In the hours following the release of the latest Flow of Funds statement on Thursday, some of the glorified powerpoint-cum-statist tabloid media outlets released a very disingenuous and flat out wrong comparison of household net worth to total US debt (even though technically total US GDP was showed, although the two are now interchangeable with total US Debt having surpassed total US GDP). Supposedly this was intended to demonstrate the “net worth of America is massively positive” and that America is “not even close to being broke.” Of course, by doing so they merely confirmed once more their complete cluelessness when it comes to the debt market, as US household net worth (source) is the direct beneficiary not just of sovereign debt, but certainly all on-balance sheet debt verticals in existence which include, again from the Flow of Funds report tab L.1, household, non-financial corporate, non-financial non-corporate, financial and rest of world debt. The grand total is also conveniently tracked by the Fed in the Total Credit Market Debt Owed category (source) which in the last quarter was $55.3 trillion: just “modestly” above the $16.3 trillion strawman of merely US Federal debt. Comparing this to the $65 trillion in household net worth certainly gives a far less rosy picture of just how “massively positive” net worth of America is.
More importantly, this true total debt number is rising far faster than net worth, and as the chart below shows, as recently as 2 years ago, the ratio of total Household Net Worth for the first time in history dipped below the total Credit Market Debt. It is this ratio that is the true indicator of household viability which is now levered not just by the balance sheet of the US, but by its banks, by its corporations, and, of course, by its households.
And remember: the above chart shows just on the books debt.
But wait, there is more.
Since of the $78.2 trillion in total household assets (and thus net worth), a whopping two thirds is financial-market related, one should also add to the liability side that “other” financial debt that everyone always ignores when doing debt calculations: the all important shadow banking debt which is sufficiently complicated that everyone – monetary theorist most certainly included, always ignore it. And that is a mistake because as we have shown repeatedly it amounts to a whopping $15 trillion, or about the same as total US GDP!
Adding this debt, which is perfectly real debt (including such very real obligations as MBS and Agency debt, repos, ABS paper, and many others), shows that in the quarter ended Sept 2012, household net worth of $65 trillion was not even enough to cover total traditional and shadow debt amounting to a total of $70 trillion, and resulting in a household net worth coverage ratio of 0.92x!
But the bottom line that even tabloid wannabe financial reporters should grasp from this is that the real total debt applicable to US households when calculating consolidated liability exposure is not $16 trillion, but $70 trillion.
And, of course, all this excludes the off-off-balance sheet debt of $90 trillion in underfunded welfare state liabilities.
Still think America is not even close to being broke?