The “wealth effect” is thought to boost consumption, but common sense (and some evidence) suggests it would also impact the need and willingness to work. Household wealth has surged over the past quarters for broad segments of the public, with an overall increase of $5.8t just over 2021 Q2. Fiscal policy pumped $1.3t of cash onto household balance sheets, but the market gods have also made a hefty contribution. Over the past two years home prices nationwide rose 25%, the S&P 500 is up 45%, and crypto gains have changed many lives. At the same time, the labor participation rate is depressed, employees are resigning, and wages are rising. Older workers can now retire early, and many others have enough of a nest egg to walk away from work they don’t need. In this post we estimate the distribution of wealth increases, pencil in the missing crypto wealth, and suggest that the Fed may be running the economy much hotter than they realize.
The wealthy have been by far the largest beneficiary of recent asset inflation, but other groups have also benefitted substantially as well. Overall, Fed data shows household asset values increased 20% from 2019 to 2021Q2. Applying this growth rate to the median asset holdings by wealth (net worth) percentile from 2019 data illustrates the scale and distribution of the wealth gains. (Note that household debt is largely mortgage debt, so increases in asset values roughly equal increases in net worth). These are just rough estimates that will hide substantial amounts of variation depending on a household’s actual asset allocation. But any one who owns a home (~65% of Americans) and/or some stock has experienced substantial wealth gains in a very short period of time.
The surge in asset prices has been so extreme that even less wealthy cohorts saw meaningful gains since 2019. The median wealth of the 75th to 90th wealth percentile group is estimated to have grown by $158k, and the median wealth of the 50th to 75th wealth percentile group is estimated to have grown by 63k. In line with these wealth gains, the labor participation rate of older employers remains at around pandemic lows while mid-career employees are the dominant participants in the Great Resignation. These two cohorts tend to be relatively wealthy and would have benefitted from recent asset inflation.
The less wealthy bottom half of the population has not benefitted from the asset boom, with data suggesting the group is largely comprised of younger households. However, Fed data is incomplete and does not include a significant new source of younger household wealth – cryptocurrencies.
Cryptocurrencies are a $2t asset class absent from flow of funds data because they exist on decentralized ledgers outside of national reporting systems. Anecdotally, crypto appears to be largely held by young men with big dreams and not a lot to lose. Bitcoin may be the the largest and best known crypto, but it is flanked by literally hundreds of lesser known “alt-coins” each with significant market values. Crypto as an asset class was negligible in 2019 but may have grown to levels that are impactful on a macroeconomic level. Like dark matter, it is exerting influence without being seen.
It’s hard to estimate the impact of crypto on domestic household wealth because coins are both globally held and in accounts that are largely anonymous. Most crypto ledgers can be publicly viewed, but that is not enough to understand the distribution. This is because some accounts act as custodial accounts by holding crypto on behalf of many users, some users have multiple accounts, and some users simply lose access to their accounts. However, user data from the largest domestic crypto exchange suggest that there is a large and rapidly growing investor base. Growing interest usually happens when many people are making money.
It’s not clear how much of global crypto wealth is held by American households, but even a fraction of that wealth would imply a few hundred billion increase in household wealth over a couple years. That would be a substantial increase for younger households, who are asset poor. As the value of wealth gains is relative to one’s life circumstance, even an extra bit of crypto wealth may have some impact on a young man’s motivation to seek employment.
The scale and speed of the rise in household wealth is simply unprecedented. The roughly $40t increase in household wealth over the past 2 years is real “money” that can be spent on goods and services (just don’t all sell at once). This has obvious implication for consumption and inflation, but also on the public’s urgency to seek employment. Stopping the flow of unemployment payments may be less impactful in encouraging employment when the stock of wealth has grown tremendously.
The Fed appears confused by the labor market: there are many signals of a labor shortage even though the unemployment rate is also elevated. The Fed is holding rates low on the belief that the economy is far from maximum employment, even though inflation high. But if the “wealth effect” has structurally changed the labor market, then the Fed is viewing the world through an outdated model. It may take much higher wages to reach the pre-pandemic unemployment rate. The Fed may be inadvertently running the economy much hotter than they realize.