Charting The Government's Chronic And Flawed Overrepresentation Of Household Net Worth: A $2.1 Trillion Downward Revision In One Quarter

Tyler Durden's picture

After we posted our preliminary thoughts on the Z.1 "Flow of Funds Accounts of the U.S." report earlier, we had the chance to dig deeper through the data in the governmental cash flow report. To our surprise we uncovered some dramatic data revisions whose presence highlights the recent "consumer resurgence" in a very different light. The key finding is that the government has been chronically overrepresenting Household Net Worth in original publications, and subsequently revising the data dramatically in order to hide the fact that consumers' wealth is nowhere near as impressive as originally represented. Putting a number to this statement: a $2.1 trillion downward revision in just one quarter.

Exhibit A - ratio of Household Net Worth to Disposable Income

Two of the most critical data sets in the Z.1 are total Household Net Worth and Disposable Income, and their respective ratio. Over the past decade this ratio has averaged roughly 5.5x, and as the confluence of the real estate and stock price market lifted household net worth into the unrealistic stratosphere, this ratio hit an all time high of 6.5x in 2006. Ever since then the ratio has collapsed, and according to today's release it hit 4.86x. Yet what is notable are the recent revisions to this data, whereby this ratio, which in Q2 was disclosed to be 4.87x originally, was subsequently reduced to 4.63x per today's data. This is a dramatic revision.

What was the reason for this revision? One specific item.

Exhibit B - Household Real Estate Worth

Comparing the constituents of household net worth, yields one glaring disparity. While in Q2 Household Real Estate was valued at $18.3 trillion dollars, in today's data it was revised by a stunning $2.1 trillion lower. To put that into perspective, the entire increase in HNW from Q2 to Q3 was $2.7 trillion, of which $2.3 trillion was from "Equity Shares At Market Value." In other words, had the government not fudged the data initially (or had it not subsequently revised it by a whopping 11.4%), today's Z.1 would have shown a much less ebullient picture, with just a $600 billion increase in HNW instead of $2.7 trillion: an 80% haircut! Our data demonstrates that over the past 5 quarters this has been a habitual game of over-inflating household real estate by the government, only to trim it subsequently, as the stock market picks up courtesy of an imaginary (and soon to be revised massively downward) "improvement" in the consumer's net worth status. A big (and potentially fraudulent) Catch 22 perpetrated by the government: consumers believe they are richer (when they are not), they buy into the ponzi, the government then removes the "net worth" crutches, but the ponzi has ratcheted up a notch in value; next period: rinse, repeat.

The comparison of originally reported real estate value and any given period's most recent revision is presented below. Ever since the peak of the housing bubble, 10 quarters ago, the government has been consistently deflating the margin of actual-revised numbers, while over the past 5, the revisions have gotten simply blatant, with a record $2.1 trillion in actual-revised adjustments in Q1 and Q2 of 2009. Not a bad way to make it seem that the consumer is $2.1 trillion dollars richer based on "adjustments," even if these disappear into thin air after a mere 90 days.

And if the United States government is willing to "adjust" numbers to the tune of $2 trillion+ within 90 days, who is to say what goes on in the Bureau of Labor Statistics, Department of Labor and the Census Bureau...


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B9K9's picture

You are off by a factor of 10-20X. The "money" created by the Fed out of thin air is subsequently loaned to banks at 0%, which is then pyramided via FRB based on established (and shadow ie CDS) reserve requirements. Rothbard illustrates exactly how this is done in his seminal publication:

The Case Against the Fed

Let us see how this process typically works. Suppose that the "money multiplier" — the multiple that commercial banks can pyramid on top of reserves, is 10:1. That multiple is the inverse of the Fed's legally imposed minimum reserve requirement on different types of banks, a minimum which now approximates 10 percent. Almost always, if banks can expand 10:1 on top of their reserves, they will do so, since that is how they make their money. The counterfeiter, after all, will strongly tend to counterfeit as much as he can legally get away with. Suppose that the Fed decides it wishes to expand the nation's total money supply by $10 billion. If the money multiplier is 10, then the Fed will choose to purchase $1 billion of assets, generally U.S. government securities, on the open market.

