Posted on 09/21/2008 6:06:20 PM PDT by JasonC
The press is full of breathless reports of the calamities of American indebtedness. The financial press speaks of "develeraging" and expects it practically end the American way of life. Everyone and his brother reiterates endlessly that we cannot possible afford anything, since we are so deep in debt we clearly own nothing and might as well give up and declare national bankruptcy. But these statements are always curiously devoid of actual figures as to what Americans own and owe.
Not because they are unknowable or unknown. The statistics are collected religiously by the Federal Reserve and published each year as the "flow of funds" data set. The Fed knows because it tracks essentially all financial payments in the entire economy. Even practically all cash ones, at least legal and commercial transactions, because one side or the other goes through the banking system at some point. The Fed regularly prepares the standard financial statements, including a balance sheet, for each major sector of the economy - households, corporate business, small business, and all levels of government. They have been doing this not since the day befoer yesterday but since 1945 - like a swiss watch. We know the whole history. So there is no excuse for making these things up.
I don't expect everyone here to make an academic study of 63 years of detailed statistics, which run to over 500 pages of numerical tables, one after another. But I do expect economically literate conservatives not to endlessly repeat palpable falsehoods, like the notion that our aggregate net worth can be negative. That should be obviously absurd on its face, to everyone. Everything is owned, not all of it is carried by debt, and all the debts are in turn owned by somebody. Net foreign debt is dwarfed by domestic ownership of all types and cannot even come close to changing that basic fact. Sometimes we are treated to breathless statements about how fast debt has grown or is growing, often with the idea that this is obviously unsustainable because our net worth must be plumbing new negative depths, and often someone will ask, when are we ever going to pay all of it off?
The solution to misunderstandings like these is simply and soberly to present the balance sheets of the major sectors of the US economy, condensed to snapshots every 10 years, and in only 3 lines for each - assets, liabilties, and net worth. Since the economy is growing throughout and these are all actual historical amounts in dollars, I also give the size of GDP in each reference years. I start at 1945, the end of WW II and for all intents and purposes, the origin of present economic arrangements. The last data point I give is 2005, the horrible height of this irrational bubble, except for the inconvenient fact that net worth has gone right on increasing in the 2 years since. But leave aside the last bit and prophecies about what doom is written in the skies for the future. Just the historical facts.
All series are 1945, 1955, 1965, 1975, 1985, 1995, and 2005 in that order, and all figures are in billions of dollars. Remember though that GDP is an *income* item - an amount produced and earned *each year* - while all the others are stock items - an absolute amount, as would appear on a corporate balance sheet. At the end of each series I also give the average annual rate of growth from 1945 to 2005.
GDP - 223, 415, 719, 1638, 4220, 7378, 12422 - 6.9%
Now government. Note that this is all levels, state and local as well as national combined, and that the assets are financial assets of all kinds, but do not include e.g. federal lands or mineral rights etc. I abbreviate assets with A, liabilities with L, and net worth with N. Negative net worth, which note well occurs only with the government, is denoted with parentheses, as in standard bookkeeping.
Government A - 52, 56, 96, 234, 774, 1254, 2369 - 6.6%
Government L - 275, 291, 391, 741, 2346, 5265, 7764 - 5.7%
Government N - (233), (235), (295), (507), (1572), (4011), (5395) - 5.5%
Notice immediately that the government's debts and negative net worth have grown slower than GDP. This reflects the very high level of government debt compared to GDP at the start of the whole series in 1945. Government debt exceeded GDP at the end of WW II - it was the cost of the war. Over the next 20 years government debt barely grew, and debt to GDP fell. Since 1965 the negative net worth of government has increased at a 7.5% annual rate, modestly faster than GDP, but as we shall see, about in line with many other series we are about to see. Government net worth, negative, to GDP was 41% in 1965 and it is 43% in 2005. No great ballooning catastrophe - just growth in line with the economy.
Now the corporate sector, which is supposedly dying of unprecedented overleverage. Here are its series -
Corporate A - 266, 596, 975, 2765, 7410, 11461, 23721 - 7.8%
Corporate L - 70, 171, 335, 1087, 3308, 6010, 11145 - 8.8%
Corporate N - 195, 425, 640, 1678, 4102, 5451, 12576 - 7.2%
Has debt grown as a portion of assets? Yes, modestly, to an absolute level just below 50%, or 2 to 1 leverage. Starting from a level around 25% right at the end of WW II. This increase basically happened by 1975, however (45% of assets carried by debt as of that year), in response to higher rates of inflation that made debt a preferable form of financing, and since then hasn't moved much. Moreover, corporate net worth has increased at essentially the same rate as the economy as a whole - insignificantly faster.
