarter before 1998 had the household net worth-to-GDP ratio ever reached 4.0 or higher.
With that being said, according to the chart above:
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