In the first step, the Fed directs its Open Market Agent in New York City to purchase $1 billion of U.S. government bonds. To purchase those securities, the Fed writes out a check for $1 billion on itself, the Federal Reserve Bank of New York. It then transfers that check to a government bond dealer, say Goldman, Sachs, in exchange for $1 billion of U.S. government bonds. Goldman, Sachs goes to its commercial bank — say Chase Manhattan — deposits the check on the Fed, and in exchange increases its demand deposits at the Chase by $1 billion.

Where did the Fed get the money to pay for the bonds? It created the money out of thin air, by simply writing out a check on itself. Neat trick if you can get away with it!

Chase Manhattan, delighted to get a check on the Fed, rushes down to the Fed's New York branch and deposits it in its account, increasing its reserves by $1 billion. Figure 10 shows what has happened at the end of this Step One.

The nation's total money supply at any one time is the total standard money (Federal Reserve Notes) plus deposits in the hands of the public. Note that the immediate result of the Fed's purchase of a $1 billion government bond in the open market is to increase the nation's total money supply by $1 billion.

But this is only the first, immediate step. Because we live under a system of fractional-reserve banking, other consequences quickly ensue. There are now $1 billion more in reserves in the banking system, and as a result, the banking system expands its money and credit, the expansion beginning with Chase and quickly spreading out to other banks in the financial system. In a brief period of time, about a couple of weeks, the entire banking system will have expanded credit and the money supply another $9 billion, up to an increased money stock of $10 billion. Hence, the leveraged, or "multiple," effect of changes in bank reserves, and of the Fed's purchases or sales of assets which determine those reserves.

Note that the Federal Reserve balance sheet after a few weeks is unchanged in the aggregate (even though the specific banks owning the bank deposits will change as individual banks expand credit, and reserves shift to other banks who then join in the common expansion.) The change in totals has taken place among the commercial banks, who have pyramided credits and deposits on top of their initial burst of reserves, to increase the nation's total money supply by $10 billion.

B9K9's picture

If people knew just how easy it is/was for CBs to radically inflate the money supply starting back in Mar '09, no one would be surprised at the ensuing manipulation of markets & information.

Of course, the other shoe is yet to drop. All the extra debt taken on by the public sector in lieu of private sector de-leveraging still must be brought to account. If it had been invested in anything even remotely productive, there might have been some way to pay back the capital (interest) costs.

But, of course it was merely spent on current consumption ie gov't paychecks, social programs, etc. We still haven't even begun addressing Part II of this story. It ain't gonna be pretty.

Miyagi_san's picture

WG looks like that recession we just had was parlayed into a collapse

Jeff Lebowski's picture

Give CNBC a hand in their "not a scientific survey" on the state of the economy....  Unlike their accurate (in their words) economic indicator of 800 people reported by Steve Liesman earlier today.  In other words, 2.34e-6 of the population surveyed.



Anonymous's picture

Obama is all about change, expect lying multiples.

Anal_yst's picture

The simplier explanation is that the Gov't just sucks ass at collecting useful data in a timely manner, designing predictive models, etc...

trav777's picture Gresham's Law operates, there is tremendous selective pressure to "interpret" the numbers in such a way as will be rewarded.

Nobody gets far telling the unvarnished truth.

Anonymous's picture

are government bonds included in this number?
owing money as a group to yourself as a person nets to 0.

Anonymous's picture

The over-estimating of "good news"--be wealth, employment, whatever--in preliminary reports and then revising the "good news" to a much lower number has an additional perception effect ALWAYS REPORTED IN THE MSM when the next new "good news" report is issued: the positive change in the "good news" is much greater from the less-good revised number to the new over-estimated preliminary number.

Never believe the spin; always analyze the data.

Anonymous's picture

The over-estimating of "good news"--be wealth, employment, whatever--in preliminary reports and then revising the "good news" to a much lower number has an additional perception effect ALWAYS REPORTED IN THE MSM when the next new "good news" report is issued: the positive change in the "good news" is much greater from the less-good revised number to the new over-estimated preliminary number.

Never believe the spin; always analyze the data.

gabeh73's picture
The Establishment speaks: “devalue the dollar” The CFR published this article today. It is yet more evidence that the establishment has to devalue the dollar or lose, of course they don't want rapid devaluation, so they will try a slow devaluation.


"If it is serious about recovery, the United States must balance the budget, stimulate private saving, and embrace a declining dollar.

