Decline in net wealth some data from the thirties

Dec.18, 2008 12:55 a.m.

A fair bit of press attention is being paid to the loss in net wealth due to the stock market crash and the fall in house prices. Many economists believe that there is a wealth effect on consumption and therefore economic growth and employment. For example in Canada much is being made of the headlines about the fact that Canadians have lost over 190 billion in the crash. Americans , of course have lost more than ten times as much because of their bigger population and the fact that home prices have fallen more dramatically there. But it is necessary to put these numbers into perspective. After all total Canadian household wealth was estimated in 2006 to be 4.97 trillion dollars. So if we subtract 200 plus billion from that we are still left with a hefty figure of around 4.77 trillion. Nevertheless the effect is still a shocking one.
But lets look at what happened in the worst years of the depression 1930 to 1934 in the US. An excellent neoclassical economist Don Patinkin in his classic work, Money , Interest and Prices published in 1965 included a very useful table of data for the US see table B. p.662 for this period. In 1930 according to data extracted from Raymond Goldsmith, Robert Lipsey and Morris Mendelson,( Studies in the National Balance Sheet of the United States, Princeton, 1963) the net worth of the household sector was 489.51 billion US current dollars.

That statistic fell to 335.23 billion by 1934.This was a drop of over 30 %.At the same time the annual average consumer price index with 1947-49=100 fell from 71.4 in 1930 to 57.2 in 1934 and recovered a bit to 59.9 in 1940. So the drop in prices was about 20 % for the period 1930 to 1934. And this led to a prolonged period of very low prices.

So far we have not experienced any such equivalent although these are early days. However the fall in house prices and the shocking crash of the stock market are nevertheless substantial worries.More on this tomorrow.