Business Economics

https://doi.org/10.1057/s11369-019-00120-z

ORIGINAL ARTICLE

The third post‑world war II wealth bubble

Eugene Steuerle1 

© National Association for Business Economics 2019

Abstract
The United States has now experienced three major wealth bubbles since 1945. The first two peaked in 1999 and 2006, fol-
lowed by crash and recession. By 2018, peaks were higher than ever, implying new risks that either this third bubble will pop,
or returns on investments will fall, or some combination. This article provides data to support the wealth-bubble assertions,
suggests that all three bubbles share characteristics and causes unique to a modern period since about 1990 and extending
across asset markets, and faults arguments about market timing based on starting points with lower wealth valuations.

Keywords  Wealth · Bubble · Recession · Investment

The United States has now experienced three major wealth
bubbles since 1945. The first, associated with the technol-
ogy stock bubble, peaked in the first quarter of 2000. The
second, associated with the Great Recession, peaked in the
fourth quarter of 2006.1 A third bubble (at the time of this
writing) may have peaked near the end of third quarter of
2018. The economy currently faces a high level of risk that
this third bubble will pop, as have the previous two, result
in a lower overall return for investments ranging from equi-
ties to other business assets, or some combination. The drop
in stock valuations at the end of 2018, after a significant
early-year rise, is only a shot across the bow. Policymak-
ers and investors should prepare for inevitable adjustments,
despite uncertainty over extent, timing, and most affected
asset classes.
This article provides data to support the wealth-bubble
assertions and suggests that all three likely share a common
cause or causes that transcend any one asset market, such
as equities.
The article also cross-examines three conventional the-
ses that look, in isolated fashion, at possible causes of the
wealth bubbles. First, those defining recent bubbles with
respect to one market, such as tech stocks or housing,2 rather
than those forces more broadly affecting valuations across
markets. Second, those that consider possible catalysts for
various declines in valuation, such as relating end-of-year
2018 declines in stock values to President Trump’s latest for-
eign or trade policy, while ignoring the underlying chemical
brew that has been stirring during the much longer period
in which these three wealth bubbles have occurred. Third,
those that depend upon a statistical sample of historical but
unrelated data points to make unproven assertions about
investors’ inability to time stock market investments.
1 The new peak
At the end of the 3rd quarter of 2018, based on the Financial
Accounts of the United States as estimated by the Board of
Governors of the Federal Reserve System, the ratio of net
worth (here both “net worth” and “wealth” refer to assets less
liabilities) of US households to GDP hit an all-time high 5.3

Electronic supplementary material  The online version of this
article (https​://doi.org/10.1057/s1136​9-019-00120​-z) contains
supplementary material, which is available to authorized users.
* Eugene Steuerle
esteuerle@urban.org
1
The Urban Institute, Washington, DC, USA
1
 See note on then-Federal Reserve Chairman Bernanke’s “dou-
ble bubble bind.” Government We Deserve blog, https​://www.urban​
.org/sites​/defau​lt/files​/publi​catio​n/29466​/90131​2-Berna​nke-s-Doubl​
e-Bubbl​e-Bind.PDF.
2
 For example, see Ben S. Bernanke, “Financial panic and credit
disruptions in the 2007–2009 crisis,” Brookings Institution blog,
September 13, 2018, https​://www.brook​ings.edu/blog/ben-berna​
nke/2018/09/13/finan​cial-panic​-and-credi​t-disru​ption​s-in-the-2007-
09-crisi​s/.

