US Consumer Credit Rises

In February, consumer credit increased at a seasonally adjusted annual rate of 4-3/4 percent. Revolving credit increased at an annual rate of 3-1/2 percent, while nonrevolving credit increased at an annual rate of 5-1/4 percent, according to the Federal Reserve.

Consumer Credit Growth (Seasonally Adjusted). Recessions are shaded.

This covers most credit extended to individuals, excluding loans secured by real estate, including student loans, car loans, and credit cards.

Capital Flows to the Banking Sector

Deputy RBA Governor Guy Debelle, spoke at the Australian Financial Review Banking & Wealth Summit on “Recent Trends in Australian Capital Flows“. He highlights that Australian banks are still reliant on US funding sources, and this includes exposure to US commercial paper.

We therefore highlight that events there will impact banks here, especially changes in market rates (which are likely to be impacted by FED policy as we discussed earlier).

For more than a century, Australia’s high level of investment relative to saving has been supported by capital inflows from the rest of the world. These net capital inflows are the financial counterpart to Australia’s current account deficit. Foreign investment has been instrumental in expanding our domestic productive capacity and has been attracted by the favourable risk-adjusted returns on offer here.

Although net capital inflows have been a consistent feature of Australia’s balance of payments, the composition of both the inflows, as well as the outflows when Australians invest offshore, has varied substantially over time.

When I spoke about capital flows a few years ago, I discussed the significant changes in the composition of capital flows that had taken place since 2007. At that time, I highlighted three noteworthy developments: a marked increase in foreign direct investment in the mining sector associated with the mining investment boom; the significant change in flows to the Australian banking sector from sizeable inflows pre-crisis to around zero; and a substantial increase in foreigners’ purchases of Australian government debt.

Graph 1: Net Capital Inflows

 

To a large degree, these trends have continued over the past three years. But under the surface, there have been some significant changes in the composition of these flows in recent years.

The aggregate pattern of capital flows to the banking sector has not changed materially since I last spoke on this topic. Since 2014 – and indeed over the period since the financial crisis – there have been minimal net capital flows to or from the banking sector. Following the shift away from offshore wholesale debt towards domestic deposits that took place in the wake of the global financial crisis, the funding composition of banks has remained relatively stable. But notwithstanding this stability, recently there have been two noteworthy developments relating to short-term debt, both stemming from regulatory reforms.

Firstly, over the past year or so, Australian banks have reduced their short-term debt issuance in preparation for the introduction of the Net Stable Funding Ratio (NSFR) next year. The NSFR provides an incentive for banks to shift to sources of funding considered to be more stable and away from sources such as short-term wholesale liabilities.

Graph 3: Net Foreign Purchases of Australian Bank Debt

 

Secondly, the composition of Australian banks’ short-term offshore funding has also changed following the implementation of US Money Market Fund (MMF) reforms by the Securities and Exchange Commission in October 2016. As a result of these reforms, the value of assets under management of prime MMFs (those that lend to banks) has fallen by US$1 trillion or around 70 per cent over the past couple of years. Some prime funds have switched to become government-only funds, that is, funds that invest only in US government debt. At the same time, investors have allocated away from prime funds to government-only funds. Although prime MMFs have maintained their exposure to Australian banks relative to banks globally (at around 8 per cent of total MMF exposures to banks), their holdings of Australian bank debt have declined from around US$100 billion to under US$30 billion currently.

However, in aggregate, Australian banks have continued to raise almost as much short-term funding from US commercial paper markets, despite the decline in MMFs. They have been able to tap other investors, in particular US corporates with large cash holdings, such as those in the technology sector.

Fed Minutes From March Meeting – Financial Market Impact

The minutes of the US Federal Open Market Committee March 14–15, 2017 have been released. They provide context for the rate decision. All but
one member agreed to raise the target range for the federal funds rate to ¾ to 1 percent. We also got some impressions on how the FED will manage the billions of dollars in assets it purchased in an attempt to reflate the economy after the financial crisis. This is a big deal, with global consequences for financial markets.  Not least, think about how expected future rate rises may interact with reducing asset purchases.  Bond prices may be impacted. The US T10 was down a little.

In the U.S. economic projection prepared by the staff for the March FOMC meeting, the near-term forecast for real GDP growth was a little weaker, on net, than in the previous projection. Real GDP was expected to expand at a slower rate in the first quarter than in the fourth quarter, reflecting some data for January that were judged to be transitorily weak, but growth was projected to move back up in the second quarter.

