Sunday, January 21, 2007

Even the Rich Are Borrowing Large

The Wall Street Journal is reporting that wealthy individuals are borrowing at a faster rate than middle class Americans. From the article:

Just as the rich control a disproportionate share of national wealth, they also account for a disproportionate share of debt. The richest 1% now hold 7% of the nation's debt, with a total of $650 billion in borrowings, up from 5% in 1998.

Debt for this group grew faster than for any other group in the Fed survey. Total debt held by the top 1% increased 150% between 1998 and 2004, compared with growth of about 100% for those in the 50th-to-90th percentile wealth range. The rich, in short, have joined the great American borrowing binge. Call them the leveraged elite.

After buying up second (and third and fourth) homes and funding ever-more lavish lifestyles, today's risk-friendly rich are embracing debt as a way to expand fortunes and fund increasingly acquisitive lives.

The problem for the middle class is the costs for necessities such as health care, housing and education are rising faster than inflation. Their problem is compounded by the fact that wages are not keeping up with inflation.

It appears that the problem for high-income earners is that they are borrowing in an attempt to get ever larger returns on their investments.

"There is a drive by the merely rich to keep up with the obscenely rich."

[However] on the whole, their balance sheets remain healthy. According to the Fed, the debt held by the top 1% amounted to only 3.7% of their total wealth. That compares with 24% for Americans ranked in the 50%-to-90% groups.

What concerns me about this statement is that many of the calculations that measure wealth are based on inflated values of real estate and stocks that both arguably have overinflated values. What happens when the real estate loses value and stocks fall due to a selloff? There's no doubt that, on average, the wealthy will still be solvent. But what will such a correction do to their penchant for risk?

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