Daily Gains Letter

American Household Net Worth up More Than 26%; Is the Dollar the Main Reason?

By for Daily Gains Letter | Jan 10, 2013

















DL_Mohammad_7During the financial crisis in the U.S. economy, the wealth of individuals decreased—there were investment losses across the board. Total net worth of individuals and non-profit organizations took a nosedive. Their net worth declined to $51.2 trillion in January of 2009—the lowest since April of 2004. (Source: “Total Net Worth – Balance Sheet of Households and Nonprofit Organizations,” Board of Governors of the Federal Reserve System, December 6, 2012.)

Now, after numerous efforts by the government to boost economic growth in the U.S. economy and run up in the stock markets and other asset classes, the net worth of households and nonprofit organizations reached $64.8 trillion in July of 2012.

How does one actually go about calculating one’s net worth? As scary as this may sound, to check for personal financial conditions, it’s not at all difficult—it just requires a little searching and a very basic calculator.

To calculate net worth, only two things are needed: assets and liabilities. Assets are the things a person owns, and liabilities are essentially the obligations that a person must pay. The difference between the two shows the financial health of an individual—assets minus liabilities equals net worth.

With that stated, an increase in household net worth may sound great to many—total household net worth increased more than 26% in a matter of a few years. But the real question a person should ask is: has it actually increased in real terms? Consider the following chart of the U.S. dollar index. This chart compares the value of the U.S. dollar with other major world currencies.

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Chart courtesy of www.StockCharts.com

Not surprisingly, the value of the U.S. dollar has been declining on the chart since 2010, but if you look at the bigger picture, it shows a horrific image. To give you some perspective, $1.00 in 1960 had the same buying power then as $7.78 does now—meaning that what you could buy for a dollar in 1960 costs almost eight-times more now. The U.S. dollar is declining at a very fast pace. (Source: “CPI Inflation Calculator,” Bureau of Labor Statistics.)

Keep in mind that the U.S. government and the Federal Reserve are currently working together to print more U.S. dollars to fund the government’s spending. This will cause the value of the U.S. dollar to further deteriorate. If you thought the dollar couldn’t decline anymore than it already has, think again.

Why does it matter to you? As the U.S. dollar goes down, the price of assets will rise with it—eventually, the net worth in terms of dollars will increase as well. But, the problem comes in when it’s actually time to use what you have collected over time for your retirement.

If you are planning for your retirement and your net worth has increased over the past few years, consider doing some fact-checking. Make sure that your net worth or wealth isn’t increasing only because the dollar is falling in value. Increasing asset prices is certainly good, but if it’s increasing for artificial reasons, it can be disastrous in the long run.

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