I recently wrote about the fact that the forces impacting the U.S. economy’s balance sheet, at about $200 trillion, dominate those affecting GDP (just over $14 trillion) when thinking about interest rates and stock prices. A blog reader wrote to ask me where the $200 trillion figure comes from.
First, I want to point out that it is revealing that we have to ask the question. Why is it that people know so much about something so small (GDP) but so little about something so big (total assets)? I think it is because since the 1930’s macroeconomics has developed into a discipline concerned almost exclusively with who is spending how much money. Very little attention is paid to the capital base, or balance sheet, that makes it possible to produce the goods and services measured as GDP. A glance at a newspaper or any list of data produced by the government will convince you this is the case.
The best source of asset market, or balance sheet, information we have today is the document Z1: Flow of Funds of the United States produced after the end of each quarter by the army of economists working at the Federal Reserve Board.
The most recent (116 page!) flow of funds document, publish March 12, contains information about the balance sheet of the U.S. Economy on 12/31/08. I will warn you that you will have to dig for it–most of the 116 pages are devoted to measuring “flows of funds”, roughly the amount added and subtracted from balance sheets during the quarter. But you can find most of what you need if you hunt for it.
So what about the $200 trillion? I have constructed the table, above, by pulling figures from the report. The report reports balance sheets for some sectors of the economy but not others (which I find a little strange). They report balance sheets for 1) Households and Nonprofit Organizations, 2) Nonfarm Corporate Business (big companies), and 3) Nonfarm Noncorporate Business (small companies). These balance sheets show that at the end of 2008 housseholds and nonprofits owned $40,814 billion in financial assets like stocks and bonds and $24,905 billion in tangible assets like houses and cars, which adds up to $65,719 billion in total assets. Against that total, households and nonprofits owed debts, or liabilities, of $14,242 billion, which means they had net worth of $51,477. (These last numbers are in the document on p. 102 but not in the chart.)
Adding the three sectors together (Subtotal in row 4) produces a balance sheet with $104,049 in total assets divided between $58,639 in financial assets, and $46,301 in tangible assets.
Now it gets trickier. The Fed does not report complete balance sheets for the other sectors (farms, financial sectors, federal government, state & local governments, or rest of world (foreign owners). Instead, they report statements of financial assets, financial assets and financial liabilities. In other words, they leave out the fact that all these other sectors own tangible stuff like land, buildings, cars and computers, in addition to securities. I think that is a big mistake, reflecting the analytical bias in the macroeconomics community that somehow people consciously manage their portfolios of stocks and bonds but are passive owners of more than $46 trillion of real stuff.
We can use the Fed’s measures of financial assets held by all the sectors to get a pretty good figure for total financial assets in the balance sheet. Adding in farms, financials, governments and foreign owners brings the total financial asset figure up to $141,512 billion, which is reported on p. 115. (I say a pretty good figure because the document reports a $4,922 billion statistical discrepancy in getting to that figure themselves.) They do not report figures for tangible assets held by those “other” sectors, which is unfortunate because the “other” sectors are actually bigger than the ones they report.
That leaves us in an awkward position in trying to derive a total asset figure than makes sense for the overall U.S. economy’s balance sheet. One way to do it is to add up the numbers that we do know. I have done so in line 13. We know there are $141,512 billion in financial assets. We know that just three of those sectors own $46,301 billion in tangible assets. Adding those two numbers together produces a (reported) total asset number of $187,813 billion, pretty close to the $200 trillion number I wrote about at the top of the story. (The number would have been much closer 2 years ago before the recent drop in asset values.) Unfortunately, I have no idea what to call this number because it leaves out so many huge question marks.
If I weren’t so lazy I could dig up numbers to at least approximate the values of some of the question marks in the table. Farms own land and tractors, banks own buildings and ATM machines, governments own all sorts of crap including nearly a billion acres of land and all those cars you see on the highway that don’t have to buy license plates like you and me. And foreigners own a ton of stuff too. For today’s purposes all we have to know is that these things would add up to a very big number. And plugging these figures into the missing cells in the table would produce a total assets number far in excess of $200 trillion.
OK, that’s enough arithmetic. Why does this matter? It is to show you that the balance sheets are so big that almost any analysis of the economy that focuses on spending or saving or budget deficits alone, to the exclusion of the balance sheet, is almost certain to be wrong because balance sheet changes are so big. For example, household financial asset holdings fell from $50.5 trillion in Q3/07 to $40.8 trillion on 12/31/08 due to the collapse of stock and bond prices. And the value of their tangible assets fell by another $3.5 trillion due to falling home prices. Does anyone really think that the impact of this roughly $13 trillion drop in household net worth can be fixed by sending people checks for $700?
The most relevant application of this thinking today is how to understand the impact of the massive bailout programs on the economy and to say something meaningful about the impact of government borrowing on interest rates and stock prices. I will write more on these questions later.
You can read an analysis of budget deficits and interest rates using this approach in Chapter 4 of my new book, Lessons from a Road Warrior. You can get it from Amazon or get a signed copy directly from the John’s Book section of our website.