Recent information on housing activity suggested that residential investment increased at a solid pace early in the year. Starts for both new single-family homes and multifamily units strengthened in the fourth quarter and remained near those levels in January. Issuance of building permits for new single-family homes—which tends to be a reliable indicator of the underlying trend in construction—also moved up in the fourth quarter and remained near that level in January. Sales of existing homes rose in January, while new home sales maintained their fourth-quarter pace.

The open market reinvestment operations, are currently supporting the financial markets in the US, and are having global impact on interest rate and bond benchmarks. When the time comes to implement a change to reinvestment policy, participants generally preferred to phase out or cease reinvestments of both Treasury securities and agency MBS.

The staff provided several briefings that summarized issues related to potential changes to the Committee’s policy of reinvesting principal payments from securities held in the System Open Market Account (SOMA). These briefings discussed the macroeconomic implications of alternative strategies the Committee could employ with respect to reinvestments, including making the timing of an end to reinvestments either date dependent or dependent on economic conditions.

The briefings also considered the advantages and disadvantages of phasing out reinvestments or ending them all at once as well as whether using the same approach would be appropriate for both Treasury securities and agency mortgage-backed securities (MBS). In their discussion, policymakers reaffirmed the approach to balance sheet normalization articulated in the Committee’s Policy Normalization Principles and Plans announced in September 2014. In particular, participants agreed that reductions in the Federal Reserve’s securities holdings should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings. Most participants expressed the view that changes in the target range for the federal funds rate should be the primary means for adjusting the stance of monetary policy when the federal funds rate was above its effective lower bound. A number of participants indicated that the Committee should resume asset purchases only if substantially adverse economic circumstances warranted greater monetary policy accommodation than could be provided by lowering the federal funds rate to the effective lower bound. Moreover, it was noted that the Committee’s policy of maintaining reinvestments until normalization of the level of the federal funds rate was well under way had supported the smooth and effective conduct of monetary policy and had helped maintain accommodative financial conditions.

US GDP Revised To 2.1 percent

U.S. Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the fourth quarter of 2016, according to the “third” estimate released by the Bureau of Economic Analysis. In the third quarter of 2016, real GDP increased 3.5 percent.

The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month. In the second estimate, the increase in real GDP was 1.9 percent. With this third estimate for the fourth quarter, the general picture of economic growth remains largely the same; personal consumption expenditures (PCE) increased more than previously estimated.

Real GDP: Percent Change from Preceding Quarter

Real gross domestic income (GDI) increased 1.0 percent in the fourth quarter, compared with an increase of 5.0 percent in the third. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 1.5 percent in the fourth quarter, compared with an increase of 4.3 percent in the third quarter.

The increase in real GDP in the fourth quarter reflected positive contributions from PCE, private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local
government spending that were partly offset by negative contributions from exports and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the fourth quarter reflected downturns in exports and in federal government spending, an acceleration in imports, and a deceleration in nonresidential fixed investment that were partly offset by accelerations in private inventory investment and in PCE, and upturns in residential fixed investment and in state and local government spending.

Current-dollar GDP increased 4.2 percent, or $194.1 billion, in the fourth quarter to a level of $18,869.4 billion. In the third quarter, current-dollar GDP increased 5.0 percent, or $225.2 billion.

The price index for gross domestic purchases increased 2.0 percent in the fourth quarter, compared with an increase of 1.5 percent in the third quarter. The PCE price index increased 2.0 percent, compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index increased 1.3 percent, compared with an increase of 1.7 percent.

The USA’s New Debt Bubble

From Mises Wire.

The New York Fed’s most recent household debt report showed ballooning debt and delinquency in student and auto loans. Total household debt has just about reached its previous late-2008 high of over $12.5 trillion.

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You’ll notice that housing debt (blue) has not increased much since its 2013 low, meaning that the increases in total debt have mostly come from non-housing debt (red). A closer look at the composition of non-housing debt reveals that the biggest increases in debt have come from student and auto loans (red and green, below).

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In fact, the numbers make it look like the housing bubble was almost exactly replaced by new bubbles in education and cars. From 2008 to 2016, housing debt has decreased by $1.01 trillion, while student and auto loan debt together have increased by $1.04 trillion. The Board of Governors of the Federal Reserve has an even higher estimate than the NY Fed for current student loan debt, at $1.41 trillion.

