Most of us have been feeling poorer. On Thursday, the Federal Reserve released numbers to support the sentiment. At the end of 2008, Americans' net worth fell $11.2 trillion, or 18 percent from 2007, to $51.5 trillion; $5.1 trillion of that decline was felt in the fourth quarter alone.
Net worth soared from 2003 through the third quarter of 2007 as stocks and real estate hit record highs. But the Fed's numbers show that net worth -- which measures the difference between a household's real estate and financial assets and its liabilities -- has been on the decline for six quarters in a row and puts Americans' total wealth back to 2004 levels, when net worth was $51.8 trillion.
Overall, the data confirm that the "wealth effect," the tendency for people to spend more money as their asset values rise, is over.
There are bright spots: After years of next to no savings, Americans are fluffing up their cash cushions again.
Taking on less debt, we are weary of the consequences. During the Great Housing Bubble the "wealth effect" became so great and there seemed to be very few consequences. Remember the times when people would used their HELOCs to pay the mortgage? Remember the time you could afford anything you needed through a refinance? Remember the time when flippers were glamorized on TV? Most of these are memories now (unless you can catch Montelongo reruns, but that itself is another story.)
Although we did not want it we are now in the "poor effect" era where even those who can afford things are choosing not to. This new era will be characterized with the coolness of frugality and depression era cooking shows. How things have changed!