America’s Wealth Miracle Is On Shaky Ground
Posted December 26, 2024
The United States is experiencing an extraordinary surge in wealth. During the third quarter of 2024 alone, U.S. household wealth increased by $4.8 trillion, bringing the total to an astonishing $169 trillion. This remarkable figure reflects a wealth increase of $108 trillion since 2008, $52 trillion since 2019, and $17 trillion in just the past year. To put it into perspective, the recent $17 trillion gain alone could pay off half of the U.S. government’s $36 trillion debt.
Yet, this “wealth miracle” rests on a shaky foundation.
The main driver behind this surge has been the booming stock market, fueled by unprecedented fiscal and monetary stimulus during the COVID-19 pandemic, excitement over the AI revolution, and, alarmingly, a wave of “investment mania.” Stock prices rose sharply in the third quarter, accounting for 79% of the wealth increase. However, this growth coincides with troubling economic imbalances.
The Ground Beneath the Boom
While wealth has soared, credit growth—the traditional engine of U.S. economic expansion—has faltered. For decades, whenever total credit adjusted for inflation grew by less than 2% annually, a recession followed. But since 2022, despite credit growth falling well below this threshold, the economy has remained surprisingly strong. This anomaly has raised questions about how long the current trajectory can be sustained.
Moreover, liquidity is tightening. The Federal Reserve has destroyed approximately $2 trillion through quantitative tightening, reversing 40% of the liquidity created during the pandemic. At the same time, inflation has moderated, but uncertainty looms as potential fiscal and trade policy changes under President Trump could reignite price pressures.
The Fragility of Wealth-Driven Growth
History shows that manias are fragile. Asset prices are already at historically elevated levels relative to income, with the U.S. wealth-to-income ratio at 778%—far above its long-term average of 550%. Previous peaks in 2000 and 2007 were followed by severe crashes. A similar correction today would not only wipe out trillions in wealth but could also trigger a sharp economic contraction.
What Comes Next?
The future trajectory of the economy may hinge on government policy. The unprecedented growth in government debt has been a lifeline, accounting for half of all credit growth since 2008. Without it, the economy could have fallen into depression during the Global Financial Crisis and the pandemic. But with the debt ceiling set to be reinstated in January 2025, political gridlock could threaten further debt growth, amplifying risks to the economy and financial markets.
As we look ahead, the critical question is: Can the U.S. economy maintain its momentum, or is this “wealth miracle” on the brink of unraveling? History suggests caution. For now, the ground beneath this wealth-fueled boom is looking increasingly unstable.
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