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Shahein Nasiripour at Bloomberg showed the relative changes based on the same data this way:

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While both student and auto loan debt have increased substantially, delinquency rates are higher for student loans. In 2012, student loan delinquency spiked up enough to claim the top spot, probably due to the number of people who chose more school over searching for employment during the bust. The graph below shows that student and auto loan delinquency rates are the only ones not decreasing.

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Of course, this is more of an intended feature than a flaw of the Fed’s monetary policy since the housing bubble popped. Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another.

The redirection is mostly guided by new government interference in markets. Pre-2008, federal government programs to encourage new housing and mortgages, along with the low interest rates and new money from the Fed, created the housing bubble. Since 2008, programs like Cash for Clunkers, auto manufacturer bailouts, and income-based student loan repayment have funneled spending, borrowing, and increasing prices into education and autos.

Some recent headlines already signal a collapse in used car prices this year. Meanwhile, college tuition increases are still the norm every year, despite the decreasing value of a diploma. According to this AP report, “the average amount owed per borrower rose to $30,650 in 2016, after rising steadily for years. In 2013, borrowers on average owed $26,300.”

Another recent release by the NY Fed contains data on labor outcomes for college graduates versus all other laborers. There have been dramatic swings in employment across the board since 2008, but comparing September 2008 to September 2016 on net, the unemployment rate for college graduates has increased while the unemployment rate for all other workers has decreased. The underemployment rate (“defined as the share of graduates working in jobs that typically do not require a college degree”) for recent graduates has hovered around 45% since 2008. An indexed measure of job postings indicates that demand for laborers with a college degree has not increased as much as demand for laborers that don’t need a college degree, though both reached a peak late 2015.

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The overwhelming conclusion from all of this data is that we almost certainly have new bubbles in education and the auto industry. A trillion dollars of housing debt has been replaced by a trillion dollars (or more) of student and auto loan debt. Delinquency rates are increasing for student and auto loans, while other loan types have seen a decrease in delinquency. Finally, the value of both the university education and the automobiles people are buying don’t seem to justify the amount being borrowed and spent, from a big picture perspective. Their prices are artificially inflated due to the Fed and the federal government teaming up to create new bubbles, just like they did to create the housing bubble.

 

US Budget “Deconstructs The Administrative State”

The Economist produced this graphic which shows the radical shift in US budget policy and says it shows a move to “deconstruct the administrative state”.

STEPHEN BANNON, President Donald Trump’s chief strategist, famously promised the “deconstruction of the administrative state”. On March 16th, the Trump administration took its first step toward achieving Mr Bannon’s vision by proposing a budget that makes steep cuts to domestic programmes.

Not all departments would suffer. Mr Trump’s budget proposal, which covers $1.1trn of discretionary spending for the 2018 fiscal year, requests an additional $52bn for the Department of Defence and $2.8bn for the Department of Homeland Security. The majority of this additional spending would go towards what the administration calls “urgent warfighting readiness needs” including fighter jets, drones, missiles and weapons systems. At least $2.6bn would be spent on the construction of a wall on the southern border, a project which could eventually cost as much as $22bn. An additional $1.5bn would go towards the expanded detention, transport and removal of illegal immigrants.

To pay for this build-up in defence and border protection, Mr Trump would slash budgets across the federal government. Under his proposal, with a familar title of “America First: A Budget Blueprint to Make America Great Again,” the Department of Health and Human Services would be cut by $13bn or 16%, the State Department would lose $11bn or 29% and the Department of Education would see its funding fall $9bn or 14%. The Environmental Protection Agency, widely expected to face the steepest cuts under the Trump administration, would be reduced by a whopping 31%, eliminating 50 programmes and 3,200 jobs.

How Mr Trump’s budget would affect the broader economy is still unclear. Despite calling the national debt a “crisis”, the proposal would keep overall spending at roughly the same level. Given Mr Trump’s zeal for tax cuts and frequent promise for massive infrastructure spending, deficits may even increase. The administration will not release its full budget—complete with ten-year spending and revenue projections—until May.

Of course, the president’s budget is only a wish list. It is Congress that ultimately controls the government’s purse strings. And at the moment, many lawmakers are wary of deconstructing the administrative state just yet. When asked on February 28th about the Trump administration’s proposed cuts to the State Department, Senator Lindsey Graham of South Carolina told reporters the president’s budget is “dead on arrival”.

Fed Embarks on New Phase of Normalization

The US Federal Reserve’s (the Fed) decision to hike interest rates by 25bps represents the beginning of a new phase of US monetary policy normalization, says Fitch Ratings.


