The Paradox of Debt by Richard Vague

Author:Richard Vague
Language: eng
Format: epub
Publisher: Forum

With inflated prices, nominal GDP grew, but this was because private sector debt increased sharply, from $931 billion to $1.5 trillion, while total government debt, including state-level and local debt, continued to grow higher. GDP adjusted for inflation – real GDP – was down in the first two quarters of 2022 as compared to the final quarter of 2021; for the first three quarters of 2022 it was up only a modest 1.9 percent as compared to the first three quarters of 2021. Higher inflation took a large bite out of real growth.

On the net worth side, the trends were more unfavorable, as shown in Figure 6.2. By September 2022, the value of household equities had tumbled in value and trends in real estate prices were mixed. The overall effect was that household net worth was down by 4.6 percent for the snapshot taken at the end of the third quarter of 2022, from $150.1 trillion to $143.3 trillion.38

Yet, these values were still well above the levels in 2019, just before the pandemic (see Figure 2.6). And those 2019 levels were themselves highs for the period following the Global Financial Crisis of 2008. For these reasons, it was implausible to characterize these assets on the US balance sheet as being undervalued, even after correction. This left many economic observers concerned that household net worth would continue to reverse, at least somewhat, in the near future.

Such a drop in net worth has ample precedent. During the 2008 financial crisis, net worth as a percentage of GDP fell by 16 percent and then took a full eight years to return to its pre-crisis level. The largest drop in household net worth to GDP before then was 12 percent, which occurred from 1972 to 1974, during the worst years of the 1970s oil and inflation crises. Then, net worth also took a number of years to return to its previous peak.

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