Fed Tightening Reduces Horrendous Wealth Disparity that QE and Interest Rate Repression Have Wrought: Fed Data

The vast wealth of the top 1% households declined, the minuscule “wealth” of the bottom 50% increased a tad. By Wolf Richter for WOLF STREET. In the third quarter, the drop in asset prices continued to reduce the biggest wealth disparity ever between the “Bottom 50%,” who gained a little wealth, and the very top households – the “Top 0.1%” and the “Remaining 1%.” – who gave up some of their vast wealth for the third quarter in a row, according to the Fed’s data on the distribution of wealth by category of wealth. In other words, the tightening by the Fed – the higher interest rates and the beginning of QT that the crybabies on Wall Street bewail on a daily basis – has undone a small portion of the horrendous wealth inequality that the prior years of QE and interest rate repression had caused. Alas, the Bottom 50% don’t show in the chart because their “wealth” is so minuscule that it’s just a straight line on top of the horizontal axis. Even the “Next 40%” (everyone below the Top 10% and above the Bottom 50%) have so little compared to the top 0.1%, they barely register at the bottom of the chart (green line). Note the gigantic wealth disparity between the 0.1% and the Remaining 1%. This is the nature of the wealth disparity in America, according to the Fed’s data. But QT and rate hikes are now undoing a little of it: To put it into the perspective of households, I divided the Fed’s wealth data by the Census Bureau’s number of households to obtain the average wealth per household in the Fed’s categories of wealth. Average wealth per household, by wealth category in Q3, 2022: Here is the average wealth per household in Q3, by wealth category, and how it changed from the end of 2021 (in bold). Note the gain by the Bottom 50%: “Top 0.1%” (red): $132.4 million (-$13 million, -9.0%) “Remaining 1%” (purple): $19.3 million (-$2.4 million, -11.2%) Next 9%” (brown): $4.4 million (-$269,000, -5.8%) “Next 40%” (green): $768,000 (-$16,500; -2.1%) “Bottom 50%” (not shown in the chart): $70,800 (+$10,800; +18.1%). The bottom 50%, 63.9 million households. The Bottom 50% own almost no stocks and mutual funds, which is why a stock-market swoon doesn’t faze them. Most of their assets are their home and “consumer durables.” Consumer durables are things like cars, appliances, electronics, etc., whose value depreciates. They have $164,200 in assets per household on average, minus $93,400 in liabilities = wealth of $70,800. Assets: Real estate (home): $96,500 – meaning many households don’t own any real estate. Consumer durables (cars, appliances): $30,000 Stocks, mutual funds: $3,000 – meaning most households don’t own any equities. Pension entitlements (defined benefit & defined contribution): $13,600 Private business: $2,400 Other assets, including money in the bank: $18,700 Liabilities: Home mortgage: $45,400 Consumer credit (auto, student, credit cards, other loans): $41,300 Other liabilities: $6,700 Their wealth has increased by $10,800 per household on average in 2022, largely due to an increase of home equity and consumer durability. This is why half of Americans got nearly nothing when the Fed inflated the stock market with QE and interest rate repression; and they don’t care what happens to the stock market. What they care about is the purchasing power of their labor – and inflation, including house-price inflation, ate it up. Here we’re looking with a magnifying glass at what in the chart above didn’t show because it was a straight line on the horizontal axis: The Top 0.1%, 127,800 households, primary beneficiaries of QE and interest rate repression. The Top 0.1% on average own a huge amount in stocks and mutual funds, and they own high-value private businesses. And they have relatively little debt, compared to their assets. A household in that category has on average $133.5 million in assets, minus $1.1 million in liabilities = a wealth of $132.4 million. Assets: Real estate (residential & other): $11.9 million Consumer durables (cars, boats, etc.): $3.3 million Stocks, mutual funds: $53.9 million. Pension entitlements (defined benefit & defined contribution): $1.2 million Private business: $41.9 million Other assets: $21.3 million. Liabilities: Home mortgage: $488,500 Consumer credit (auto, student, credit cards, other): $147,100 Other liabilities: $461,300 The Next 40%: households below Top 10% but above Bottom 50%. Their assets are spread across the board, and they also have relatively modest liabilities. A household in this group has on average $911,200 in assets minus $152,700 in liabilities = a wealth of $758,500. Assets: Real estate: $911,200 Consumer durables (cars, etc.): $63,000 Stocks, mutual funds: $66,900 Pension entitlements (defined benefit & defined contribution): $235,000 Private business: $40,600 Other assets: $150,100. Liabilities: Home mortgage: $112,700 Consumer credit (auto, student, credit cards, other): $32,600 Other liabilities: $7,300 Their overall wealth dipped by only 2.5% due to their stock holdings. This is the green line in the first chart above under the magnifying glass: How did we get here? During the era of QE and interest-rate repression, the “Top 0.1%” and the “Remaining 1%” got immensely richer, while the “Bottom 50%” had nearly no wealth to begin with, and still have nearly no wealth. QE and interest rate repression created the biggest wealth disparity ever in dollar terms, and in the shortest amount of time – and it turned into the greatest economic injustice of modern times. It was based on asset price inflation – which the Fed long justified by its official policy, the “Wealth Effect,” which counts on making the already wealthy a lot wealthier by inflating asset prices via interest-rate repression and QE, so that the then immensely wealthy can spend a little of this wealth, so that this can trickle down to the rest of society. Alas, this era of the wealth effect ended in 2021. In 2022, the Fed rates began to hike and it kicked off QT, and as yields and interest rates rose, asset prices began to fall, and the wealth of the wealthiest households began to fall as well, while the tiny little bitty wealth of the bottom 50% – a large portion of which are consumer durables – has increased. The Fed’s reversal of QE and interest-rate repression in 2022 is deflating the Everything Bubble and is thereby narrowing the horrendous wealth disparity that the Fed had wrought with its easy-money policies in the prior years. 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