The prediction for three hikes in 2017 in the Federal Open Market Committee’s (FOMC) December 2016 Summary of Economic Projections was initially met with some skepticism in financial markets. However, by moving rates up again so quickly, the Fed now looks well on track to deliver. Two rate hikes within the space of just over three months and some marginal toughening up of the statement on forward guidance underscore the contrast with the glacial and hesitant approach to unwinding stimulus seen in the past few years. More broadly, Fitch believes that the recent US rate hikes could mark the beginning of a significant shift in the global interest rate environment, with benchmark US policy rates settling higher over the long term than current market expectations.

The decision to raise the Fed Funds target rate to 0.75%-1.00% marks the second rate hike in just over three months. This represents a major acceleration in Fed action. Fitch now expects a total of seven hikes in 2017 and 2018, bringing the policy rate to 2.50%. This contrasts with just two rate hikes in total between the end of 2008 and 2016.

Macro indicators through 2H16 and early 2017 reinforce the likelihood of a pickup in rate normalization over the medium term. GDP growth of 2.6% (annualized) in 2H16 was a significant recovery from 1H16, underpinned by improvements in private investment and industrial output. So far, jobs data this year have also been supportive, with the latest nonfarm payrolls, unemployment and private sector earnings figures all pointing to tightening labor market conditions.

Material fiscal easing should bolster positive domestic demand trends. President Trump’s agenda of tax cuts, fiscal stimulus and deregulation in the financial services and other sectors strongly indicates that some level of growth boost is likely. Although the precise form of stimulus remains uncertain, Fitch believes that fiscal policy could add up to 0.3pp to economic growth in both 2017 and 2018. Fitch recently revised up its US growth expectations in recognition of the increased likelihood of fiscal easing, higher private investment and improving global outlook. Fitch forecasts US GDP growth to accelerate to 2.3% and 2.6% in 2017 and 2018, respectively.

Fitch does not believe that the increased pace of Fed rate hikes poses a risk to US economic growth. However, the impact from dollar strengthening could have wider global effects, especially should this result in prolonged monetary policy divergence. US rate rises, combined with fiscal stimulus, at a time when the European Central Bank and Bank of Japan are continuing to pursue ultra-loose monetary policy, should prolong the dollar strengthening trend. Rising rates and dollar strength have historically added to external financing risks for emerging markets.

Fitch believes that market expectations for a permanently lower equilibrium interest rate in the US and the continuation of ultra-loose monetary policy for several more years could be increasingly challenged. This could result in a rapid shift in consensus expectations toward a higher terminal rate and a faster pace of normalization. Notably, market consensus was not expecting a March rate hike as early as last month, although healthy macro data releases and hawkish public statements from FOMC members resulted in a quick shift in expectations ahead of the actual decision.

Rising interest rates in 2017 and 2018 will not be a broad concern for US corporates in aggregate, but pockets of risk could challenge entities at the lower end of the rating spectrum, according to Fitch Ratings.

With current LIBOR levels at or above most pricing floors – USD 3M LIBOR was 1.11% as of March 8 – subsequent rate hikes would expose leveraged loan issuers to reset risk that could pressure credit profiles and cash flow generation. This risk is most acute for deeply speculative-grade credits with large amounts of floating rate debt, already large interest burdens, and limited to negative FCF.

Near-term interest rate risk is most evident for leveraged issuers who took advantage of longstanding favorable market conditions to issue large amounts of floating-rate debt, but whose credit profiles deteriorated due to secular challenges or idiosyncratic issues that resulted in higher leverage, depressed cash flows and limited liquidity.

Retail companies, for example, with high floating-rate debt exposure could be particularly exposed to interest rate risk if secular challenges offset the benefits of an accelerating economy on top-line growth.

From a credit profile perspective, we are less concerned about exposure to fixed-rate high-yield (HY) bonds. Historically, HY spreads do not increase meaningfully until after the Fed has concluded its tightening cycle. As a result, modest policy rate increases may not be accompanied by corresponding increases in spreads.

Interest rates typically rise in response to higher inflation, usually during economic recoveries, implying generally improving credit profiles. Fitch’s Stable Outlook for US Corporates in 2017 supports this view.

Moreover, companies have been proactive in managing maturity profiles. US corporates have aggressively refinanced during nearly a decade of low interest rates, pushing out maturities with long-dated, low-coupon debt to maintain historically strong interest coverage metrics and solid liquidity profiles. We expect fundamentals to remain stable as expectations of growth in cash flow are fueled by persistent cost controls, efficiencies, and revenue growth, albeit weak.

