The Great Recession and the collapse of wealth

In a previous post (The long depression – the waste of capitalism, 3 May 2012) I reckoned that the US economy has now permanently lost $5trn of income (or some 40% of current US GDP) that would have been generated by Americans at work if there had not been the Great Recession and the ongoing long depression (i.e. below-average potential real GDP growth and high unemployment) since mid-2009.

But this loss of output is nothing compared to the loss of wealth suffered by the average American household.  According to data released triennially by the US Federal Reserve on US household finances (Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin, June 2012), the Great Recession has wiped out nearly two decades of Americans’ wealth, with working-class families bearing the brunt of the decline.  The Fed survey found that, over the 2007–10 period, the median value of real (inflation-adjusted) family income before taxes fell 7.7%.  It was less for the top 10% because they get nearly 25% of their income from profits out of businesses they own and profits recovered sharply in 2010, while wages did not.  The poorest families suffered the biggest loss.

But median net worth (wealth) decreased even more dramatically, down 39%, from average net wealth of $126,400 in 2007 to $77,300 in 2010.   That put Americans now no better off than they were 20 years ago in 1992. The wealthiest families actually saw their wealth rise.  The biggest drop occurred among middle-income Americans, whose wealth is inextricably linked to their homes.

The implosion in the housing market inflicted much of the loss. The value of Americans’ equity stake in their homes (i.e. the value after deducting the mortgage) fell by 42% to just $55,000.  For most Americans, what wealth they have is in bricks and mortar (or is wood and steel?).  After mortgage defaults and repossessions and an inability to get a mortgage since 2007, home ownership, part of the great ‘Anglo-Saxon’ consumer dream, has become just that – a nightmare.  Home ownership has fallen back to the level of 2001, before the housing boom took off.

Households have been forced to try and pay down their debt or default on it.  Even so, the value of their assets has fallen even more, so household debt relative to assets rose markedly and the proportion of American households in arrears on their debt payments rose to a record 10.8% in 2010.

The Federal Reserve’s quarterly Flow of Funds report for Q1 2012 also came out last week.  It revealed that for the first quarter since house prices peaked in 2006, the value of real estate assets held by American households rose.  The value of real estate held by all American households had fallen by 47% from 2006 to the end of 2011.  Now it was up slightly.

In contrast, financial assets (stocks and shares, cash and bonds) had recovered the loss of value suffered during the Great Recession and had finally returned to the level of 2007 in Q1 2012.  This was mainly because stock prices had recovered somewhat, along with bond prices, but also because richer Americans were building up some cash.  But with home values down nearly half, the value of assets held by American households was still 20% less than it had been in 2007 and net worth was still some 8% below its peak in 2007.  Net worth had recovered simply because some Americans were defaulting on their mortgages and other debts and these were being written off.  In other words, overall net worth had risen because there were less Americans with mortgages.  So it was the least wealthy who were taking the hit.

And that brings us to ‘deleveraging’, the necessary process that capitalism must go through to restore profitability.  After the credit binge of the 2002-7, private sector debt (households, businesses and banks) had reached $40.8trn in 2008.  These sectors have now deleveraged to $38.6trn, or down 8%, mainly because banks have shrunk and households have defaulted on their mortgages.  But this private sector deleveraging has been countered by a huge rise in public sector debt, up over 70% from around $8trn in 2007 to $13.7trn now and still rising, if more slowly.  Public sector debt has risen to finance the bailout of the banking system as well as rising budget deficits as tax revenues collapsed and unemployment and other benefit payouts rocketed.

The overall debt burden (public and private) in the US is still rising and at a rate that matches nominal GDP growth.  So the overall debt to GDP ratio is still not falling.  This explains why the apologists for capitalism want to reduce the public sector debt or at least shift  the burden of financing it onto labour and away from capital.

