http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ7HBEgYCzUE

That’s a lot of disappearing cash…

Of course I wonder how they calculate “household wealth”.

Then I found this out…

Sheryl King (Merrill Lynch analyst) writes that household balance sheets shed almost $3 trillion in the third quarter, thanks in large part to a decline in stock prices. That loss, the largest 3-month drop on record, brings the total loss by U.S. households in 2008 to $10 trillion, or about 10 years worth of equity earnings.

So it looks like household wealth at least has stock portfolios and home values figured into the equation (although I question the wisdom of considering a mortgaged home a form of wealth).

Anytime household wealth begins dropping, it makes people feel poorer. This switch in moods can affect an entire population. And then it changes the mindset from “spend, spend, spend” to “save, save, save”. From that same report…

Persistent negative wealth effects from the slide in housing and equity prices should reinforce the uptrend in the personal savings rate, creating a highly disinflationary environment as job losses mount and unemployment rate rise toward 8-1/2% in the coming year. We estimate that the savings rate will rise to around 5% by 2010, on its way towards a more sustainable 6-7% at some point just beyond our forecast horizon. This is a daunting prospect for future US economic growth given that for every one percent increase in savings, consumer spending – that 70% of the GDP pie – is suppressed by a roughly equal amount.

So it seems that the velocity of money will slow in the coming YEARS. That could put a ceiling on how bad inflation could get (since saved money is money not spent. And money not spent does not contribute to price inflation).

And to think, we’re going to see even more losses from the commercial real estate bust, the emerging market bust, the municipality bust, the credit card debt bust, and the list goes on…

I just don’t see how a long-term rise in inflation could possibly happen in this environment. Perhaps in a few years, but it doesn’t seem like it could happen tomorrow, or next month, or even this year.

- CD