The first pillar of our thinking is also the simplest: Stuff Matters. No macroeconomic analysis is complete without accounting for people’s multi-trillion dollar holdings of Stuff. Stuff describes the items on our balance sheets, including tangible assets (land, office buildings, collectibles, used cars, and other claims on future services), financial assets (stocks, bonds, bank accounts, and other claims on future cash flow), and all forms of liabilities (credit card debt, mortgages, and the obligation to service and repay the national debt).
Analyzing the income statement alone, i.e., GDP and its components, is just not good enough. That’s because there is so much stuff out there. This year US GDP will be just over $11 trillion, compared with total assets (not including more than 700 million acres of government-owned land) worth more than $120 trillion at market value.
Stuff matters because the values of the individual items on our balance sheets determine our net worth, and our solvency, collateralize our obligations, and influence our behavior. Those values are set in markets based on the relative risks and after-tax returns of different assets and liabilities. Government policies that result in abrupt changes in relative risks and returns induce massive responses from private investors. These responses are the most important channels of economic and financial change.