"Kee" Points with Jim Kee, Ph.D.


  • Assets and Household Debt
  • Corporate and Government Debt


This week I’m going to take a break from the markets and the mid-term elections. Instead, I would like to address “what’s missing” (or at least one of the things missing) in media stories about debt and indebtedness, namely, assets. As an economist, I don’t think much of discussions regarding debt levels that fail to also mention asset levels. There are a lot of numbers in what follows, but I think you will find them interesting (or I wouldn’t include them!).

 

Assets and Household Debt

U.S., China, and even global debt “crisis” stories are not hard to find in the press or on the internet, and most Kee Points readers know that my first response to them is to assume it is a slow news week. That’s because there is nothing in these debt numbers that wasn’t there yesterday, or last week, or last year. A country’s debt is the sum of three categories, (a) private sector debt, (b) government debt, (c) corporate debt. I don’t want to make light of excessive debt issuance, but debt numbers by themselves don’t really mean much without knowing the value of the issuer’s assets as well (in addition to the annual cost of servicing the debt relative to annual income). In the U.S., household debt is about $13 trillion, the largest component being mortgage balances ($9 trillion). Student debt is $1.41 trillion, followed by auto loan debt of $1.24 trillion and credit card debt of $829 billion. Is $13 trillion worth of debt a lot? What about the value of assets, which ultimately service the debt? Well, according to the Federal Reserve, U.S. households hold $87 trillion in financial assets (like stocks) and $35 trillion in non-financial assets (like real estate). In fact, while this $13 trillion in household debt is 30% above its prior 2008 peak of $10 trillion, household net worth (assets minus liabilities or debt) is a staggering $107 trillion, or over 45% above its prior 2007 peak of $69 trillion (Federal Reserve Bank of New York).

 

Government and Corporate Debt

Another debt story making the rounds this past year is corporate indebtedness, with corporate debt outstanding over $6 trillion, “higher than it was in 2007” (Forbes). But research shows that high levels of debt financing are found in healthy as well as unhealthy corporations (Financial Industry Regulatory Authority-FINRA). Truly valuable assets – including people – which vary widely among companies, are pretty hard to measure. My estimates using CS HOLT data put corporate assets (gross investment, capitalized R&D, cash, etc.) at about three times corporate debt, as are equity values (they are linked but too much to get into here!). Is that too much debt? With interest rates (borrowing costs) coming off multi-year record lows, is it too little? Believe it or not, no one knows, because modern finance has yet to solve the puzzle of what the “optimum capital structure” (debt versus equity) is. Finally, U.S. government debt is about $21 trillion, with 32.5% owned by U.S. investors, 11.2% by the Federal Reserve, 27% by the U.S. government (mostly by social security and federal/military pension plans), and 29.3% foreign investors. China owns about 5.6%, and Japan owns about 4.9%. Is $21 trillion a lot? It would be for, say, Cuba. But what about a country with assets the size of the U.S.? Tough to say, particularly since the values of the assets are partially determined by the laws and regulations governing their use, and how those laws and regulations might change. However, I wouldn’t pay too much attention to articles about U.S. government debt that didn’t take a stab at estimating these assets.