Friday, December 26, 2008

Asset Price Declines, Wealth Destruction, and Federal Borrowing / Bailouts

The Federal Government's Flow of Accounts (hat tip Mish) shows a ton of detail related to just how much wealth has been lost in the past 12 months (through the third quarter). Per Mish:

$7.08 Trillion in wealth has vaporized in the past year. Figure 2008 Q4 to be as bad as Q3. If so, roughly $10 Trillion in household wealth will be vaporized in little over a year. And looking ahead, there is no reason to believe the stock market, the housing market, or the economy will show signs of recovery anytime soon.
Detailed below, we see that more has been lost ($7.7 Trillion), looking at just the holding gains / losses on assets over the past 12 months (R.100 Page 113).

Going back to 2004, we can see just how large a drop off this was (note that YTD 2008 we have seen losses across all the asset classes tracked).

Without cheap financing to prop up asset prices above sustainable levels... asset prices fall. Just think about it... home prices have fallen as individuals find it much harder to get a mortgage (if they even want one). A home buyer found it much easier to pay $500,000 for a home with no money down, than with the traditional 20% down.

This is exactly what has happened as corporations, investors, and banks are no longer able to lever their businesses, investments, or balance sheets due to a lack of available financing or losses they were forced to write down. Credit has all, but ceased with the HUGE exception being that for the Federal Government (data from F.1 page 17).