Some Thoughts On US Wealth Patterns

When I first started paying attention to national-level economic statistics in the late 1970s and early 1980s, it was commonly taught that the ratio of national wealth to GDP was more-or-less a constant over time. This made some intuitive sense. After all, the value of real estate wealth will be worth what people are willing to pay for it, and it makes some sense that this should grow over time with people's incomes. The value of stock market wealth in US companies will reflect future expected profits in the corporate sector, and again, will be growing over time with the economy. But this longstanding pattern fractured in the 1990s. 

Here's a figure showing the wealth-to-GDP ratio for the US economy (generated using the ever-helpful FRED website maintained by the Federal Reserve Bank of St. Louis). 

(Click on image to enlarge)

As you can see, the ratio was relatively close to being constant at about 3.6 for the period from the 1950s into the early 1990. The patterns of the figure in recent decades are fairly obvious. The run-up in wealth in the 1990s represents the stock market taking off. The run-up in the early 2000s is the real estate market taking off. After a big fall in both during the Great Recession of 2007-2009, both have rebounded. By mid-2020, the ratio was up to about 5, near an all-time high.

What has changed this ratio? Why are the US real estate and the stock market worth so much more, relative to GDP, than they had been for decades? One plausible reason has to do with the generally lower levels of interest rates since the 1990s (for discussions, see here or here). At an intuitive level, lower interest rates mean that people can afford to spend more on houses--so housing wealth goes up. A similar logic applies to the stock market, when interest rates are very low, the potential future returns from companies look that much better, and investors are willing to pay more for them. 

This explanation also implies that those who have seen big increases in their wealth over the last few decades--for me, that would be higher housing equity and a rising balance from the stock market investments in my retirement account--are growing wealthier only in part from a willingness to make those monthly mortgage payments and contributions to the retirement account. A substantial portion of the gain in wealth is from those shifts in interest rates. 

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