personal views of a former fed trader

Wealth (Side)Effects

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.

Wealthier Medians

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.

Older workers are not returning to work. Part of it could be health concerns, but many also no longer need to work
Quite rates are around 20 year highs. Data suggests workers aged 30-45 had greatest increase in quit rates

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.

Younger people are asset poor, so even modest crypto gains make meaningful differences

Dark Money

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.

Many coins have grown to multi-billion dollar market caps with little fanfare

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.

MTU is a user who actively or passively transacts on the platform over a 28 day period

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.

Fast Money

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.


  1. Seth Hall


    Great piece. We will miss you at our Fed NY meetings (if they ever resume onsite again…). Hope you are well.

    • Joseph Wang

      Thanks man! Those were great meetings – learned a lot from you guys. Appreciate your readership here as well

  2. T

    Are you suggesting that the Fed should accelerate their tightening or that inflation will pick up and force the Fed’s hand to tighten faster than they would prefer?

    I remember this quote from your article in May that the Fed can’t fight this inflation – ” The one thing the Fed can still do is protect the “moneyness” of Treasuries – that means lower rates and more asset purchases, forever.”

    Are you departing from that conclusion?

    • Joseph Wang

      I am suggesting the Fed is misunderstanding the labor market, which will result in them keeping rates low for too long.

      I still believe that right course of action in an inflationary setting is to buy Treasuries, there by maintaining their “moneyness” and financial stability amidst a rapid decline in their value. Basically, shifting interest rate risk from private sector to public. This is because the level of debt is so high the financial system probably can’t handle a big sell off.

      But once you do that you have more space to raise rates. So I would raise rates but roll out YCC so the market does not overreact. This avoids a deflationary panic sell scenario by putting a floor on bond prices, but still allows inflation to reduce debt.

      • T

        Thanks for the reply.
        Do economists still consider the Phillips curve as relevant at all?
        You just kind of disproved it.

        • Joseph Wang

          Well, the Phillips curve hasn’t been very useful the past decade. I think the Fed’s new framework acknowledges this by noting they won’t raise rates because unemployment rate is low (they don’t know what maximum employment is and maybe the relationship between high employment and inflation is not there any more).

          But we are in the case when they are trying to get rid of perceived shortfalls in maximum employment when shortfalls may not exist. Maybe raising rates won’t do much – massive deficits and energy squeeze persist. But it’s the tool they have and will try, given their mandate.

  3. MarkLouis

    If a central bank lacks the ability to target inflation and lacks the intellect to understand unemployment, what is the point of having a central bank?

    This is how the Fed ( deservedly) loses its independence.

    • T

      Central banks are clearinghouses. They are not able of creating inflation. Monetary inflation comes from commercial bank lending and deficit spending and we are in a period where there is a dearth of that thus QE has been implemented.

      Zerohedgers are so annoying. sheesh.

  4. AJ

    I’d suggest something different. The direct transfer of public $’s to private sector through direct fiscal transfers, over and above pre-COVID income levels, effectively recapitalized many HH balance sheets of those lower income consumers. While undoubtedly well-intentioned AND necessary, the impact of those $ recycled thru economy (whether in actual economic activity or arenas of speculation-asset markets- have been capitalized into stock prices on acct of higher earnings AND multiples. Collectively, this makes BOTH the real economy, AND the markets, even MORE integrated and subject to reflexively similar paths- Fiscal & Fed policy working together created an Un-paralleled quantum of support that has driven asset prices to AT highs- (as % of GDP, using any # of multiples at 99th percentile vs history). This will reverse dramatically over next 12 mos & create a near mirror image of liquidity support vs the last 12-18 mos. If that’s right, from these prices/valuations, policy reversals are quite likely to dent the net worth positions of MANY of those u reference in next 12 months as many of the asset markets u reference are especially vulnerable to higher rates (no carry in crypto) and BS positions currently seen as durable are likely to be re-assessed when under the microscope of challenged (even leveraged) current income positions..Reading Ur argument , it’s hard not to think it carries many elements of the 3rd tenet of Minsky’s ponzi finance theory

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