How America’s worth was nearly halved

The typical American family has less wealth today than it did in the early 1990s, according to new data from the Federal Reserve. Around 20 years’ worth of gains were wiped out. Why?

One phrase: leveraged debt.

The net worth of American families plummeted by a whopping 38.8 percent between 2007 and 2010, according to the report. The median net worth of U.S. families dropped from $126,400 to $77,300. The net worth is calculated by adding up all your assets and subtracting all your debts.

According to the Fed, most of the damage was due to the housing crash. When home values plummeted it destroyed what was in many cases the family’s main investment.

When housing prices fell, people were wiped out financially because the value of their debt remained.

That is the danger of debt. When you borrow money to invest, if the investment goes south, you are still stuck with the bill. This is a painful lesson that many Americans have now learned. And since many Americans rushed into the housing market to buy homes before they got priced out of the market, they are now left with monthly mortgage payments indexed to bubble prices, even though the house is now only worth a fraction of what they borrowed to pay for it.

Compounding this problem is a crushing decline in median incomes. Median incomes have been steadily falling since 2004, but plunged 7.7 percent between 2007 and 2010. Median household income in 2010 was $3,100 less than it was in 2001.

According to the Federal Reserve, only one segment of the population actually saw their net worth increase during this time—those in the top 10 percent income bracket.

The reduction in American wealth has grave implications for the economy. The destruction of America’s wealth means the country has less money to drive investment, and thus job growth. Additionally, when people have less, they need to save more. While this is good in the long term, it has negative implications for an economy that has become reliant on debt-bubble-fueled spending. And because of the reduction in median salaries, it will take even longer for families to dig out from their housing debt mess.

What this all means is that five years after the housing crash, America is nowhere near a recovery.

And because of the growing divide between the rich and the poor, America is becoming much more fertile ground for social unrest and class warfare. Look at Argentina as an example of what is soon coming to America.

Should make for an interesting election.