You don’t need to look far. The Internet is full of stories proclaiming doom. The US, they say, is on a one way street to financial ruin. Well it appears they are wrong. And if even if you could say that at a pinch there is a kind of one way street to debt hell, the street is very very long, and it would not be hard to construct a diversion, and furthermore, we have plenty of time to do it.
Oh woe is us! Or is that woe is the US? And since the US will remain the most important advanced economy as far into the future as we can possibly predict, maybe the US and us is kind of the same thing.
At the end of 2011 US total liabilities were worth 741 per cent of GDP. Foreign holdings of US debt are currently worth around 60 per cent of US GDP – a big chunk of that is owned by China. The level is rising too. And then there is the so called elephant in the room – healthcare costs. Estimates suggested that the net present value of unfunded US liability for US healthcare is $42.8 trillion, and $20.5 trillion for social security. Last November the ‘Wall Street Journal’ ran an article by Chris Cox and Bill Archer arguing that the true liabilities of the US government are nearer 500 per cent of GDP.
These are scary numbers. It is just that they are seriously misleading.
Take a look at any plan. It could be a business plan, a plan for funding retirement, a plan for a holiday or buying a house, or one for emigrating. And then ignore all the good news, all the promise. Quelle surprise the plan that is left does not look very attractive. Those who say the US is bust are applying similar logic.
According to Capital Economics, if you take into account the assets owned by the US, including equities, property, assets abroad, and indeed US infrastructure owned by the US government you are not left with net debt at all. In fact, the US has a net worth of around 550 per cent of GDP. Capital Economics calculates that the net worth of US households is 408 per cent of GDP, for non-financial businesses it is 118 per cent of GDP, for the financial sector it is 36 per cent of GDP, and minus 13 per cent of the US Government.
Bear in mind that this balance sheet applies at a moment that has succeeded a crash in US house prices. By historical standards US house prices look cheap.
Sure, the US has owns money abroad. But then again, the US also owns foreign assets. You can’t count US debt, but ignore money owed to the US. Take the full story into account, and net US foreign debt is about 30 per cent of GDP, less than a quarter of Greece’s external liabilities. Besides, the US tends to enjoy much higher returns from the money owing to it, than it pays out on money owing abroad. This is largely because much of US debt held by foreigner is in the form of very low risk, low yielding government bonds.
Then there are heathcare and social security costs. In calculating the net current value of these costs, the doomsayers have looked at 75 year actuarial projections. As Capital Economics said, “Why stop at 75-year projections? Why not keep going for 100 years so the debt runs into the hundreds of trillions?”
In calculating the net current value of healthcare costs, the doomsayers have assumed costs will continue to grow at a much faster rate than GDP, and have built in assumptions about what the US economy will look like between 2040 and 2090.
Even if their assumptions are right – and it will be one very lucky guess if they are – the US has plenty of time to implement measures to address this, such as raising the retirement age, or upping taxes.
So here is the real shock. If the US carries on the way its critics predict, maybe at some point in the next 30 years it will have to see a rise in the retirement age and some kind of VAT.
Of course, there is something missing from all these guesses. Forget about the lone elephant in the room; there is a herd of mammoths, and it is technology. How anyone can start making sensible guesses as to what the US will look like in 60 years’ time, without taking into account the possible changes technology may bring is something of a puzzle.
© Investment & Business News 2013