Vol.:(0123456789)
 E. Steuerle

Net worth/GDP Real estate/GDP Equities/GDP

2000 Q1 2007Q1 2018Q3
441.4% 483.7% 523.1%
6

0
1946
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Year

Fig. 1  Household Net Worth as a Percentage of GDP, 1946–2018. estate excludes business assets. As a percent of GDP, the fourth quar-
Households include nonprofit organizations. Household real estate ter of 2018 ended at 499.4% for net worth, 139.7% for real estate, and
excludes business assets. Source Federal Reserve Z101 Tables 128% for equities
Notes Households include nonprofit organizations. Household real

based on measures going back to the end of World War II
(Fig. 1).3, 4 As thorough as these data are, their limitations still
restrict interpretation of the causes of these bubbles. In the
ideal, one would have available data on worldwide measures
of wealth and income, as bubbles in the US and abroad can be
negatively correlated, as when a burst abroad leads to a further
flight to safety in US assets, or positively correlated to com-
mon worldwide factors, such as aggregate worldwide saving
(demand) relative to new investment opportunities (supply).
Also, since my focus is on all asset markets, not just the stock
market, I would like to have had a reliable and time-consistent
measure of total returns to capital, including from household
real estate and the capital portion, if it could be measured,
of returns to partnerships, Subchapter S corporations, farms,
and self-employment. With such a parsing, it might have been
possible to separate further how much bubbling was due to
changes in the earnings share of all capital for the economy,
new investment, and other factors, such as movement of capi-
tal from farms to corporations to pass-through businesses.
Just before the Tech Bubble Recession and the Great
Recession, all-time highs were reached, at 4.5 at the end of
the first quarter of 2000, and 4.9 at the end of the first quar-
ter of 2007. Based on end-of-quarter data, the drop, peak to
trough, was about 10% in the first case (by the third quarter
of 2002) and 17% in the second (by the first quarter of 2009).
In both cases, the drop was to almost the same level, at about
4 times GDP. Yet, even this ratio represented a new “high
low” since, by comparison, in no single quarter before 1998
had the household net worth-to-GDP ratio ever reached 4.0
or higher.
In effect, to the extent that monetary and fiscal policy lim-
ited the impact of these recessions by curtailing the fall-off
in wealth values and the further downward economic spiral
likely to follow, they still left household wealth-to-income
ratio on a higher-than-normal plateau.
2 The drop implied if historical levels are
restored

