March 31, 2005


Surprise--America Owes Too Little (Kenneth L. Fisher, 04.18.05, Forbes)

What is the right debt level for society to carry? The answer is: that level where our marginal borrowing costs approach our marginal return on assets. This is, in fact, the same formula that a corporation would use. If you can borrow at 6% to build a factory that will yield a return of 12%, you should borrow.

The U.S. is nowhere near there. As a result, we need more debt to get more income, so people can become wealthier.

The Federal Reserve counts $97 trillion of assets in the economy, offset by $44 trillion of debt, leaving (with rounding) $52 trillion of net worth. The asset figure, to be sure, involves some double-counting (General Motors' factory, an asset, is financed by bonds, counted again as an asset in your individual retirement account), but no matter: The key figure is the $52 trillion at the bottom of the U.S. balance sheet. And we're getting a great return on that $52 trillion. Our national income is $12 trillion.

Yes, most of the income is labor income, not a return on capital as conventionally calculated. Yet think for a moment: Why are labor rates higher here than in Madagascar? It's precisely because we have so much invested in the form of roads, factories and job skills. I compare the $12 trillion income to the $52 trillion of net capital and conclude that capital is extremely productive in this country. I'm not worried about importing a little more of it and putting it to use.

Folks fret about our $2 trillion of consumer debt and $4 trillion of federal government debt. But these are small numbers in relation to our income, to our total debt (mortgage and business debts are far larger) and to our net worth. Stop worrying. Instead, buy stocks.

Lend us more and we'll make it grow.

Posted by Orrin Judd at March 31, 2005 8:16 PM

That assumes that you borrow money to procure income producing assets. Borrowing against your credit card or HELOC to buy a HumVee or Crestliner doesn't count.

Posted by: Robert Duquette at March 31, 2005 10:25 PM

Yeah, the folks around here who drive Humvees live paycheck to paycheck...

Posted by: oj at April 1, 2005 12:49 AM

Alberta just paid off their entire debt. I wonder what will happen to them now?

Posted by: Randall Voth at April 1, 2005 7:44 AM


They will be struck by a large glowing meteorite.

Posted by: jim hamlen at April 1, 2005 8:33 AM