By Vincent J. Truglia
One impact of the latest fiscal fiasco – pardon the alliteration; I couldn’t resist – has been lots of moaning and groaning by foreign officials about the US. First, and foremost among these has been China. Since the Chinese government holds a lot of US treasury securities, one can understand why they might be concerned. However, that’s not the US’s problem. The only reason the Chinese government holds those securities is that doing so benefits China. The Chinese government has accumulated large reserves in order to keep its exchange rate artificially undervalued, thereby giving a boost to exports, helping to relieve pressures from China’s chronically imbalanced domestic economy.
Income vs. Wealth
I have heard many commentators say this latest round of dysfunction is the beginning of the end for the US, especially vis-à-vis China. It is endlessly repeated that China has over $3 trillion in foreign exchange reserves. Yes, we know China has over $3 trillion in reserves, but that in no way determines which country is more powerful or wealthier. We have to remember, there is a big difference between income and wealth. Granted, the Chinese economy has grown phenomenally in the last two decades through a combination of suppressing consumption and accumulating savings at a rate not seen since Stalin’s Gulag, yet, it will take several generations for the Chinese to accumulate the wealth the US has.
Flow of Funds
To measure US wealth, I turned to the Financial Accounts of the US, formerly known as the “Flow of Funds,” a report produced quarterly by the Federal Reserve. The latest issue was published on September 25, 2013, with the latest data being for 2Q13. The method used by the Fed is similar to that used following international standards. I was quite surprised by some of the data.
US Household Wealth
Total assets held by households (this includes non-profit organizations, which represent a fraction of the total), at end-March 2013, totaled $88.4 trillion – yes trillion. Of that $88.4 trillion, financial assets accounted for an extraordinary $61.9 trillion, with non-financial assets totaling $26.5 trillion. US households had a total of only $13.5 trillion in liabilities. The net result: US net household wealth at the end of March was $74.8 trillion (numbers don’t add perfectly because of rounding errors).
Business Financial Net Worth
Non-financial corporate business net financial assets were $1.8 trillion. Financial business net financial assets totaled a whopping $4.5 trillion. Non-corporate business had a negative net worth of -$2 trillion. This is not surprising, since this sector includes small businesses, which are usually not well capitalized in the US.
Financial liabilities of the governmental sector (defined as the federal government, state and local governments) totaled $20.7 trillion, with governmental financial assets equaling $4.3 trillion, resulting in a governmental negative financial net worth of $16.4 trillion.
It is this last figure that gets everyone’s attention. However, total net governmental debt only equals 22% of household net worth. The US government is far from bankrupt. China will take decades to reach such levels of financial wealth.
Non-financial Governmental Assets
We also need to keep in mind that these figures only take into account financial assets and liabilities of US governments at all levels. For instance, the federal government alone owns huge amounts of land and resources. The federal government holds 28% of all US land. If a full balance sheet were created for the federal government, we would find that federal government’s net worth to be highly positive. If we simply valued the land, never mind the value of all the minerals and energy resources underground, those assets would dwarf the federal debt by a huge margin. Using realistic prices for non-monetaized assets, we would find the US federal government to be rather wealthy.
Why Do Foreigners Buy Treasuries?
Foreigners hold a disproportionate amount of US treasury securities. The yield is pathetically low. However, as noted at the very beginning of this blog, foreign governments hold treasury securities because they want to control their exchange rates vis-à-vis the US dollar, not because treasuries are a valuable investment. The size and scope of the exchange rate intervention is indicated by the fact that although foreigners own about 48% of treasury securities, of that total, foreign official holdings of treasuries was $4.0 trillion at end-March, accounting for 72% of all foreign holdings of treasuries. That translated into 34.1% of all treasury debt outstanding. That compares to the Fed’s holdings which only equaled 16.3% of treasury debt, and that after years of massive Fed QE purchases of treasury debt.
In summary, the US is extraordinarily wealthy, not only in terms of financial assets, but also in terms of non-financial assets, most of which have not even been priced. We should never forget the difference between wealth and income. Even $3 trillion in official Chinese reserves is paltry compared to the $74.8 trillion in net worth of ordinary Americans. The US shouldn’t be cowered, especially not by the nouveau riche.
As always, Clear and Candid.