Flow of funds: Households and Nonprofit Organizations Q2 2004

In the second quarter of 2004, the primary source of funds for American households came from borrowing through home mortgages.

Part of this money went to buy real estate, but a large portion went into consumer durables and household spending. There was a 49.9% increase in spending on residential real estate and a 14.1% increase in outlays for consumer durables, as compared to the year 2000.

Financial assets were shifted out of stocks, bonds, and money market funds into mutual funds, savings deposits, government bonds, agencies, and pension fund reserves. Increased funds for home mortgages came directly and indirectly from foreign investors, as a result of the U.S. trade deficit.

Sales of direct holdings in equities exceeded investments in mutual funds (which are only partially invested in equities), resulting in a net divestment from equities by households during the quarter.

In the second quarter of 2004, personal income of American households was 13.7% higher than in the year 2000. Personal taxes were down 16.7%. However, unemployment was running at 5.6% — more than the 4.0% observed during 2000, but not unusual in the longer view.

Personal consumption was 20.3% higher than in the year 2000, resulting in less personal ’savings’ (as measured by economists), despite greater income and lower taxes.

The War on Terror and high levels of domestic spending, both by government and by households, was supported without sharply increasing interest rates because of the willingness of foreigners to sell goods and services to Americans in far greater amounts than there were goods or services to receive in exchange and because these sales were contracted in dollars, the most popular international means of payment, thereby providing ample funding to finance the deficit.

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