Listen to this article
Americans have now had 10 years since the credit crisis for their financial health to recover. Stock prices have tripled since then and interest rates are still on the floor, so the conditions should have been there for a full recovery to financial health.
However, most do not feel better off. That much is evident from the way that Americans have voted recently, with the election of President Donald Trump a clear sign that many found the status quo insupportable. And indeed Americans’ financial health remains far more parlous than it should.
Running in their favour have been stock markets, which went on a long rally as the Federal Reserve cut base rates to zero, and then got another lease of life when the Trump administration won an unfunded tax cut last year.
Americans have also been much luckier than their counterparts elsewhere in the fees they have to pay to take part in the market. The last decade has seen a surge of money into exchange traded funds and into passive index-tracking mutual funds, which compete on the basis of low costs. Fidelity, which was for many years the biggest and most powerful investment institution in the country, has recently made a splash with “ zero-fee” index funds: this is a good position for consumers.
Further, the past 10 years have turned out to be a great time just to put money into passive indices, which is what many have done.
Low interest rates have helped push down debts. Meanwhile, house prices have recovered far faster than many had expected. Those who bought near the top of the housing boom (which peaked in the summer of 2006) and avoided foreclosure are now mostly clear of negative equity, while many are sitting on a profit. The S&P Case-Shiller index of house prices in 20 US cities is now up 3 per cent from its 2006 high — while it is up almost 60 per cent from its low in 2012.
Employment has also recovered dramatically since the brutal recession that followed the crisis. At one point above 10 per cent, unemployment has now dropped below 4 per cent, one of the lowest unemployment rates on record.
So what are the problems? The first is the corrosive effect of a vicious circle involving low confidence, joblessness and addiction. The epidemic of opioid use in the US overlaps closely with low employment participation rates — the term for the proportion of the potential workforce that is making itself available for work. States with high opioid use tend to have low participation rates, and vice versa. They also tend to be states which voted most enthusiastically for Donald Trump two years ago, and which suffer the most glaring inequality.
There is room for impassioned argument over the arrow of causation, but it appears clear that a large group within the population is caught in a tragically vicious circle. Their financial health has suffered along with their physical health, making it almost impossible to escape their economic difficulties.
Then there is the issue of increasing debt elsewhere in consumers’ budgets, even if their mortgage debt is now under control. Thanks to the obscenely high price of higher education in the US, which continues to rise, student loans have more than doubled since the crisis. Consumer credit has also risen, while auto loans have risen sharply, leading some economists to warn of a bubble.
Then there is the problem that incomes for those in work have stagnated. That has kept inflation under control but made it hard to buttress families’ financial stability. Average earnings growth is still only 2.9 per cent, according to the latest figures, and that is the highest in a decade.
And finally there is the alarming issue of pensions. The US public sector, and many old-line large companies, entered the crisis with old-fashioned “defined benefit” pensions, in which savers were promised a proportion of their final salary for the rest of their lives. These pensions were already in poor shape before the crisis, and their deficits (the amount by which their total assets lagged the imputed present cost of their liabilities to pensioners) have shot up. That is because lower bond yields make it more expensive to guarantee an income.
By the end of July, according to Mercer, the consultancy, the aggregate deficit of pension plans for companies in the S&P 1500 index came to $193bn, so this is a dangerous problem.
Meanwhile, the solution of moving people to defined contribution plans — known as individual retirement accounts (IRAs) or 401(k)s) in the US — may not be working because savers are not putting enough money into the plans. A third of Americans between the ages of 56 and 64 have no retirement savings at all. Roughly half have less than $100,000 — nowhere near enough money to guarantee a good income in retirement.
America’s financial and economic recovery from the disaster of a decade ago has been much stronger and faster than many thought possible at the time. But there are good reasons why most Americans feel no financially healthier now than they did then.