Why Policymakers Are so Keen to Support Asset Markets?

In my previous article, I had discussed the Total Credit Market Debt Outstanding in the United States. From the same document of Flow of Funds Accounts of the United States (1Q12) , I found some more interesting data worth sharing with readers.

The Total Assets of Households as of 1Q12 was USD76.3 trillion and the net worth (after reducing USD13.4 trillion of liabilities) was USD62.9 trillion. The total assets of US households has increased by USD8.6 trillion from a low of USD67.6 trillion as the end of 2008. The net worth has increased by USD9.3 trillion during the same period in discussion. 

However, my objective is not just to present this data to readers. I will explain the importance of these numbers after the two charts on household assets and contributors to increase in assets during the last few years.

The chart below gives the assets of U.S. households for 2008 and for the first quarter of 2012 in billions of USD

Total Household Assets for 2008 and First quarter of 2012 in Billions of USD

The second chart gives the components, which lead to an increase in assets for U.S. Households during the periods under study

Change in Household Assets (1Q12 Compared with 2008)

If one looks at the first chart, the financial household assets as a percentage of total household assets for the first quarter of 2012 was 68.8%. In other words, a high percentage of household assets are related to financial markets. 

How much the household assets are dependent on financial markets can be observed from the second chart. The USD8.6 trillion household asset increase over the period of discussion has been largely due to improvement in the equity markets.

Therefore, it is not surprising to see Bernanke and Company so much keen to print money and save the household financial asset worth from collapsing. However, the key point that is forgotten here is that purchasing power is what matters and not the amount of financial assets or money in the system. 

I had discussed about exposure to equities in pension assets in one of my previous articles. It remains to be seen if a financial market collapse erodes household or pension wealth or it gets eroded by the way of excessive inflation through monetary easing. 

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