C. FRED BERGSTEN is Director of the Peter G. Peterson Institute for International Economics.

AnonymousMonetarist's picture

'I felt so good, like anything was possible.
Hit the cruise control, rubbed my eyes.
There's somethin' good, waiting down this road.
I'm pickin' up whatever's mine.
Running down a dream.
-Tom Petty

'I was sitting around a dead dial
Just another lost number in a file
I was trying to find my way home
This is Radio Nowhere.
-The Boss

'Karma police, arrest this man
He talks in maths
I've given all I can
It's not enough
I lost myself.

'Its a primal thing, this very unconscious place with the fears of what can happen to your children and will you be able to keep them safe. Then there's that place of utter desperation where you wonder if you're completely insane.'
-Jodie Foster

Retail sales better than expected!

Yea beer!

Uh well, only place seeing sales growth are the discount houses and gas huts. A gazillion bucks buys you a couple bips up off the Apocalypse.

The 1.3% 'leap' off about a 350 billion base is ~4 billion.

If employment is at First Great Depression levels and credit is till slippin' down the sloppy slope where is this V shape recoverin' extrapolatin' moolah coming from?

Almost nose-snotted by coffee when I read this in the WSJ yesterday:

By Mark Whitehouse

People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.

Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.

Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.

(Moral hazard writ large! And its' good boys and girls, its' good! -AM)

Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.

(Punish the sober, exalt the drunk, the Oracle at Eccles has junk in the trunk. -AM)

"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth. Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March.

"We're saving lots of money," Ms. Richey says.

(Good times. Good times. -AM)

For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month (there's your retail sales ladies and gentleman -AM) -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.

"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."

(The American Dream as the American Scheme. Necessity is the mother of invective. Its' all clear to me now. Should not have paid off the house, could have taken out a federally guaranteed mortgage, short sold it to the bank, dropped the proceeds and a couple bars into a triple index long fund with some gold and gun stocks on the side , ka-chinged off the debasement of our standard of living, and chased it down with some sweet ambrosia from the skull cup of the common man. What was I thinking?

How can this not end in a short-hair curling moment? -AM)

John Bigboote's picture

Incredible investigative journalism and analysis. This site is truly one-of-a-kind. In my opinion, the most important service Zero Hedge provides is exposing government sponsored manipulation of data and social reality; the manipulation is so perverse I don't even know where to begin when going off on it.

There is nothing more frustrating than being whipped back and forth by my own beliefs, observations, and common sense on one hand and the government's spin on the other (which happens to be gobbled up by 99.9% of the people I like and respect). It tends to make one doubt oneself when making preparations for the inevitable implosion.

Anonymous's picture

WOW John--GREAT comments!
That is how SO many people feel. It is both amazing and frightening how hard the government is pushing such mis-information and out right LIES through the mainstream fiancial media.

You can count on one hand the real journalists, who have not been bought out by this manipulation machine.

WaterWings's picture

The real ones are working at Home Depot four hours a day.

Anonymous's picture

Isn't this really tied to the rebound of our 401Ks? And isn't this partial bullish run also related to those working, continuing their 401Ks and keeping the market on life support? Just a thought.

Count Laszlo's picture

Isn't this wealth increase really tied to the rebound of everyone's 401Ks?  And isn't the market really on life-support because idiots continue to dump their earnings into 401Ks?

Anonymous's picture

These numbers aren't being "cooked" but maybe they are being paid to do the "cooking."

Anonymous's picture

I think home values are based on replacement cost in the z-1

SilverIsKing's picture

Are we up to the bank failures yet?  I'm getting antsy.

Anonymous's picture


Apparently Obama meant HE was going to change
his opinion on everything, right after he was sworn in....

gabeh73's picture

I am one of the idiots putting money in my 401k. I don't think it is really so company puts in 8k per year no matter what. I really do need to keep working with 3 young kids. My company also matches th first 5 k I put in...then I have to the option of commodity funds, emerging markets, international bonds etc...I'd have to be a pretty bad investor not to at least be able to preserve what I have been putting in there. The taxes I'm avoiding are significant , the longer I can put off payign them the better chance I have of escapign with my money eventually.

If I switch jobs, I'll put a big chuck in precious metal...but in this economy I'm sticking with the job/home I have.

Anonymous's picture

This lunacy is like the Energizer bunny. You, and the zombies, will probably be right in the end! Just have some kind of backup plan: canned food, water filter, and lead backed with gunpowder.