The Trump administration’s tax proposal to cut the corporate tax rate to 15% and eliminate the tax-deductibility of interest expenses adds another layer of risk. Negative cash flow impact from the removal of interest expense deductibility may outweigh the positive cash flow impact from the corporate tax cut for issuers with high debt burdens and debt costs

The US is healing but we can’t even admit we’re ill

From The NewDaily.

The Federal Reserve’s widely anticipated rate rise is a reminder that while the US has learned from its housing market crash, our political leaders have created a record bubble of mortgage debt by shying away from reform.

When Fed chair Janet Yellen announced Thursday morning (Australian time) the fed-funds rate had risen to a new target range of 0.75 to 1 per cent, it caused barely a stir in markets. The New York Stock Exchange rose 0.8 per cent, as the Fed signalled future rate rises are likely to arrive sooner than previously expected.

These days the Fed telegraphs each move so effectively that markets no longer ask ‘will they move or not?’, but more ‘does that move reflect what’s really happening in the economy?’

Yes, with its years of super low rates, the Fed did set the scene for the 2009 housing collapse that hit global markets like a tsunami. But its three rate rises since the GFC have been spot on – late enough to avoid choking the recovery, but early enough to prevent inflation getting out of hand.

At a press conference Ms Yellen said the Fed is pushing rates back towards “normal” levels because the US economy has returned to reasonable health – growing at a “moderate pace”.

Meanwhile, Australia’s rates remain at historic lows. So what are we doing wrong?

The biggest reason we’re not seeing US-style growth is, gallingly, entirely self-imposed. Our political leaders have skewed the economy heavily towards real estate investing.

The vast sums of capital tied up in housing could be establishing new businesses, or backing the expansion of existing ones. Instead, we’re a nation hypnotised by capital gains that thinks buying and selling the same houses back and forth is a productive industry.

It all began in 1999, when treasurer Peter Costello cut capital gains tax to a rate well below the personal tax rates of middle- and upper-middle class Australians. It was one of the most economically harmful policies ever dreamt up in Canberra.

It did not take the nation’s accountants long to point out to clients that investing in a property, negatively gearing it for a few years, and then banking the capital gain at the new rate would slash the investor’s tax bills.

During the same period, the US was experiencing a credit bubble for different reasons – super low rates, plus the advent of sub-prime mortgages.

When the early ‘sub-prime’ phase of the GFC finally began to be felt, US house prices tumbled. And when the sub-prime crisis worked its way through the banking system, global stock markets crashed too.

Whereas the US learned from this and started rebuilding, we arrested our correction and did everything possible to keep the credit bubble growing.

As the share market tanked in 2009, Australian policy makers decided that the sacred cow of house prices must be protected at all costs. The 2009 first home buyer’s grant kickstarted that defence, and was topped up by most state governments too.

Even though the Rudd government’s own tax review – the Henry Tax Review – had recommended reining in negative gearing and the capital gains tax discount, all that was ignored.

The tax lurks stayed, gleefully maintained by the Abbott and Turnbull governments, and the RBA joined in by cutting interest rates that blew the credit bubble larger still.

The lack of action by politicians has pushed responsibility for reining in the bubble to the Australian Prudential Regulatory Authority, which imposed a fairly weak ‘speed limit’ on credit growth two years ago.

And now the RBA itself is threatening to put more “sand in the gears” of the credit machine.

It’s all too little, too late.

Australia, having ‘escaped’ the house price collapse that swept through so many nations in 2009, is now stuck in a self-imposed debt bubble.

Aging and Wealth Inequality

Interesting piece from the St. Louis Federal Reserve looking at the connection between age and wealth and its implications for aging and wealth inequality.

An individual’s wealth varies with age. Most people are born with little to no financial wealth and, as they age, they save part of their income to accumulate wealth or sometimes borrow to finance education, which creates debt. Once people reach retirement, they stop accumulating wealth and start spending down their savings. Thus, the richest people can often be found among those who are about to retire.

Age is not the only determinant of wealth. People’s wealth varies with how much they are given by their parents, their income, and their decisions on how much to consume or save and how to invest their wealth.

In this essay, however, we focus on the connection between age and wealth and its implications for aging and wealth inequality. The issue is salient because the U.S. population is aging and inequality is a frequent concern. Today, less than 15 percent of the overall population is 65 years of age or older, and that share is projected to rise above 30 percent by 2030. Is this going to exacerbate or mitigate wealth inequality in the United States?

