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Who is feeling richer?

By Judy Martel · Bankrate.com
Monday, December 9, 2013
Posted: 6 am ET

Today, Bankrate launches its wealth report with an analysis of the increasing gap in income and wealth among Americans. As the nation continues to slowly climb out of the Great Recession, consumers are cautiously optimistic, casting a wary eye on the Federal Reserve stimulus program, sluggish job growth and an uncertain interest rate environment.

Shoppers aren't feeling the wealth effect that typically leads to higher spending.

Shoppers aren't feeling the wealth effect that typically leads to higher spending.

So far, economic recovery is being led by slowly rising real estate values and a more rapidly rising stock market. Those invested in equities are seeing significant gains in wealth, while others are still trying to catch up and regain lost equity in their homes.

The issue of sluggish growth and income inequality is not lost on Washington -- President Barack Obama called upon Congress last week to raise the minimum wage and said he would make income inequality a major theme of the remainder of his time in office.

But until consumers are comfortable with their income and personal financial situation, they won't be feeling the so-called wealth effect that leads to more spending and a boost to the economy. As proof that consumers are holding back, the National Retail Federation says that although more shoppers turned out for the popular Thursday-through-Sunday Thanksgiving weekend, spending was down.

The Federal Reserve's role in the wealth gap

The Federal Reserve's quantitative easing policies, which began in 2008 and are designed to keep interest rates low and stimulate economic growth, are contributing to the wealth gap in a broad sense, says Brent Fykes, senior investment partner at GenSpring Family Offices.

"The Fed stimulus is creating a wider gap between the haves and have-nots," he says. "It's been good for those holding financial assets like stocks because we've had good market performance over the past two to three years."

But that doesn't mean the wealthy are feeling it, Fykes adds. They're just as wary as everyone else. When the Federal Reserve begins tapering, the market could pull back, erasing some of the gains of recent years. "Because of uncertainty over when the Fed will stop priming the pump, I'm not sure the wealthy think they are wealthier than they were four or five years ago, even though they are," he says.

The lingering sting of the recession

The wealth effect is also hampered by memories of the recession. Pre-recession, a lot of Americans' net worth was paper wealth, says Fykes. Hot real estate values and the stock market created inflated personal wealth, with the effect being that many people felt confident and over-borrowed. Those who saw their balance sheets go into the red during the recession are still climbing out of debt, he adds. Those who didn't lose everything, but lost a significant amount of the value of their investments and home equity, are still in a wait-and-see frame of mind.

"In 2008, people saw how quickly a drawdown can happen in a portfolio," says Fykes. "It altered the psyche of people and today there's a much bigger focus on capital sufficiency goals."

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