3 How much of a drop would occur if the ratio at the third

  Since I am using a broad measure of household wealth and looking
across markets, I also use a broad measure of income, GDP, and not a
measure of earnings, as on stock, for which a more traditional price–
earnings ratio is calculated.
4
 End-of-quarter comparisons are available since 1951 and end of
year since 1946. The quarterly data since 1951 are used for most
purposes here; the graph, going back to 1946, uses annual data until
quarterly data are available. Equity ownership counts direct holdings
and indirect ownership through investment vehicles such as retire-
ment accounts; the household real estate measure is mainly for house-
hold real estate and does not take account of commercial real estate,
which is subsumed in residual net worth within other business assets
(not shown in graph).
quarter of 2018 were to fall to average historical levels? To
answer, I split available quarterly estimates from post-World
War II into a pre-modern period, 1951 to 1990, before most
of the new wealth bubbling began, and a modern period,
1991 to third quarter, 2018. Comparing the average for the
pre-modern period, the drop would be 32% (to a ratio of
3.6); for the entire period, 1951 to 2018, 27% (to 3.9); and,
for the modern period, 18% (to 4.3). Of course, dropping
only to an historical average implies resting briefly on a
plateau where future years would be above the historical
The third post‑world war II wealth bubble
140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0% 11.9%
4.0%
0.0%
-4.5%
-20.0%
-20.8% -26.0%
-40.0% -32.7%
-60.0%
Recession
Fig. 2  Pre-recession Growth in Household Net Worth Relative to
GDP 5-year increase in household net worth/GDP*. Source Financial
Accounts of United States (Z1) and calculations by author and Han-
nah Hassani.
average. Or, more simply, drops must occasionally be to
below-average levels for averages to be maintained.
3 Relationship of modern wealth bubbles
to recent recessions
The last two recessions stand out in the extent of prior 5-year
wealth bubbling: a 32.7 percentage-point rise in net worth
to GDP in the period before the recession beginning in 2001
and a 59.7 percentage-point rise before the recession begin-
ning in 2007 (Fig. 2). The build-up prior to the 1990–1991
recession was 23.4 percentage points, while five of the prior
seven recessions saw pre-recession declines in net worth rel-
ative to GDP, and the other two involved increases of only
4.0 and 11.9 percentage points.
By comparison, the 5-year period up to the 3rd quarter
of 2018 entailed a 61.8 percentage-point increase, part of
a 126.7 percentage-point increase since a Great Recession
trough in the first quarter of 2009.
Looking beyond the few years prior to recessions, Fig. 1
shows more generally that household wealth-to-GDP had
much greater constancy throughout the earlier post-World
War II periods. Between 1945 and the second quarter, 1997,
its maximum never exceeded 3.96 (fourth quarter, 1949) nor
dropped below 3.26 (fourth quarter, 1974).
Having discussed the ratio of total household wealth to
GDP, I next parcel out valuations for equities and house-
hold real estate and compare the growth in valuations for
126.7%
61.8%
59.7%
32.7%
23.4%
-0.6%
Notes *Five-year increase refers to a 20 quarter change up to the first
quarter of a recession or from third quarter, 2013 to third quarter,
2018.**Great Recession trough refers to first quarter, 2009
those two asset classes for the 5 years before all postwar
recessions.
In the ten recessions examined here, household real estate
(relative to GDP) went up over the 5 years prior to the reces-
sion and declined only once, prior to the 1969–1970 reces-
sion, and then quite modestly. Of course, this market is much
less liquid than the stock market, so marginal valuations do
not always immediately reflect declines in construction or
sales. In the postwar period until 1990, real estate as a share
of GDP increased 57 percentage points, while equities fell
by 24 percentage points. Since 1990, despite the tumult that
hit in the Great Recession, real estate is still up by an addi-
tional 14 percentage points, while equities are up by 115
percentage points.
4 Why we should be concerned, immediate
crash or not
Underlying the concerns about the new wealth bubble is a
mathematical tautology: When the ratio of asset value to
income, which hereafter I will refer to simply as a wealth-
income or W–Y ratio, displays an historically high level,
then the income-wealth or Y–W ratio displays an historically
low level. W may fall or crash to some more normal level
relative to Y or income may remain low relative to underly-
ing wealth. Of course, uncertainty about how those adjust-
ments occur warns against making exact predictions—the
old maxim about predicting amount or date, but never both.
 E. Steuerle
Put more simply, markets likely will adjust to these
extraordinary wealth valuations in one of two ways, if not a
combination of both: a drop in wealth valuation or a lower
income-to-wealth ratio. In the latter case, unless the earnings