Now small business and proprieters, what the Fed calls non-corporate business. Here are its series -
Small business A - 123, 244, 365, 988, 2888, 4108, 9212 - 7.5%
Small business L - 7, 32, 72, 265, 1007, 1397, 4053 - 11.2%
Small business N - 116, 212, 294, 724, 1881, 2712, 5160 - 6.5%
Small business has also grown its net worth in line with the overall economy. Slightly slower rather than the slightly faster we see for corporate business. The high rate of debt growth mostly reflects the extremely low starting point - basically small business was not able to borrow money in any significant amount in the early decades of the period under consideration. By 1985 this had changed, with the bulk of the change again occuring in the inflationary 1970s. After that, small business debt growth is 7.2% per year on average, roughly in line with the overall economy and with its own historical rate of asset and net worth increases.
The last ownership sector to examine is the household sector, which is the bulk of the nation's overall balance sheet. Because all the shares and all the debts of the preceding business sectors are owned by individuals, directly or indirectly. Do not double count, therefore - these household assets include their ownership of all of the above, both the equity and the corporate debt. Here are the total US household series -
Household A - 742, 1564, 2868, 5903, 16613, 32854, 64146 - 7.7%
Household L - 30, 144, 352, 761, 2368, 5054, 12200 - 10.5%
Household N - 711, 1425, 2516, 5742, 14245, 27800, 51946 - 7.4%
That's right Virginia, US household sector net worth was $52 trillion in 2005. And no, it isn't down since then - it was up another $5 trillion and change as of the end of 2007. And that 2005 figure was up a measly $24 trillion in the 10 years immediately prior - despite an intervening recession and an epic stock market crash (which alone wiped out over $7 trillion). Again the debt growth figure is higher than the others, and again the reason is a very low starting point - households had insignificant debts in 1945, having just come through a period of rationing and force war bond drives. The nation's debts were all concentrated in the federal government. Again inflation and the 1970s form a natural breakpoint in the series, with the growth rate of debt 8.5% since 1985. Also notice that household net worth has increased slightly faster than overall economic growth, faster the corporate net worth, faster than small business net worth, and faster than the growth of government debt. And finally, notice that the increase in leverage decry by all far and wide, is a move up to --- 19% of the value of owned assets.
Last, we can create an artificial series of all debts, adding the liability lines of all these sectors. I say artificial because in fact the debts of the business sectors are owned by the household sector. But one may wish to compare a double counted corporate debt plus government and household, to the assets of the households alone. Here is that artificial total liabilities series -
All L - 382, 638, 1150, 2854, 9029, 17726, 35162 - 7.8%
It grows marginally faster than the overall economy and in line with the asset line of the household sector. In fact, the total debt was 51.4% of household assets in 1945, and it is 54.8% of household assets in 2005.
Growth of debt is normal. The whole economy grows continually. Debt does not mean "negative net worth". Debt is used to *carry assets* that routinely earn as much as the cost to carry that debt, and usually a modest amount more. The level of leverage used by US small business and non-financial corporations has run about 2 to 1 since the inflation of the 1970s. The level of leverage used by US households is dramatically less, on the order of 5 to 4.
In no decade in the entire series is the increment to household debt (not percentage, number of dollars) larger than the increment to household assets. It never even approaches it. In fact, it never even approaches the change in household net worth, in any decade, as an absolute dollar change. Every decade, like a swiss watch, US households get dramatically richer, and they borrow a modest portion of that new wealth to carry additional assets. In the most recent one, for example, households added $31 trillion in assets of which $7 trillion was financed by debt, while $24 trillion was owned. Even if you want to double count the debts of businesses ignoring that the bonds are owned by households too, total debts increased only 56% of the amount assets did.
We are not a poor country. We are not going to be a poor country. The American economy is the greatest wealth creating engine in the history of the world. We do not have a negative net worth. Debt is not a sign of negative net worth. It is not an immoral road to rack and ruin and the poorhouse. It is a normal part of financing our robust ongoing economic growth.
Thank you for this post!!
