What is the Wealth Effect?

Jul 11, 2022 | Macro Insights



Summary: Household net worth has ballooned from $56T during 1Q09 to $104T in 1Q20 (+86%) to $141T during 1Q22 (+36% since covid). This reflects an increase in home values, 401K holdings, and security holdings (for those that have them). A $37T increase in consumer net worth since covid represents a 1.5x multiple of the $24T annual GDP, creating what is know as a “wealth effect” that fuels consumption. While consumer payments may not be keeping up with inflation, their net worth (or savings) certainly is. That is, for people who own houses and stock portfolios. Those that don’t own houses and stocks are feeling the “poverty effect”. So, the Fed’s money-printing experiment has aggravated the divide between the halves and the halve nots by inflating assets that only a portion of the country owns. All the same, the Fed gives & the Fed takes away. Now with the Fed’s massive interest rate hikes, there is a great sucking sound as the wealth effect begins to evaporate…  

Household Net Worth Graph

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