garnered by all wealth—something hard to measure, much
less measure consistently over time, in pass-through busi-
nesses like partnerships—increase their share of national
income, and labor decreases its share further, a lower Y–W
ratio implies also a lower return to wealthholders. CBO
(2019) projects an increase in wages and salaries as a share
of GDP over the decade from 2019 to 2029.5
Any drop in wealth valuations could occur quickly or
more slowly over time. The data surrounding the last two
crashes and the last two recessions suggest that the prob-
ability of a sudden drop is high, though one suspects that
monetary authorities are trying hard to avoid that happening.
Any such decline, however, need not begin in the same
markets or in the same way as in 1999 or 2006. Thus, past
fiscal and monetary reforms that reduced reductions in risk
in one market, such as home mortgages, may have shifted
some risks to other markets; for example, highly leveraged
commercial real estate, nonbank finance, or farmland.
By limiting downturns in wealth valuations to new and
higher plateaus—the new high low discussed above—mon-
etary and fiscal authorities may have made investors more
secure and added to risks in new ways. Such possibilities fit
neatly into Merton and Bodie’s thesis that “well-intentioned
government policies aimed at reducing the systemic risks
of a crisis in the global financial system may have the unin-
tended and perverse consequence of actually increasing the
risk of such a crisis” (1995, p. 267). Or Hyman Minsky’s
analysis of why “stability is destabilizing” (Minksy 1992).
Risk rises when expectations about future returns become
based on past, unsustainable returns on assets. There is a
very high probability that we are at the end of a long, multi-
decade increase in valuations relative to income, in large
part, paraphrasing Herbert Stein, what can’t go on forever
won’t. And, if so, can and should monetary and fiscal author-
ities continue to limit any new drop in wealth valuations
5
  In this article, I do not focus further on a third set of outcomes that
are unlikely but at least mathematically possible. Some of the growth
in valuations relative to GDP could reflect an expectation of an even
further concentration of GDP in the form of profits to owners of
capital and a corresponding reduction for labor, as noted above, or a
belief that GDP (Y) growth will increase so significantly that a drop
in W–Y ratios would be easy to accommodate. It is hard to find empir-
ical or theoretical support for such explanations, though they are not
impossible. For instance, neither explains why interest rates would be
so low, why the Congressional Budget Office (2019) would project
both an increase in wages and salaries as a share of GDP and contin-
ued low economic growth, or why real estate values have grown as
they have. See discussion below for a more plausible explanation for
all three wealth bubbles.
(relative to GDP) to troughs or lows higher than any valua-
tion in the pre-1990 period, or, even more dramatically, to
ever-higher troughs? And if so, when will this end?
Consider a second alternative—a lower income-to-wealth
ratio as the W–Y ratio (W includes all wealth, not just stock:
Y includes all income, not just returns to capital) stays at cur-
rently high levels because of some more permanent change
in the economy and international flows of saving. As a sim-
ple analogy with the stock market alone, and assuming that
earnings are measured correctly, a stock price–to-earnings
(P–E) ratio of 25 means a real return of 4%; a P–E ratio of
16 means 6%.
Now assume that returns to all capital stay constant rela-
tive to returns to labor, rather than fall to some more tra-
ditional level, as projected by CBO. Under this scenario,
returns to capital, just like the returns to all factors, drop
considerably relative to the recent past owing to two factors:
a lower ratio and the elimination of gains from ever-higher
valuations. Again, by analogy to the stock market, when a
P–E ratio starts at 17 and rises toward 25, the investor starts
out by getting an annual real return of 6% plus a return from
the rise upward from 17. Starting and staying at 25, the
return is 4%
Note a common problem in many conventional stock mar-
ket analyses and related statements about not being able to
time the market: the only way that a geometric mean rate
of return as high as 9 or 10% nominal, or 6 or 7% real,6 is
earned by investors who remain active when the P–E ratio
is high would be if valuations drop at times, hence allowing
those who stay in the market (and do not consume out of
their wealth or its return) to go through a period where the
returns on their investment are buying assets on the cheap
(e.g., through reinvestment of dividends or stock buybacks).
If there were no drop in value, the geometric mean rate of
return over time would be smaller and closer to the E–P
ratio, assuming that earnings are properly measured.
Consider some of the many possible consequences of a
more permanent, lower-return environment. Leveraged com-
mercial and homeowner investments will become riskier due