The figure shows wealth per capita (black line) by age group in 2010. As indicated earlier, the richest people tend to be 65 to 74 years of age. The figure also shows the fraction of wealth (dashed line) held by households, ranked by the age of the head of household. A key message is that age is a significant source of inequality: The largest and youngest groups hold the least wealth—those under 35 years of age (blue line) represent over 25 percent of the population but hold only about 5 percent of total wealth. If the dashed and blue lines overlapped, each group’s share of the population and share of wealth would be the same and age would not contribute to wealth inequality. In this case, the black line would be flat: Each individual would hold the same amount of wealth, regardless of age.

One can examine the effect of the age distribution using a standard measure of wealth inequality: the Gini index (sometimes called the Gini coefficient), which varies from 0 to 1. A value of 0 indicates no inequality—everyone holds the same wealth. A positive Gini index indicates some inequality. If one individual held all the wealth—maximal inequality—the Gini index would equal 1. In the United States, for example, the richest 1 percent of the population holds 42 percent of total wealth.1 As the figure shows, the age group with the highest share of wealth—those 55 to 64 years of age—holds almost 31 percent of the wealth but represents only about 16 percent of the population. The Gini coefficient implied by the figure is 0.385.2 Because this Gini coefficient measures only the dispersion of wealth by age group, it omits additional sources of wealth inequality and therefore understates the true Gini coefficient for the United States.

A simple example helps illustrate that wealth inequality by age contributes to overall wealth inequality: Consider an economy, as shown in the table, with 100 people. Each young person holds $1 of wealth, while each old person holds $10 of wealth (top panel). The population shares of young and old are 80 percent and 20 percent, respectively. Note that this panel represents, in a stylized way, the features of the U.S. economy displayed in the figure: There are many more young people than old people, but the old hold more wealth than the young. The total wealth of this economy is $280, where the young collectively hold $80 and the old collectively hold $200. The young’s share of total wealth is (80/280) = 29 percent, which is noticeably less than their 80 percent share of the population. The Gini coefficient associated with this distribution of wealth is 0.51.

Suppose now that the economy ages and there are 50 old people and 50 young people (bottom panel). Because older people have more money, total wealth in the economy rises from $280 to $550. If each young person still holds $1 of wealth, their share of total wealth becomes (50/550) = 9 percent instead of 29 percent—a decline of 20 percentage points. But their share in the population decreased by 30 percentage points, from 80 percent to 50 percent, so the Gini coefficient declines from 0.51 to 0.41.

So the aging of the population, per se, is a factor that can reduce wealth inequality. This example, however, must be interpreted with caution. It does not imply that the forecasted aging of the U.S. population will be accompanied by a reduction in wealth inequality. As mentioned in the introduction, the calculation presented here abstracts from other forms of inequality not related to age. It is conceivable that these other forms of inequality may increase as the population becomes older and offset the effects described here.

US Financial Accounts 4Q 2016 Shows Household Debt Higher

The Fed released the US Accounts to Dec 2016.  It shows growth in household debt, but a lowering of business investment and government debt down from the 2008 highs.

Domestic nonfinancial debt outstanding was $47.3 trillion at the end of the fourth quarter of 2016, of which household debt was $14.8 trillion, nonfinancial business debt was $13.5 trillion, and total government
debt was $19.1 trillion.

Domestic nonfinancial debt growth was 2.9 percent at a seasonally adjusted annual rate in the fourth quarter of 2016, down from an annual rate of 5.8 percent in the previous quarter.

Household debt increased at an annual rate of 3.8 percent in the fourth quarter of 2016. Consumer credit grew 6.2 percent, while mortgage debt (excluding charge-offs) grew 3.1 percent at an annual rate. Percentage changes calculated as seasonally adjusted flow divided by previous quarter’s seasonally adjusted level, shown at an annual rate

Nonfinancial business debt rose at an annual rate of 2.6 percent in the fourth quarter, down from an annual rate of 6.3 percent in the previous quarter.

Federal government debt increased 2.9 percent at a seasonally adjusted annual rate in the fourth quarter of 2016, down from an annual growth rate of 8.2 percent in the previous quarter.

State and local government debt rose at an annual rate of 0.2 percent in the fourth quarter of 2016, down from an annual growth rate of 0.7 percent in the previous quarter.

The net worth of households and nonprofits rose to $92.8 trillion during the fourth quarter of 2016. The value of directly and indirectly held corporate equities increased $728 billion and the value of real estate rose
$557 billion.