“Bullish on America” is now an empty Slogan

The distribution of wealth in the US has both shrunk and changed dramatically as a result of the economic crisis. The middle class, with much of their accumulated wealth in equity in their homes, has become substantially poorer. The following chart from “Housing and the End of Upward Mobility in the U.S” shows what has happened to home equity over time:

Despite rising home values equity in homes dropped as people used their homes as ATM machines to live beyond their incomes. After 2007, home prices began to decline leaving many homeowners without any equity.

Charles Hugh Smith, who wrote the aforementioned article, also presented the following graph illustrating the dramatic shift in wealth distribution:

The bottom eighty percent of the population owned 15% of the country’s real estate wealth and 7% of the country’s financial wealth in 2007. Most of the real estate wealth for this group has been wiped out, with the housing market still in decline. Real estate represented the bulk of their wealth. According to Smith:

Home mortgages have fallen a negligible amount, from $10.48 trillion in 2007 to $10.26 trillion at the end of 2009. As of the end of 2009, total equity in household real estate was a paltry $6.24 trillion of which about $5.25 trillion was held in free-and-clear homes (32% of all household real estate, i.e. 32% of $16.5 trillion).

That leaves about $1 trillion–a mere 1.85% of the nation’s total net worth– of equity in the 51 million homes with mortgages.

That is a staggering conclusion, for it suggests that the bottom 80% of the nation’s households which own a home have virtually no inheritable wealth left in their homes. And without that equity, what foundation of wealth is left? Their 7% share of the nation’s financial wealth? That is 7% of $45 trillion, or $3 trillion, including all stocks, bonds and securities in IRAs, 401K retirement funds, savings and other accounts.

This change in the composition of wealth is devastating to the middle class. It has significant implications for the country’s future. No society is cohesive with such disproportionate extremes in wealth.

In a country where the populace believes that corruption and corporatism is the rule, people don’t believe they have a chance. As the realization of what has happened to them sinks in, civil unrest and distrust are likely to emerge in ways not seen before, other than in the inner cities.

There is no recovery on the horizon. Housing prices will continue to decline for the foreseeable future, perhaps as much as another 20%. As Smith stated, we are already in dire straits:

The orgy of speculation, leverage and debt incentivized by the credit/housing bubble of 2000-2006 has, in the aftermath of the bubble’s bursting, destroyed most of the nation’s middle-class wealth.In effect, three generations of accumulated equity was blown off in “wannabe wealthy” consumption and speculation.

Three generations of wealth built up under the American Dream have been erased. Doubts increase daily about the wisdom of government policies and their effect of a continuation of that dream. Our economic vitality is being questioned at home and abroad.

Merrill Lynch is now gone. If they were still here, would they still be “Bullish on America?”

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