My recent post The Beverley Hillbillies and the Fiscal Cliff sparked considerable debate amongst some of my regular readers. With this in mind I wanted to write a detailed response, specifically to the interesting points raised by Algernon Percy on the current fiscal position of the US.
Algernon Percy said:
Remember that this imaginary household ('back of the envelope' figures) – 1) Lives in, and owns a house worth $563,000 (total value of tangible assets in America) 2) Has total wealth of approximately $750,000 (a capital base which is growing all the time) 3) Is able to print / devalue the currency The household is therefore approximately 15% geared, but interest cover is 40 x (GDP/ interest cost), the household is in work (becoming more busy by the day) and its income and asset base is growing all the time. Also, new joiners are joining the household (immigration). Conclusion – It’s certainly not the way I’d run my household, but as an outside observer, I’m not too concerned that they are going to hit the rocks.
I think Mr Percy is making a fundamental mistake: my original blog post took the state of US government finances and turned them into a household budget of the sort Jed Clampett might have understood. Mr Percy suggests that I am wrong to worry about the US financial position on this basis because of the private sector’s assets. But if we bring in the private sectors assets, we will also have to bring in their debts, and I also have some doubts about the assets.
The debt figure I quoted is just Federal debt. The total debt is far higher. On top of the $11,279bn of Federal debt, we must add:
▪ State and local government debt ($3,008bn)
▪ Private debt ($41,071bn)
Then there’s quasi-debt and off balance sheet debt:
▪ Federal debt owned by the welfare agencies ($4,711bn) ▪ Pensions owed to Federal employees ($5,792bn) ▪ Forward welfare commitments, in excess of assets, owed by Social Security (“OASDI”) and Medicare. I’ve reduced this from the official (75-year) number to a shorter (30-year) period, but still come to $36,472bn. (Others, such as Laurence Kotlikoff, put the quasi-debt number very much higher than this).
So total debt, for the all the Clampetts (now defined as America-private and government) averages $553,579, rising to $1,023,329 if we include quasi-debt:
|State & local debt||$3,007,600,000,000||$30,076||$3,008|
|Total government debt||$14,286,500,000,000||$142,865||$14,287|
|Medicare and OASDI||$36,472,000,000,000||$364,720||$36,472|
|Government debt & quasi-debt||$61,261,500,000,000||$612,615||$61,262|
Turning to the assets, according to the Fed, household assets, at the end of 3Q 2012, were $78,204bn, pretty close to Mr Percy’s total. But the validity of the asset figures for this purpose (debt service) is highly debateable.
Real estate is worth what it can be sold for. You cannot sell a country’s entire housing stock, so any real estate value for this purpose is is notional. (This where the household analogy breaks down-you might choose to live beyond your means and realise your property assets but a whole nation can’t). They can only sell homes to other Americans - so they are worth what their fellow citizens can afford to pay you, a zero-sum figure. The boomer generation, who will need to monetise these assets, will have to sell them to a younger generation, who are fewer in number, and poorer.
Stocks-Again, you cannot monetise the whole lot, so the capital value is largely notional en masse.
So very little of the assets are actually cash-equivalent and available to service the debts. That needs to be done from the income of $23,480pa. So I think that America is closer to those rocks than Mr Percy thinks.