to a lower return plus a lower real appreciation rate in values
of structures. State and multi-employer defined benefit pen-
sion plans will be even more underfunded than estimated
under already generous actuarial assumptions. Retirees will
be even less protected against risks of very old age, as one
member of a couple, each member age 62, can already be
6
 The geometric return is often based on Center for Research in
Security Prices or CRSP estimates from 1926 to today, with 1926
often used as “proof” that one can start in a highly valued market and
still get a high average return. For example, see CRSP, “Investment
Illustrated Charts,” http://www.crsp.com/resou​rces/inves​tment​s-illus​
trate​d-chart​s.
The third post‑world war II wealth bubble
expected to live almost three decades to about 90.7 Returns
to endowments will fall. Risk assessments based on histori-
cal returns will prove inadequate. Experts in many other
areas can add to this very incomplete list.
Of course, monetary and fiscal authorities have long
recognized that historically high peacetime deficits, along
with recent low interest rates, require operating in a new
environment. From this wealth perspective, they may find
themselves with even less room to maneuver if they fear
that drops in wealth valuations will lead to a downturn or
low rates of growth.
5 Water finding its own level
By way of metaphor, think of heavy rains as a new environ-
mental condition analogous to the unusual amounts of money
flowing (from around the world and Federal Reserve policy)
and filling an underground pool (wealth valuations) to his-
torically high levels. The water seeks its level any way it can
and seeps into a house through various cracks and joints. The
owner (macro policy) responds to one flood by sealing one
set of cracks and joints (tech stocks) and to a second flood
by sealing another set of exposed cracks and joints (owner-
occupied housing). In both cases, however, the water level
peaks well above any other high and, after the flood stops,
recedes only to a water table higher than any previous valley.
Now the rains come a third time, and the water level
reaches a higher high than ever before. How sanguine should
we be about whether past fixes can prevent further seepage
in either old or new cracks?
My take, and the point of this article, is that wise policy-
makers and investors at least should diversify their national
or personal portfolios against these new sets of risks. Fur-
ther, classic statements that one cannot time the market are
misleading because they “predict out of sample.” That is,
using post-World War II American data, we’ve only got two
sets of observations of high W–Y ratios that might be consid-
ered similar to the current situation. And both were followed
by a crash in wealth valuations. Further, we have no set of
continuing observations of the Y–W ratio staying this low
for many years running. In a way, our position is similar to
that of William Sealy Gossett, who developed the Student’s
t-distribution to deal with such issues as the chemical prop-
erties of barley when sample sizes might be as few as three.
7
  See “Alternative Measures of Age,” Urban Institute, accessed Janu-
ary 28, 2019, https​://www.urban​.org/polic​y-cente​rs/cross​-cente​r-initi​
ative​ s /progr​ a m-retir​ e ment ​ - polic ​ y /proje ​ c ts/moder ​ n izin ​ g -our-retir​
ement​-progr​ams/alter​nativ​e-measu​res-age.
6 What is leading to these new wealth
bubbles?
Many explanations of the last two recessions turned to cat-
alytic events, such as the overvaluation of tech stocks or
excess lending in the subprime market. Similarly, a dip in
the stock market at the end of 2018 was sometimes laid at the
feet of Donald Trump’s foreign and trade policies. Looking
simply to catalytic events fails to provide much explana-
tion for the broader market shifts shown in the data. Such a
narrow focus may reflect investors and traders who project
future gains only from the recent past, think they can time
an “escalator-up, elevator-down” stock market, or do not
know what to do with their lives or money if they step off
the escalator on its way up.
Different theories abound as to why wealth valuations
have risen so much. However, the rapid growth in incomes
of now-middle-income countries such as China, India, and
Turkey must certainly play a role. Their citizens maintain
high saving rates, and their wealth holders and monetary
authorities seek to put their money or reserves in relatively
safe places operating under a well-grounded rule of law. Both
Ben Bernanke and Alan Greenspan in discussing the Great
Recession have referred at times to the “lack of historical
precedence” for today’s globalized markets (Greenspan 2008,
p. 368) and a corresponding limited ability to control money
supply in increasingly internationalized financial markets.
Of course, low interest rates maintained by the Federal
Reserve, along with its many purchases of wealth (mort-
gage-backed securities) traditionally held privately, certainly
contributed to increases in wealth valuations across different
