Financial Position of United States

In order to get at a net worth of at least $123.8 trillion (723% of GDP), the financial position of the United States must have assets worth at least $269.6 trillion and debts worth at least $145.8 trillion.

Financial

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The ratio of public to private debt in the United States climbed from 152% GDP in 1980 to a peak of 296% GDP in 2008, before declining to 279% GDP by Q2 2011. The fall between 2009 and 2011 was brought on by foreclosures and higher household saving rates. Except for the government, which ran substantial deficits to counteract deleveraging or debt reduction in other sectors and financial position, all other sectors saw notable drops in debt to GDP.

US consumers, companies, and governments owed $50.7 trillion in debt as of 2009, which is more than 3.5 times the country’s yearly gross domestic product. Domestic financial liabilities were $106 trillion and domestic financial assets reached $131 trillion as of the first quarter of 2010. Selected industries’ tangible assets in 2008 (such as property and machinery) reached an additional $56.3 trillion.

Net Worth:

For a certain industry, net worth is the total of all assets—both financial and physical—minus all liabilities. Due to the inclusion of both financial obligations and the ability to meet those obligations in the calculation, net worth is a useful indicator of creditworthiness and financial health.

Over time, the net worth of the US and its economic sectors has remained largely stable. From 1960 until the 2000s, the total net worth of the US remained between 4.5 and 6 times GDP. It then increased, reaching a peak of 6.64 times GDP in 2006, primarily as a result of an increase in household net worth during the US housing bubble. Due to reductions in the value of US corporate equities and real estate as a result of the subprime mortgage crisis and the global financial crisis, the net worth of the United States drastically decreased to 5.2 times GDP by the end of 2008. The net worth of US households increased from a low of 3.55 times GDP to 3.75 times GDP during 2008 and 2009, while nonfinancial business decreased from 1.37 times GDP to 1.22 times GDP.

The net wealth of American households and nonprofits accounts for 75% of the country’s overall net worth, or 355% of GDP in 2008. US consumers have held this position since 1960; they are followed in importance by nonfinancial business (which accounted for 137% of GDP in 2008) and state and local governments (50% of GDP in 2008). The federal government’s net worth has ranged from -7% of GDP in 1946 to a high of 6% of GDP in 1974 to -32% of GDP in 2008. The banking sector has been stuck at zero net worth since 1960, indicating its leverage.

Debt:

Regular reports on debt levels and flows are published by the Federal Reserve. According to the Federal Reserve, as of the first quarter of 2010, the entire amount of public and private debt held by American corporations, households, and the government was expected to be $50 trillion, or nearly $175,000 per person and 3.5 times GDP.

In 2008, US families, companies, governments, and organisations paid $3.29 trillion in interest on their debt. Interest on deposits was paid by the financial industry to the tune of an additional $178.6 billion.

In 1946, the federal government controlled two-thirds of the total US debt, which was 150% of GDP. The federal government’s debt to GDP ratio has decreased significantly since 1946, dropping to 54.8% of GDP in 2009. Contrarily, the banking sector’s debt-to-GDP ratio has soared, rising from 1.35% of GDP in 1946 to 109.5% of GDP in 2009. The household ratio increased almost as much, from 15.84% to 95.4% of GDP. The US lacks a “credibility strategy” to stabilise its increasing public debt, posing a minor but significant danger of a new global economic crisis, according to a statement made by the International Monetary Fund in April 2011.

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Financial Sector:

The US banking industry owed $3 billion in debt, or 1.35% of GDP, in 1946. This had grown to $15.6 trillion by 2009, or 109.5% of GDP. The majority of the debt owed by the US financial sector is represented by federal GSE issues and agency-backed securities. This is in reference to securities that are insured and mediated by government-sponsored enterprises (GSEs), including Ginnie Mae, Fannie Mae, and Freddie Mac. The mortgage pools that serve as collateral for collateralized mortgage obligations are also a part of this category. The amount of debt held in GSE and federally associated mortgage pools has expanded from $863 million or 47% of the overall financial sector debt in 1946 to 57% of the entire financial sector debt in 2009, despite the fact that this debt now amounts to over $8 trillion.

The second-largest component of debt in the financial industry is bonds. Bonds made up 6% of the banking sector’s debt in 1946, but by 1953, this number had increased to 24%. This remained fairly consistent until the late 1970s; in 1981, bonds made up 14% of the debt in the financial sector. The prime rate peaked at 21.5% at the same time that Federal Reserve chairman Paul Volcker implemented his plan to combat stagflation by raising the federal funds rate; as a result, funding through credit markets became prohibitively expensive.

In the 1980s, bonds had a recovery and made up around 25% of the debt held by the financial sector in the 1990s. However, between 2000 and 2009, the amount of bonds issued by the financial industry climbed to $5.8 trillion, or 37% of the total debt held by the sector. Only 12% of the debt in the banking sector in 2009 was not represented by bonds or GSE/federal agency-backed instruments.

Households and non-profits:

US families and nonprofit organisations owed $35 billion in debt in 1946, or 15.8% of GDP. This amount had increased to $13.6 trillion by 2009, or 95.4% of GDP. In 1946, consumer credit made up 24% of all family debt, with home mortgage debt accounting for 66.5%. By 2009, consumer credit had decreased to 18.22% while home mortgage debt had increased to 76% of total household debt. The 2008 financial crisis was brought on by “unsustainable levels of household debt,” claims the McKinsey Global Institute. Between 2000 and 2007, the proportion of household debt to income increased by around one-third. Among advanced economies, the US now has the twelfth-highest debt to GDP ratio.

