We continue to be cautiously positive on the US households' ability and resiliency to withstand the current size and level of their debts. Here is why:
1. United States' public debt as % of GDP is 60.8%, lower than many other developed and emerging countries (see appendix A below). US rank is lower than Canada, Japan, Germany, India, and Singapore.
2. Total US households' liabilities (not just the credit card debt) as % of their total net-worth is still 27.5% (as we pointed out before on 05/22/2009: "Will Credit Card Debt Crush American Housholds" which was also published later on Seeking Alpha on 05/26/2009: "U.S. Credit Card Debt: Not as Bad as Advertised").
3. Total actual and potential write downs on bad assets from 2007 to 2010 by financial institutions in US is projected to be around $2.7 trillion (according to IMF; see Appendix C below) vs. $14.3 trillion of US GDP (or equals to 14.3% of US GDP). We consider this level as not alarming; and write downs of this magnitude likely will not continue forever.
4. The $2.7 trillion total projected write downs of bad assets is only 5% of Net-Worth of US Households (US Households Net Worth = $51.5 Trillion as of end of 2008 --- see Appendix B). Naysayers may not be convinced. Now, to be conservative, we can simply consider $5 trillion as the total projected write downs; this figure is still around 10% of US Households' Net Worth - hardly a serious level.
5. Total US mortgage debt outstanding of $10.5 trillion (as of end of 2008; source: federal reserve) is only 20.38% of total US households' net-worth of $51.5 trillion. This is still very reasonable level. Many articles have been published discussing the alarming size of total mortgage debt outstanding of $10.5 trillion as % of GDP of $14.3 trillion (a whopping 73% of GDP) such as Fortune article published on 05/27/2008; we consider the article informational but not insightful. Intelligent investors analyzing companies do not compare total debts with total revenue, they compare total debts with shareholder equity or net-worth. Hence, similarly, investors and market observers should focus more on US mortgage debt outstanding as % US households' net-worth to obtain more useful insight.
6. We share Warren Buffett's statement: “Don't bet against America." United States has always been proven very resilient and capable country for the past 100 years in dealing successfully with various high profile economic and political shocks. We believe this time is no different. Consider this: US households have been able to survive and to continue growing their net-worth despite all these events:
- Great Depression, Word War I and II, Korean War, Vietnam War, Cuba crisis;
- Cold War with Soviet Union (now Russia federation), Kennedy assassination;
- Very high inflationary environments in 1974 and 1980;
- Market meltdown in October 1987, dotcom bubble and collapse from early 2000 to 2003, disastrous 9/11 event, Enron fraud and collapse, Worldcom fraud and collapse;
- Lehman Brothers collapse, Bear Stearns demise, Madoff fraud;
- And the list goes on and on.
7. The fact that US stock markets have been performing very well for the past 3 months (up more than 30%) obviously has increased US households' net-worth. This rebound in asset pricing has increased American people confidence and provided seeds to positive feed-back cycle loop. The increase in net-worth due to recent stock markets' upturn also means US households nowadays have higher ability to withstand their the current size and level of their debts than in October 2008 or March 2009. If this bullish trend continues (even at a slower rate) and becomes more sustainable, then American people can and will feel more positive on their economic situations based on valid reasons, not just blind optimism.
8. The United States is still a very innovative country with strong entrepreneurial spirit as we pointed out on our blog post "Will Capitalism Fail?" (05/15/2009):
...US still posses unbeatable innovativeness and entrepreneurial drives (e.g: internet, e-commerce, and social networking technologies all are created in the US;). Almost all great innovation in technologies, supply chain, engineering processes, media & entertainment (e.g.: who else can do movies better and more advanced than Hollywood studios?) in the past 10 years came from US --- the trend is very strong and likely to continue in the long-term. US also has strong and stable political system (where else you can have someone unknown like Barrack Obama elected to become president democratically and peacefully), global leadership (although it is in declining mode, it is still a strong one), and still vibrant economic infrastructure (except its highly leveraged financial sector -- but this area too is being deleveraged and will be fixed eventually slowly), is likely to have room to recover and grow again in the long-term (however, the GDP growth rate will likely to be slow -- not as fast as it did in the past due to de-leveraging and de-risking trends that will take at least a decade). We are cautiously more optimistic on US future despite all the enormous challenges that the country is facing now. Hence, we believe both US and capitalism will not fail nor end, both will adapt and morph to a better country and modified form of capitalism...."
Hence, we consider the on-going economic crisis situation we are facing now as not extremely alarming; In our view, US will likely recover from the current crisis as a much stronger country and will continue growing (albeit at slower rate than before).
Appendix A: Rank of Countries - Public Debt as % of GDP
|Rank||Country||(% of GDP)||Date of Information|
|13||Sri Lanka||78||2008 est.|
|22||United States||60.8||2007 est.|
|25||Cote d'Ivoire||58.3||2008 est.|
|41||United Kingdom||47.2||2008 est.|
|52||Bosnia and Herzegovina||40||2008 est.|
|53||Dominican Republic||39.1||2008 est.|
|65||Papua New Guinea||34||2008 est.|
|69||Korea, South||32.7||2008 est.|
|74||South Africa||29.9||2008 est.|
|75||Czech Republic||29.4||2008 est.|
|77||Trinidad and Tobago||28||2008 est.|
|78||El Salvador||26.7||2008 est.|
|86||New Zealand||22.9||2008 est.|
|87||United Arab Emirates||22.4||2008 est.|
|104||Hong Kong||14.5||2008 est.|
|108||Saudi Arabia||13.5||2008 est.|
|113||Equatorial Guinea||9.3||2008 est.|
|120||Wallis and Futuna||5.6||2004 est.|
Note: Countries for which no information is available are not included in this list. The data was last updated on 14 May, 2009
Source: CIA The World Fact Book
Appendix B: US Household Assets vs. Liabilities end of 2008
- US household assets as a whole: $65.7 trillion, unadjusted for inflation.
- US household liabilities: $14.2 trillion.
- Net worth of US/American households (assets minus liability): $51.5 trillion (or 27.5 % of US household assets)
Source: The Federal Reserve
Appendix C: Actual and potential writedowns for 2007 to 2019 by financial institutions
Appendix D: US Fact Sheet
The US has the highest level of output in the world, with GDP valued at US $14.3 trillion in 2008.
|Annual data||2008(a)||Historical averages (%)||2004-08|
|Population (m)||303.9||Population growth||0.7|
|GDP (US$ bn; market exchange rate)||14,265(b)||Real GDP growth||1.8|
|GDP (US$ bn; PPP)||14,265(b)||Real domestic demand growth||1.3|
|GDP per head (US$; market exchange rate)||46,946||Inflation||2.6|
|GDP per head (US$; PPP)||46,946||Current-account balance (% of GDP)||-5.4|
|Nominal effective exchange rate (av; 2000=100)||73.6(b)||FDI inflows (% of GDP)||1.3|
|(a) Economist Intelligence Unit estimates. (b) Actual.|
Source: Economist Intelligence Unit-Factsheet, Country ViewsWire, April 17th 2009