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Household balance sheets continue to improve




The Fed has released its Flow of Funds data for the first quarter, and there are several notable developments, as summarized in the chart above. For starters, households have been deleveraging since 2007 (reducing net debt by almost $1 trillion), yet the economy has failed to implode as the doomsters were predicting. Financial assets have made a full recovery back to their 2007 high, thanks mainly to a $1 trillion addition to savings deposits and a rally in the equity and corporate bond markets. The value of households' real estate holdings has recovered to 2010 levels, but is still down over $6 trillion from the 2006 highs. Finally, despite all the turmoil of the past decade (housing market collapse, financial market collapse, worst recession in generations, slowest recovery in generations), households' net worth has risen at an annualized rate of just over 4% since 1997, almost double the rate of inflation.

This is a testament to the resilience and inherent dynamism of the U.S. economy. We have managed to weather almost unimaginable storms; most households have endured wrenching and painful adjustments; nevertheless, things are getting back to where they should be, slowly but surely, thanks to hard work and savings. A good deal of this progress has come despite the headwinds of excessive government spending and regulation, despite extreme gyrations in monetary policy, and despite the huge growth in federal borrowing which has raised fears of a significant increase in future tax burdens. If monetary and fiscal policy can get back to a more stable, sustainable and predictable path in the future, and I think they can, then the outlook will brighten even more. (See John Taylor's excellent summary of what needs to be done here.)

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