The US Federal Reserve released the prosaically named Federal Flow of Funds statement.

It’s full of numbers and to many people, it’s a bore. But laid out in stark detail is the horrible truth of what the subprime mortgage crisis and credit crunch has done and continues to do to the US economy and individual consumer.

The toll of damage from the crisis, the crunch and the stockmarket fall in the first quarter makes horrible reading.

The net worth of Americans fell $US1.7 trillion in the first quarter – the biggest drop since 2002; the amount of equity people have in their homes fell to 46.2%, the lowest level on record (and house prices are still falling); the net worth of US households fell 3% to $US56 trillion at the end of March, and the value of real estate assets owned by households and non-profits declined by $US305 billion, while financial assets fell by $US1.3 trillion, thanks to a $US556 billion drop in stocks and a $US400 billion decline in mutual funds.

Now that puts the estimated $US380 billion in losses from the subprime mess for financial groups in the US, Europe and elsewhere into some perspective.

While a recovery in sharemarkets will help rebuild part of those losses, only the halting of the slide in US house prices will end the most pernicious of all the problems confronting the US economy.

That’s why the nascent optimism about the US economy later in the year and in 2009 seems out of whack with the reality of what’s happening to the personal worth of American households.

There are over 80 million mortgages in the US and Americans now owe more on those mortgages as a whole than they own: how can economists and the Fed really expect the US economy to recover when it will be weighed down by that millstone?

There is one answer: Americans are continuing to borrow at 2007 rates, even though their economic circumstances have worsened and the unemployment rate has risen. The Fed figures show that US household debt grew by 3.5% in the first quarter, down from 6.1% in the fourth quarter but this was driven by a halving in the growth of home mortgage debt, including home equity loans.

Consumer credit, which includes credit cards, showed no change on 2007, rising at an annual rate of 5.75%.

That means American consumers are turning to credit cards (while still trying to use up equity in their homes) to keep themselves afloat. Not a recipe for a sustainable economic recovery by any measure.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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