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Thanks, Ben, for Our Wealth Boost
Federal Reserve policies lift stock prices for the rich — and food prices for everybody else
by By RANDALL W. FORSYTH
Americans’ wealth has been growing because of the rise in the stock market, which has been the stated goal of the Federal Reserve’s policies in recent months. But what’s to happen if the stock market begins to sputter.
According to the Fed’s latest figures, U.S. households’ net worth—the value of their assets minus their liabilities—rose 3.9% in the fourth quarter of 2010, to $56.8 trillion.
Assets rose $2.3 trillion, to $70.7 trillion, despite a fall in the value of households’ real-estate holdings. Liabilities also edged higher, to $13.9 trillion, despite the continued reduction in mortgage debt.
Behind these dry ledger entries, a different picture emerges. Equities were the biggest factor in Americans’ increased wealth, mutual funds and pension funds both posting increases that doubtlessly reflected rising stock prices.
Specifically, households’ stock holdings increased $934 billion, or some 12% in the fourth quarter, to $8.51 trillion, which was roughly in line with the 11.59% total return from the Russell 3000 (the combination of the large-capitalization Russell 1000 and the small-cap Russell 2000, a more comprehensive reflection of the U.S. stock market than 500 cherry-picked stocks.)
In addition, their holdings of mutual funds rose $427 billion or 7.1%, to $4.71 trillion, also no doubt resulting from the gains in equities. Finally, reserves of pension funds gained $716 billion or 5.8%, to $13 trillion, benefitting those fortunate still to be covered by defined-benefit plans, which would mean mainly public-sector employees.
Indeed, these gains accrue only to those households that own equities, which are heavily weighted to the wealthy. According to the Fed’s 2007 Survey of Consumer Finances, the most recent one, only 14% households in the 40%-59.9% income percentiles (which takes in the median) own equities, with an average value of $5,500. This cohort also has an average of $37,500 in “pooled investments,” such as mutual funds and an average $23,900 in retirement accounts, both presumably would have some exposure to equities.
In the top income decile, 47.5% owned equities worth an average $75,000, pooled investments worth an average $180,000 and retirement accounts worth an average $200,000. (That’s in addition to an average of $250,000 in bonds, even though debt instruments were held by only 8.9% of the households in the top decile.)
Since last Aug. 26, the day before Fed Chairman Ben Bernanke proposed the central bank resume its purchases of Treasury securities, the value of U.S. equities has increased 25%, or $3.2 trillion. But that manna in the form of $600 billion in the Fed’s second round of “quantitative easing” (known popularly as “QE2″) has landed mainly on the upper crust.
You have to be in it to win it, the lottery ads exhort. That’s even more true in order to benefit from the Fed’s policies to stimulate the economy. You have to own equities to gain from the central bank’s money printing.
As for residential real estate, the largest asset of most of the middle class, it continued to slump in the fourth quarter, falling another $260 billion in value, to $16.37 trillion.
What’s more apparent than the rise in the Dow to the median-income household is the increase in the cost of items such as food and energy, especially as gasoline heads toward four bucks a gallon. Perhaps that’s why the University of Michigan consumer sentiment survey slumped to 68.2 in March from 77.5 in February. Their one-year inflation expectation jumped to 4.6% from 3.2%, which makes them poorer—unless, of course, they forego food and fuel for equities.
As I noted here Thursday (“Toast the Bull’s Second Birthday with Fed Juice“), the central bank denies any role in the rise in food prices while taking credit for the gains in stocks.
That may play on Wall Street but it doesn’t go over in the outer boroughs in New York City. In a speech in Queens Friday, New York Fed President William Dudley tried to mollify the audience’s concern about rising food prices. According to wire services, one queried him, “When was the last time, sir, that you went grocery shopping?”
Dudley replied that the new iPad2 from Apple (ticker: AAPL) cost the same as the original version, but is much more powerful. From the Queens crowd came the retort: “I can’t eat an iPad.”