Federal Reserve Chair women Janet Yellen continues to talk higher interest rates out one side while noting weakening economic fundamentals and musing about negative interest rates out the other side. Then again when she like the rest of the worlds developed economies central bankers have painted themselves into a corner compliments of a debt based growth model, now clearly broken. Confusion and panic is to be expected especially when the best and only idea they can come up with is more debt to fix the problems caused by too much debt in the first place.
Charles Hugh Smith of the blog Of Two Minds published an interesting piece on the breakdown of asset classes and debt held by the 1%, next 9% and everybody else. The 10% hold 26% of the debt and 94% of the business equity. Looking at the primary residence and the 10% hold 41% of their assets there, the 90% conversely hold 59% of their total assets in the family home and 74% of the debt. Based on data from Edward Wolff, New York University and the Wall Street Journal.
There are a number of takeaways here. Business ownership drives wealth creation because it creates an income producing and appreciating asset, aka a productive asset. The primary residence, or real estate provides a place to live, stability and access to schools for those with children. Long term price appreciation for residences has historically been inflation +1% per year or about 4% in total. Further it is not an income producing or productive asset unless bought for investment and rental purposes and the rents received exceed the expenses incurred. Highly leveraged, or debt based speculation on one’s primary residence, that produces little if any income requires someone else to assume even more debt or leverage to be successful, because that is the only way to sell it. At some point the leverage ratios become so high the process collapses under its own weight, this is what happened during the 2008-2009 financial crisis, aka the catastrophic failure of the greater fool theory. As is usually the result with excessive leverage, aka debt, bankruptcy and foreclosure followed in mass.