In the US – and elsewhere, too – Covid distemper brought fiscal largesse, a lot of it. Fiat money creation, resulting inflation, and reactive monetary tightening all make for baleful growth and asset price prospects. The “financial surface” – where an asset’s bid and offer meet – has been volatile and may remain so for some time, having been made unsteady from poor policy-making and abrupt geopolitical action. What’s interesting to consider is the depth below the surface.
At least for the United States, it’s quite deep. That is, think about the “stock” of wealth in the US economy, which is again “deep” and actually fungible. This portends much for commercial activity, and for stark hard power and soft power manifestations. In this yet to be undone realist, globalized world, the effects from this stock of wealth will affect geopolitical conditions, just as mass curves space.
This past month, the US Congress debated the passage of a USD 1.65 trillion “omnibus spending” bill, seeking its ratification before year-end to ensure smooth government functioning and to avoid the scrutiny of a recalcitrant Republican majority in the lower House.
The state must function. The public expects public goods and services, but the burden is growing, if not becoming downright odious.
The total US government debt stands at USD 31.36 trillion, corresponding to roughly 124% of US GDP. Net interest payments on the federal debt now approximate 8% of total spending, and are set to climb as benchmark interest rates increase – all this in the context of protracted high inflation. Policy makers, investors, consumers and “all of the above” are waiting and hoping for that stubborn inflation to moderate and then abate.
Yet, let inflation run, some say. It can yield a benefit, whittling away the “real impact” of government debt as inflated dollars multiply to pay down nominal debt, even though inflation will erode price stability and dependable access to the stuff of life. Others say that punishing interest rates, needed to weigh on commercial activity and curb that said inflation – a result the body politic generally wants, will crush the economy, again putting in doubt dependable access to the stuff of life.
Given the above, fiscal probity isn’t such a bad thing – it could ameliorate on the morass cited above. Also, the natural run of things, which is to say market forces, will exert a gravitational effect, as risk premia expand, the dollar depreciates and investors exact cost, making policy makers adjust. Like trees, deficits and fiscal leverage cannot grow to the sky.
At 124% of GDP, fiscal leverage is considerable, and it has to remain manageable – or chaos will ensue – which would be a crisis of confidence concerning tradeable US government debt, and/or an inability to fund the operation of the US government.
The fiscal picture is grim, and any further attenuation at the very worst should have the situation remain at just about “grim”. Otherwise, the system will convulse from realized “event risk”. But as we noted above, market forces and discipline along with real economic consequences and public policy adjustment should hopefully forestall that crisis breaking point.
What’s interesting to think about are other economic aggregates that meaningfully “point to something”.
The “flow of funds” document highlights an over-arching economic aggregate that bears some appreciation. The US household net worth aggregate is one such figure. It measures the total asset holdings for US households and non-profits. This sum is drawn from total holdings of corporate equity securities, debt securities, real estate and other assets.
In 2012, the US household net worth figure posted at USD 72,088 billion, corresponding to 443.6% of US GDP for that year. By 2021, the net worth level had grown to USD 150,122 billion or roughly 643.8% of US GDP in 2021. The total US household net worth level has dipped in 2022, falling to USD 143,278 billion as of the third quarter – a decline attributable to the correction in the debt and equity markets over the past year.
Now think for a moment what this large stock of wealth implies, it implies more of the same – the creation of more. That wealth implies ample credit, it implies assets that can be pledged. The aggregate wealth underwrites additional risk-taking, and perhaps effective innovation. It means additional possibilities for the formation of new markets and technologies.
Now picture in your mind a heavy crucible, or better yet a large cement mixer or “tumbler”. The container shape and constraints engender US market institutions and practice, the motion of the tumbler itself reflects the initiative and agency of US risk-takers. Think of the broad extent of US net worth always being re-deployed and mixed in this formidable tumbler, yielding the capital necessary for innovation. As a by-product, the geopolitical effect is enormous.