Blog-Normal Distribution - Analytic lessons and random observations by John Sall, JMP creator and SAS co-founder

The front page of the Wall Street Journal on March 13 highlighted an "$11 Trillion Hole" and said "Americans See 18% of Wealth Vanish." I looked at the chart, and the 2008 number indeed looked as if it had fallen off a cliff.

But then I looked at the rest of the curve and remembered the two big bubbles that were going on, the Internet Bubble in the 1990s and the Housing Bubble in the 1990s and 2000s. I thought I should just exclude those points from the long-term trend.

So I got the data from the Federal Reserve's Web site and tried to reproduce the Wall Street Journal plot, adding a trend line that excluded the bubble points.

So how does our current net worth look with respect to the long-term trend? Not bad at all. We are not in a $11 trillion hole but are back on track after some roller-coaster years.





Legend:
green = used to estimate the regression line, 1985 to 1996
red = the points in the bubbles
blue = the current value that was the subject of the Wall Street Journal article

I don't want to deny in any way that we are in an economic crisis. But I do want to remind everyone that portfolio valuation drops are not quite as bad as they seem if you consider that the last few years of huge yields were somewhat artificial, and just returning to normal valuations will look like a crash.

Sources:

• Flow of Funds Accounts of the United States, 1985-1994 [PDF]
  
• Flow of Funds Accounts of the United States, 1995-2004 [PDf]
  
• Flow of Funds Accounts of the United States, 2005-2008 [PDf]
  
• Balance Sheet of Households and Nonprofit Organizations, March 12, 2009 [PDF]