Goldman sees $1.2 trillion global credit loss

Goldman sees $1.2 trillion global credit loss

March 25, 2008 0 Comments

(March 25, 2008) – Okay, here’s a big number for you. A new number from Goldman Sachs forecasts that global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40 percent of the losses. Click here to read the report, Goldman sees $1.2 trillion global credit loss.

That’s real money, even in Washington.

U.S. institutions, including banks, brokers-dealers, hedge funds and government-sponsored enterprises, have reported $120 billion in write-offs since the credit crunch began last summer and will account for $460 billion in net credit losses before it is done. Home mortgages will make up half, commercial mortgages 15-20%, and the rest will come from credit cards, car loans, business loans lending and corporate bonds.

Before we light our hair on fire, I should point out that we have tons and tons of assets here. The most recent Flow of Funds report from the Federal Reserve Board shows the composition of U.S. assets. At the end of 2007, Americans owned $141.9 trillion worth of financial assets (deposits, stocks, bonds, pension assets, etc.).

Americans also are responsible for $107 trillion in total liabilities (every loan has a borrower and a lender), including $14.6 trillion worth of mortgage securities. That makes the net financial asset figure $34.6 trillion.

But Americans also own real, or tangible, assets like homes, farms, cars, collectibles and vintage refrigerators, for which there are no offsetting liabilities. Households owned $26.8 trillion of them at the end of last year, including $22.5 trillion in real estate, and $4.0 trillion worth of used cars, boats, furniture and other durable goods. In addition, corporations owned another $14.5 trillion worth of tangible assets–real estate, plant and equipment, software, inventories, etc. Mom and pop companies owned another $7.9 trillion of real assets. (So far, that’s $49.2 trillion of tangible assets.)

But that leaves out all the other sectors–farms, financial companies (banks, S&Ls, brokers, insurance companies, money managers, etc.), and all levels of government (local, state, federal and of course the UN and the dreaded Trilateral Commission). All those trucks and cars you see that say government property are tangible assets too and should be counted in the balance sheet. Unfortunately, the Fed does not report these numbers (they did until 1994 but stopped). Since about 1/3 of people work for some level of government and government makes up about 1/3 of GDP it might make sense to guess that governments own roughly one-third of total tangible assets, which would add another $25 trillion to our numbers.

Once these tangible assets are factored in, the household and nonprofit sector alone has a net worth of $57.7 trillion–equal to 5.6 years worth of personal income.

But wait! The government also owns a butt-load (technical expression) of land. Last time I looked (and I am working from memory here (lazy SOB) which is not so good as it used to be), the GAO reported that the Federal government owned about 700 million acres of land, including about half of all the land west of the Mississippi River. I have no idea what that land would be worth if valued at market prices. To count the zeroes, however, let’s make a guess. At $10,000 per acre, the Feds alone own about $7 trillion worth of land. That is larger than total government debt in the hands of the public, i.e., the Federal government actually has a positive net worth.

Sidebar: Before 1994, the Fed reported these assets on the government’s published balance sheet. They don’t do that any more. Today, the GAO does not include land as an asset owned by the government. It is reported in a footnote as land held in trust for the American people. I’m not sure why they decided to do that (I have an idea) but the net result is they report a huge negative net worth for the government and asset sales are quietly taken off the table.

Before the nature-lovers (several of whom live in my house) get mad at me and accuse me of wanting to sell the national forests, I am not saying we should do that. I would just like to see the numbers on the table where we can understand them.

In the meantime, I am going to revise my balance sheet to refer to my house, my car and all my other stuff as assets held in trust for the Internal Revenue Service and, if there is any left over, the Rutledge children. That seems a more accurate description anyway.

So what does all this mean? It means that, although there are very painful things going on in the real estate and securities markets, the $1.2 trillion in global losses the Goldman guys write about is not the end of the world. We have at least $200 trillion in assets just in the United States and there are lots more abroad. Household net worth is $57.7 trillion–total net worth is approaching $100 trillion.

This is a big country and it would take a lot of killing to bring it down. Don’t give up on America or the American economy. And at today’s prices, don’t sell your house or your stock.


John Rutledge


  1. Tim Wiese

    March 26, 2008

    Great article John!

    Only one quibble. At $10,000 an acre I know quite a few farmers who would like to sell!

    Here in that Hawkeye state average farm rental prices are around $200.00 per acre/yr. You might get $250.00 if it is particularly good farm ground. At $10k that would only be a 2.5% ROR and that's before property taxes, inusrance, and interest!

    With that said though, keep up the great economic analysis!

    Shoot, I'd better get ready for a lot of farmers to try and sell me their land. Thanks for the information and thanks for reading.

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