Long-time AFM reader, Miguel, sent me this email last night:
I was just reading something very disturbing in Paul Krugmanâ€™s Sunday NY Times column. Apparently, the Federal Reserve has just released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. And Krugmanâ€™s interpretation of the data is that: â€¦ there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001. As Krugman puts it, the surge in asset values had been an illusion â€” but the surge in debt had been all too real.
Iâ€™m not so sure I totally agree with Krugmanâ€™s perspective, notwithstanding the fact that he has a Nobel in economics and I well umâ€¦ I suppose I donâ€™t have any prestigious prizes to speak of in any field. I mean seriously, it is actually normal for our economy to ebb and flow in cycles, its just that after such a long boom we are going to get a real ugly bust. By the way, in case you didnâ€™t know, Paul and the newspaper his column appears in are a wee bit on the liberal side (like ragingly so) and tend to view the Bush era with a negative bias (not too much of a stretch right now). But, I try to pay some attention to what he has to say, if only because a lot of people will be paying attention, and plus, he seems like a guy Iâ€™d enjoy having a chat over lunch with some day.
So, if what Krugman says is true, then thatâ€™s pretty scary and I wonder how much of it is observable in tangible ways that we can see in our everyday lives. For my own situation, letâ€™s see now:
1) Personal Income – Check. My personal income is highly variable and has taken a huge hit. Looks like Iâ€™ve been busted back to 2001 levels for the moment, though still employed which is a big plus considering the number of people I know out of work.
2) Business Income â€“ No effect yet. We have rental and business income which fortunately has not dropped off, at least not yet.
3) Investment accounts â€“ Check. Investment accounts are down over 40% in past 12 months. Feels like weâ€™ve been punched in the head, like we simply poured money down a black hole. It makes me physically ill to think about it.
4) Real estate value (home & investment r.e.) â€“ Some reduction in value but not as severe as expected â€“ I think weâ€™re around 20% off the peak right now in my area. But r.e. values are usually lagging and very sticky. Given where the NYC economy is headed it would not surprise me to see our r.e. decline further in value.
So, Iâ€™ve been wonderingâ€¦ given what we know today, is there anything that I would have done differently the past eight years, given the opportunity to do it over again. I still feel like Iâ€™m a financially better off and way more prepared today than I was in 2001. In fact, I looked at my files, and it turns out (I had forgotten) that 2001 was the very 1st year that I broke into the 7-figure net worth club. Fortunately, my current NW, while recently diminished is still way ahead of the 2001 figure. Interestingly, however, although I am worth somewhat more now, I am also carrying a lot more debt, largely because of a bigger home & mortgage, and also some use of debt to buy investment r.e.
And that relates to the one thing I would take away from the present crisis, which is that I wish I had focused more on debt reduction vs. investment. There is a saying (donâ€™t recall where I got it from) that goes something like â€œDebt is HARD, Assets are SOFT.â€ I now fully, painfully understand this one. There was a time when my liquid assets and investment accounts more than covered my debt. That was a nice feeling, knowing I had the means to pay off my mortgage. But, now I can no longer quite make that statement with the same level of confidence because my assets have shrunk (seemingly overnight). The debt is still there staring me in the faceâ€¦ laughing its head offâ€¦ â€œyou will never get rid of me now you foolâ€¦ ha ha ha.â€
I find myself kicking myself for jumping on the band wagon, especially in â€™05 and â€™06â€¦ get into the market now or youâ€™ll miss lots of upsideâ€¦ blah blah blah. On the one hand, you have to invest for the future. But, on the other hand, I should have had different priorities and done more housekeeping when I had the resources to do it. All in all, I still feel very blessed both monetarily and otherwise. I am better off today than I was eight years ago and hopefully, well-positioned to capitalize on the downturn by snapping up under-valued assets when the opportunity comes along.
I was wondering how you (and your readers) feel about these questions:
Are you better off today than in 2001? How or why?
What would you have done differently the past several years if you could redo it?
For me and my family, there’s no question that we are better off now than we were in 2001. We bought our house in 1999 for $89,000, refinanced it in 2007 in order to get some cash to do a major renovation. The house is still worth a lot more than we paid for iteven when you consider the refinancing.
The 401(k) is down substantially over the last year or so but it’s still above 2001’s levelalthough not by much.
What would we do differently if we could? Nothing really. I think we have done okay.
What about you?