Check this out: http://www.freerepublic.com/focus/f-news/2087382/posts
Regards,
If you are talking about actual record keeping; they did that between 1945-1980; then stopped keeping actual records.
I have a question about the government liabilities. There are a variety of taxes, such as the FUTA tax (unemployment) and the airline safety tax. The gov collects these, and uses about half for the intended use, and uses the rest to make the deficit look better. Do your liability figures take account of the bogus accounting the gov uses?
Excellent
The fact that your non-idiotic post is actually an accurate post is even rarer lately.
The fact that your accurate post is also a well-thought-out and insightful post is an even greater achievement. I knew you were good, but this is great.
The past few days have taught us a few things:
(1) Many, many FReepers who think they know a lot about economics actually know less than nothing about economics.
(2) Many, many FReepers fundamentally reject economic freedom as a principle or a goal.
(3) Many, many FReepers cannot do basic math.
(4) Many, many FReepers think that parrotting quotes from economic dunces like Pat Buchanan or Ron Paul - or even Bernie Sanders! - is an acceptable alternative to thinking for themselves.
Hopefully all the handwringers, crybabies, chicken littles, conspiracy theorists and bedwetters will take the time to read your work.
But I won't hold my breath.
PING
thanks again.
bump!
And duh, although I have almost no debt, I also have almost no clue what to think about what is happening.
Thankfully there is much to read here and learn from.
Isn’t a great majority of our National debt related to the creation of our money supply? I think I see where you are going with this article, but you confuse me between the personal debt held by households and the National debt.
The National debt, for better or for worse, for the most part must never be paid off the way we presently run our economy. Should we succeed in that endeavor, our money supply would disappear.
Our personal debt includes interest and inflation figures that act as hidden taxes to reduce the buying / savings power of typical citizens.
Our economy may be robust in many ways, yet it is founded on a wink-and-a-nod agreement that our money has real value and is protected by specie. It won’t take much now to cause a devastating financial blow.
PS - The US Government is quietly nationalizing large corporations at a shockingly rapid pace. We’d all go nuts on Hugo Chavez for his economic policies, but when our government makes massive purchases of corporations, we just look at it as ‘necessary’ for the security of the economy.
Buy as much gold as you can now...
As opposed to, say, automotive healthcare?
;-)
Hank
We are going to lead the world out of this hiccup to ever greater and more prosperous days ahead. Anyone who discounts the flexibility and resourcefulness and hard work of the American citizenry is a fool.
-ccm
Our currency does indeed have real value. It is legal tender for ALL debts including those owed to the government. You can pay your taxes with it, and if you do, the government won't haul you off to jail or turn you out of your house or steal the crops in your fields. That is no small thing in the history of money.
Until the government starts demanding payment of taxes in specie, or in kind, then I'm not going to worry about fiat currency per se-- only that it be properly managed by the Fed to reflect productivity increases and other influences on its buying power.
PS - The US Government is quietly nationalizing large corporations at a shockingly rapid pace.
Like the RTC, right? Except that it folded up shop and returned a profit to the Treasury years ago.
RTC-2 will work the same way. The government is going to unwind these crazy derivatives and CDO's and credit default swaps. Within the tangle, there will be many performing assets. 95% of mortgage loans are being paid back, and have value in the resale market.
As soon as the mess is cleaned up, they will be out of the banking business and out of the real estate business and out of the insurance business. You can either profit by their actions, which I assure you many people will, or you can buy gold and hunker down in your compound and wait for the end of the world that will never come.
Let me give you an example of the kind of fortunes that will be made in this affair. Back in 1991, the 100,000 sq. ft. office building in which I work was bought at an RTC auction for $700,000. The owner now collects that much in rent every five months. We have offered him twenty million dollars for the building and been turned down.
There will be plenty of time for judicious re-regulation of the securities and mortgage business. There will be plenty of thought devoted to solving the moral-hazard problem of privatizing profits while socializing risks. There will be plenty of lawsuits against the erstwhile barons of Wall Street to strip them of their assets for dereliction of their fiduciary duties. All of these are things that informed citizens should keep up with and stay in touch with their representatives about. But all of that can wait for the next few months while the cavalry rides to the sound of the guns.
There are tough times ahead but those who keep their cool and don't get over-extended will profit mightily. The nation as a whole will be fine. There is nobody and nothing that can threaten the continued rise of the United State sof America. This is going to be another American Century and I am going all-in on its success.
-ccm
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