Note from dshort: With today's release of the Fed Flow of Funds for Q4 2011, I have updated this commentary to reflect the latest data.
A quick glance at the complete quarterly data series in linear chart suggests a bubble in net worth that peaked in Q2 2007 with a trough in Q1 2009, the same quarter that the markets bottomed. The latest Fed balance sheet shows a total net worth that is 15.9% above the 2009 trough but still 12.5% below the 2007 peak. The positive news in the Q4 balance sheet is that real total net worth has increased 2.1% from Q3 of 2011, although the year-over-year number is a fractional decline of 0.6%.
But there are problems with this analysis. Over the six decades of this data series, total net worth has grown by 5000%. A linear vertical scale on the chart above is misleading in its failure to provide an accurate visual illustration of growth over time. It also gives an exaggerated dimension to the bubble that began in 2002.
But there is another problem, one that has to do with the data itself rather than the method of display. Over the same time frame that net worth grew 5000%, the value of the 1951 dollar shrank to about 10.5 cents. The Federal Reserve gives us the nominal value of total net worth, which is significantly skewed by money illusion. Here is my own log scale chart adjusted for inflation using the Consumer Price Index. Read more.....