One thought on “The Great Recession and the collapse of wealth

  1. I don’t think that the fact that total debt, public and private, still bears the same ratio to GDP post 2008, is explanation for the drive for “austerity”. First, public debt differs qualitatively from private debt in its relation to the norms of capitalist production and accumulation, fundamentally for the same reasons (for which there is no space to get into here) that the “State” differs from “Capital”. The Keynesian insight on the difference between sovereign public debt and and private debt is correct, as is its insight on the “stickiness” of wages, though these have the status of insight, not theory. So the dynamics of private deleveraging do not necessarily mechanically apply to public debt under capitalism. This is reflected in the fact that the crisis emerged from a crisis of private, not public, debt. We put aside for the moment the crucial point that the crisis emerged from a crisis in landed property prices, this comprising a fictitious capital and therefore involving credit money and private debt, this crisis in turn determined by the general stagnation and fall in real wages in the USA.

    The “Austerians” practical concern is that public debt not substitute for the surplus value distributive functions of private debt during the period of private debt deleveraging; in addition, the crisis is an opportunity for more privatizations, as with the NHS in Britain. Indeed Roberts home country is the counterfactual to his explanation, as the proportion of public to private debt is considerably smaller than in other OECD countries. This simply means that the “danger” of substitution of public for private debt is all the greater in Britain. To do otherwise would be to put at risk 30+ years of the “neoliberal” program. So Austerian concern is not a rational one of the capitalist system as a whole, but to keep on track of the trajectory of capitalist accumulation established since the rise of Reaganism-Thatcherism. Yes, Marge, capitalism actually is an irrational system, and “Austerianism” is simply the non-smiley-face of neoliberal policy.

    Second, the dynamics of deleveraging vary over the different spheres of capitalist accumulation, including that of unproductive consumption subsumed to the capitalist mode of production. It was in this latter sphere that the crisis broke out, and that is related to the insight that there is no normative relation between the level of wages/salaries expended in consumption of the land (e.g.,rent) occupied by the commodity housing, and the laws of motion of capitalist production, such that the level of expenditure of a part of wages for the housing consumption of land is completely explicable by those laws. (This is not to say that there is no possibility of descerning a normative relation, only that the relation differs from those of the analysis of capitalist production). And that is precisely why a crisis breaks out in this area! And this is reflected in the fact that the mortgage bankers in the USA – our latterday Astors – have been and are fighting tooth and nail against private debt deleveraging in the area of housing land prices. Here a rational line from private deleveraging of mortgage debt to the public finances cannot begin to be drawn, because land “values” are 100% fictitious capital: there is nothing to “leverage” against. Hence the very term “leverage” lacks meaning and theoretical status here. A capitalist leverages a productive asset in (presumably rational) anticipation of future accumulation. This only applies to land prices during the period of capitalist production of housing; the land developer will debt leverage land prices in anticipation of the transformation of its use value from that of, say, low priced agricultural land to higher priced housing land. But after sale to the wage earner, this sort of “normative capitalist leveraging” ceases to function. Instead it is the mortgage banking capitalist that wants to “leverage” land prices as high as possible, as this is the only way to increase the mass of surplus value they appropriate out of the sphere of unproductive consumption (implying that wages also share in the total surplus value, which is why worker home ownership is found mainly in imperialist countries – but conversely there can be superexploitation enacted by means of rent as well). The only possible normative regulator is the level of real wages and the supply of credit, which under fiat currency regimes is ultimately a function of the State. But the working class is not the ruling class, and wage levels alone turn out to be a poor regulator of consumer debt levels under capitalism, especially in housing. The level of land prices for worker housing, however, can act as an effective basis for the absolute wage level, via housing rents, in a given country. But that takes us into the theory of wages, another unfinished part of Marxism.

    Finally, the above can be a basis for exposing an interesting contradiction in Keynesian monetary theory in its purported desire to “euthanize the rentier”, that is, force idle money capital into productive investment. For such a monetary policy could just as easily push investment into landed property, that is, appropriation via rents. And that is exactly what Keynesian has done in the postwar, producing a rather vigorous revival of the rentier capitalist.

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