Non-financial Enterprise:

US nonfinancial companies owed $63.9 billion in debt in 1946, or 28.8% of GDP. This amount had increased to $10.9 trillion, or 76.4% of GDP, by 2009.

State and Local Governments:

State and local governments in the US owed $12.7 billion in debt in 1946, or 5.71% of GDP. This amount had increased to $2.4 trillion, or 16.5% of GDP, by 2009. State and municipal governments owe $3 trillion and have unfunded liabilities of $5 trillion as of 2016.

The combined financial resources of state and local governments in 2009 were $2.7 trillion. Credit market debt of $1.3 trillion was among them in 2009. (that is, debt owed by other sectors to state and local governments). State and local retirement accounts are not included in these numbers. At the end of 2009, assets owned by state and local retirement accounts totaled $2.7 trillion.

Federal Government:

The federal government’s debt in 1946 was $251 billion, or 102.7% of GDP. By 2009, this amount had increased to $7.8 trillion, although the debt-to-GDP ratio of the federal government had decreased to 54.75%.

At the end of 2009, the federal government had assets worth $1.4 trillion. This represents a more than twofold increase over the assets the federal government possessed in 2007 ($686 billion), primarily as a result of the purchase of business stocks, credit market debt, and cash. At the start of 2009, the federal government owned $223 billion in business equity; at the end of the year, that amount had decreased to $67.4 billion. Retirement funds for the federal government are not included in these numbers. At the end of 2009, assets owned by federal government retirement accounts totaled $1.3 trillion.

Additionally, the federal government’s debt to federal funds and organisations, such the Social Security Trust Fund, is not included in these numbers. Additionally, it excludes “unfunded liabilities” related to debt or accounting obligations for entitlement systems like Social Security and Medicare. Official government predictions indicate that during the next 75 years, Medicare will have an unfunded obligation of $37 trillion and Social Security will have an unfunded liability of $13 trillion.

Negative Real Interest Rates:

Real interest rates on government debt have been negative for the US Treasury since 2010. When the market believes there are no alternatives with low enough risk, or when well-known institutional investors like insurance companies, pension funds, or bond, money market, and balanced mutual funds are required to invest or choose to invest sufficiently large sums in Treasury securities to hedge against risk, such low rates, outpacing the inflation rate, occur.

According to Lawrence Summers, Matthew Yglesias, and other economists, government debt borrowing at these low rates increases creditworthiness while also saving taxpayer money. The US and UK both took advantage of negative real interest rates in the late 1940s through the early 1970s to lower their debt loads by roughly 30% to 40% of GDP every decade, but there is no assurance that this trend will continue. The Securities Industry and Financial Markets Association’s U.S. Treasury Borrowing Advisory Committee unanimously proposed in January 2012 that government debt be permitted to auction at even lower, negative absolute interest rates.

Derivatives:

Typically, other financial obligations like derivatives are not included in overall debt calculations. The United States Comptroller of the Currency discloses derivative contracts in terms of notional value, net current credit exposure, and fair value, among other metrics. This is partly because measuring derivatives is complicated.

Notional value, a base value used to calculate the size of the cash flows exchanged in the contract, is the figure frequently cited by the media. The contract’s fair value (also known as market value) is its value as determined by accountants or the open market. Depending on whose side of the contract the parties are on, fair value might be either positive or negative. The net loss that holders of derivatives would incur if the counterparties to such derivatives contracts defaulted is known as credit exposure.

Derivative contracts held by US financial institutions have a notional value of $216.5 trillion, which is more than 15 times US GDP. For positions with positive values (sometimes referred to as “derivatives receivables”), the fair value of US-held derivatives contracts in the first quarter of 2010 was $4,002 billion (28.1% of GDP), while for positions with negative values, it was $3,886 billion (27.3% of GDP). By every metric, interest rate derivatives account for $3,147 billion, or 79% of derivatives receivables, making them by far the majority of US derivative contracts.

Net current credit exposure (NCCE), which assesses the risk that derivatives contracts provide to banks and the financial system, is the metric that the Office of the Comptroller prefers. In the first quarter of 2010, American financial institutions’ net current credit exposure (NCCE) to derivatives was $359 billion, or 2.5% of GDP, compared to $800 billion at the end of 2008, following the global financial crisis, when it was 5.5% of GDP.

Due to netting, which occurs when financial institutions have numerous positions with counterparties that have both positive and negative values, the credit exposure to the financial system differs from the market value of US derivatives by a significant amount. This is because financial institutions frequently have many positions with counterparties that have both positive and negative values. When compared to 50.6% at the start of 1998, netting significantly reduces the credit exposure of the US financial system to derivatives by more than 90%.

Large financial institutions are the main holders of derivatives contracts. 97% of derivatives by notional value are held by the top five US banks, and nearly 100% are held by the top 25. Currently, 67% of the banks’ net current credit exposure is secured by collateral against their derivative position.

Foreign assets, liabilities, and debt:

The majority of foreign ownership of US assets is debt. Foreigners possess approximately four times as much US debt as Americans do in international debt, while Americans control more foreign stock and foreign direct investment than foreigners do in the United States.

Foreign creditors owe the US 15.2% of its total debt. The federal government owes $3.9 trillion of the $7.9 trillion that Americans owe to foreigners. Foreigners own 48% of US Treasury securities. Foreigners possess $2.33 trillion in US corporate bonds and $1.28 trillion in agency- and government-sponsored enterprise-backed securities. 24% of the debt and 17% of the equity held by domestic corporations are held by foreigners.