The increasing ratio of net wealth to gross domestic product (GDP) in the United States has raised concerns about a potential asset bubble. In 1995, total US household net worth stood at $26tn, but today it has skyrocketed to $150tn, almost six times higher. This surge in net wealth has not been matched by a similar rate of economic growth, leading to a rise in the country’s net wealth to GDP ratio from below four to over five.
YiLi Chien from the Federal Reserve of St Louis has suggested that the growth in this ratio could be attributed to the emergence of internet companies like Facebook, Instagram, and Google. These companies offer free services that are not captured by the GDP metric, yet they have the potential to generate substantial revenue in the future. Consequently, these assets may be overvalued compared to their measurable output.
Another factor contributing to the potential asset bubble is demographic change. As the population ages, individuals tend to save more, leading to increased investments in the stock market through passive funds. Vanguard, for example, has seen its assets under management grow nearly tenfold since 2005 to over $9tn. Currently, almost 40% of US equities are owned by individuals over the age of 70. However, as the baby boomer generation reaches retirement age, they will need to start selling these assets to fund their retirement.
Former Dallas Fed adviser Danielle DiMartino Booth has warned that interest rate cuts could accelerate this process. With Americans earning a record $11tn in interest and dividends in the first quarter of this year, further interest rate cuts could reduce passive income, prompting individuals to sell assets to maintain their standard of living.
DiMartino Booth also sees signs of an impending recession, citing falling prices of durable goods and a rise in credit card delinquency rates. While the September jobs report showed strong job growth, a significant portion of the gains came from individuals over 55 returning to the workforce, indicating potential economic fragility.
Unlike the 2008 recession, where the baby boomer generation was still in the workforce, the current aging population presents a different challenge. With a significant increase in the number of Americans over 65, the workforce is shrinking, making it essential to find ways to boost the working-age population to sustain economic growth.
While there are potential solutions such as increased productivity through AI, deregulation of energy sources, or pro-immigration policies, the inevitability of demographic shifts underscores the need for a strong case to support current asset prices. As asset prices remain at record highs, it is crucial to consider the implications of demographic trends on the economy and investment landscape.