Our asset-backed economy

The Federal Reserve's Flow of Funds report with data through the second quarter of 2009 was released yesterday and the $2 trillion improvement in household net worth was in all the headlines. As shown in the slight expansion of the green portion of the chart below, it was all about a rising stock market.
The rising value of equities and mutual funds accounted for a whopping $1.6 trillion of the overall increase of $1.9 trillion in assets while liabilities fell by about $35 billion.

Overall household liabilities declined for the third consecutive quarter which, while understandable, given the change in attitude toward debt by the American consumer, does not bode well for an economy where asset prices must be perpetually pushed higher by rising levels of debt in order for us all to succeed.

Clearly, the plan here is that, since consumers can't really handle any more debt (especially since a growing number of them don't have jobs), the government is stepping in to fill the void.

As for real estate, there is some good news for homeowners as the overall value of property ticked up during the second quarter.
While the amount of outstanding mortgage debt owed by households fell by about $30 billion to $10.4 trillion in the second quarter, the value of real estate reportedly increased by 1.8 percent, from $17.949 trillion to $18.272 trillion.

This is largely consistent with the Case-Shiller national home price index that rose 2.9 percent from the first quarter to the second, though it's hard to believe that this is the beginning of a new trend of rising home prices.

Then again, since the Federal Reserve has pushed mortgage lending rates down to freakishly low levels by printing money and the U.S. government now owns or guarantees virtually the entire U.S. mortgage market while Congress appears ready to double the $8,000 home buyer tax incentive ... anything could happen.