markets.
One can make a case that fiscal and monetary policies
have evolved in the modern period. The rate of rise in gov-
ernment debt-to-GDP and the Fed’s foray into purchasing
mortgage-backed securities have been unprecedented in the
postwar period. Meanwhile, these expansionary policies
seem to have inflated the prices of existing assets more than
the prices of consumer goods, in part because of greater
international competition constraining consumer price
increases.
More than ever, investors also have the financial and
legal instruments to engage in arbitrage: borrowing, sell-
ing short, taking significant tax deductions on one side of
the balance sheet, while on the other side investing in other
assets with higher returns, greater risk, and, often, limited
taxable returns in the form of unrealized capital gains. Such
opportunities can raise asset prices, and they abound when
the after-tax, after-inflation interest rate is low or negative,
and even investment in weak or unproductive capital can
prove personally profitable through the arbitrage gains (Steu-
erle 1985).
 E. Steuerle
Recent discussions of a new possible inversion of the
yield curve (to where short-term interest rates become
higher than long-term rates) may well be tied into similar
factors.8 The Fed controls the short-term rates, but world
markets exert greater control over long-term rates.
In some ways, the rate of US recovery relative to other
developed nations also enhanced the attractiveness of US
assets. Today, low interest rates in the United States are due
in part to the place of the dollar in the world of interna-
tional finance and trade as the “best looking horse in the
glue factory.”
Because those with higher incomes tend to have higher
saving rates, the increasing concentration of income may
also have led to higher average rates of saving and poten-
tial growth in wealth valuation. Of course, this includes not
just US investors, but developing nations and even oligarchs
abroad. But at least in the United States, measured saving
rates still tend to be low (though higher than in the pre-Great
Recession period). At the same time, we poorly measure
investment (and saving) that is not in the form of physical
capital investment. So, I will not speculate further on this
possibility.
Stock valuations, of course, partly reflect corporate earn-
ings, which achieved new peaks relative to GDP prior to the
Great Recession and then again around 2012.9 But that ratio
was not high in the household wealth bubbling occurring
prior to the 2001 recession, and they do not explain what
seems to be going in the modern period across asset markets.
In sum, these higher net worth-to-GDP ratios likely
result from a combination of factors: money flowing in from
abroad, expansionary fiscal and monetary policy, the low
interest rate those activities generate and the arbitrage pos-
sibilities that accompany that low interest rate, and growth
in business profits.
But can it continue? Turning to monetary policy itself,
stopping a rapid slide in wealth valuations was one of its
goals, particularly in the Great Recession. After a rapid rise
in wealth valuations, followed by a crash, monetary policy
intervention—and the expectation of future interventions—
likely led to the high plateaus maintained even after the
recessions. In a brief give-and-take with Henry Kaufman at
the National Economist Club’s 50th Anniversary dinner, I
queried whether this roller coaster ride to ever-higher peaks
and troughs (Fig. 1) could continue. He felt that it was hard
for the authorities to get off this path. But it is quite unclear
8
  Greg Ip, “Should You Fear the Yield Curve?”, Wall Street Journal,
January 9, 2019, https​://www.wsj.com/artic​les/shoul​d-you-fear-the-
yield​-curve​-11547​04420​1.
9
  https​://fred.stlou​isfed​.org/graph​/?g=1Pik.
that instruments are available to build ever skyward this
roller coaster structure.
7 Conclusion
Data on wealth valuations strongly indicate a future in which
returns to owners of wealth, including both payouts and
appreciation, will look very different relative to the past few
decades. Though a likely outcome is a hit on wealth valu-
ations, another alternative is a more permanent decline in
returns to wealth in terms of both earnings and the end of
appreciation at rates above the rate of growth of earnings.
Either way, or in combination, the economy faces a new
set of risks for which two previous postwar wealth bubbles,
which saw wealth appreciation across asset classes, provide
substantial warning.
I doubt seriously that our public and private institutions
have prepared adequately for these probable future events.
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Publisher’s Note Springer Nature remains neutral with regard to
jurisdictional claims in published maps and institutional affiliations.
Eugene Steuerle  is Richard Fisher Chair at the Urban Institute, co-
founder of the Urban-Brookings Tax Policy Center, a former Deputy
Assistant Secretary of the Treasury for Tax Analysis, and author of
Dead Men Ruling and the blog, the Government We Deserve.