READY MONEY: IT’S ALL RELATIVE

Yes! Ready Money Is Aladdin’s Lamp. — Lord Byron

By Scott Burns

Photography: Scott Burns by Lisa Means, Money by Quad Photo.

You would think the world was ending.

Day after day, we see, hear, or read stories of financial devastation. Some are told in relentless detail, communicating the loss of a fortune, the forced sale of a house, or a retirement deferred.

The particular and unique always will hold our attention. But we also need a firm grip on what’s happening to the whole. Unfortunately, that’s just an abstraction, a statistic. So it isn’t communicated very well.

But here’s a fact: Collectively, we’re doing a lot better than the stories of the particular would have us believe. My touchstone for this is an obscure set of figures kept by the Federal Reserve Bank. It’s called the Flow of Funds. Its long list of pages dissects the movement of money in our economy. It ends with a snapshot of our collective personal balance sheet.

Every three months, Federal Reserve economists tote up what we’ve got in real estate, durable goods, deposits, investments, and obligations. Then they subtract our obligations from the assets. The result is our collective net worth.

The most recent figures are from the second quarter of 2002. They contain some real surprises:

• From the stock-market peak in 1999, consumer net worth has declined by only 5.4 percent.

• Assets in mutual fund shares — the primary way most families hold financial assets — declined by only 8.7 percent. This happened because a lot of our holdings are in bond funds, not stock funds.

• Our supply of cash is up 20 percent, with money-market fund holdings up 26 percent.

• The value of homes, the most important asset held by most Americans, rose by $2.7 trillion or 26 percent.

• Consumer net worth was one-third higher than it was in 1996, when Alan Greenspan warned of “irrational exuberance.” That’s an annual growth rate of 6.6 percent, burst bubbles notwithstanding. Adjusted for inflation, the growth of consumer net worth in the last six years was faster than it was in the ’50s, ’60s, ’70s, or ’80s.

• If every dime of the $5 trillion held in individual stocks at the end of June disappeared in a puff of smoke, our collective balance sheet would still show a net increase of $5 trillion from 1996, an annual increase of 3.5 percent. There are some dark clouds out there, but no one expects the value of corporate America to hit zero.

As individuals, we’re fragile. There is real hurt. But the collective strength of our economy is staggering.

In addition, how we’re doing is relative, not absolute. It is possible to lose money and be better off than you were before — because others lost more.

Skeptics should visit an auction house — any auction house. The crowds are smaller. If you can show up, you’re ahead of the game.

Except for the handful of individuals who are scheming to own the beach the rest of us merely want to vacation on, most of us create a cocoon of security. We judge our success and position against a selected peer group. Today, you can rank high simply by having lost less. Soon we’ll be back to the regular rules.

Scott Burns (www.scottburns.com) has been a personal finance writer since 1977 and has been syndicated in newspapers across the United States since late 1980. Send your questions and comments about managing your wealth via e-mail to privateclubs@clubcorp.com.