U.S. Total Assets Bubble
Mar 1, 2014
U.S. Total Assets is the value of all of the assets owned by U. S. Households, Corporations, and Small Businesses. This is the measure of the U.S. private sector net worth as assessed and reported by the Federal Reserve Bank. This commentary will explain why this private sector net worth is dramatically over stated because of the U.S. Government's accounting system. The historical data used in this commentary was sourced from the Federal Reserve databases and the current data was sourced from www.usdebtclock.org which in turn takes a realtime feed from the Federal Reserve.
For the last several years there has been a rather consistent view that we are not in an asset price bubble and even more specifically not in a stock market bubble. This is not a surprising position for the media pundits and the financial experts to take since it promotes their own personal objectives, i.e. they are talking their own book. It is somewhat surprising to me that the Federal Reserve has generally denied that we are ever in an asset bubble, be it the Internet Bubble, the Housing Bubble, or a Stock Market Bubble. This is probably due to the desire of the Fed to not set off any alarms for the asset markets.
Certainly an exception to this position by the Federal Reserve was Alan Greenspan's comment in December of 1996 when he used the phrase "irrational exuberance" during the dot.com bubble. But more generally the Federal Reserve has been careful to avoid making statements that might imply an asset bubble of any type and more frequently have made comments or inferences that would deny that we are in bubble territory. Janet Yellen, during her initial testimony (Nov 2013) as a candidate to become Chair of the Federal Reserve said that she did not see asset bubbles forming.
Sometimes asset bubbles form like the proverbial "boiling of a frog", if you heat the water gradually enough the frog does not detect what is happening to him. I contend that USAPonzi has been creating an asset bubble for the entire duration of its existence, i.e. since 1969.
The key ingredient of a bubble is the source of the fuel that causes the bubble to expand. In the case of USAPonzi this fuel is clearly identifiable and quantifiable. It is the exponentially increasing GAAP basis deficit spending that the U.S. Government is injecting into the U.S. (and global) economy each and every year (see USAPonzi Fiscal Model). This has become a massive and systemic stimulus to the U.S. economy and therefore to United States Private Assets which of course includes stock equity. Because of the liquidity of the stock market and the realtime "mark to market" assessment of it's value it is the most responsive asset to catch the "wind" produced by USAPonzi.
The measure of this stimulus can be precisely determined by just looking at the GAAP Obligation which is the cumulative effect of this GAAP basis deficit spending much like our Cash Debt is the cumulative effect of our Cash based deficit spending.
Chart 1: United States Private Assets vs. Public Liabilities
Chart 1 above clearly shows that United States Private Assets (Household, Corporate, and Small Business) have grown rather steadily since 1969 with a few hesitations; one notable such hesitation was due to the bursting of the Internet Bubble in 2000 and the pronounced dip in 2008 was due to the bursting of the Housing Bubble. But the more important observation that can be discerned from this chart is that the general trend upward in private U.S. Total Assets is largely supported by the trend upward in Public Liabilities i.e. GAAP Obligation. This is caused by USAPonzi. The Federal Government, by using Cash Accounting, has been able to ignore the rising problem of our Unfunded Liabilities for social benefits and therefore has dramatically under taxed the wealthy Households and Businesses creating the illusion that these entities have much greater value in their asset bases than proper (i.e. sustainable) fiscal responsibility by the U.S. Government would warrant. Therefore the "real net worth" of the U.S. Private Sector is the U.S. Total Assets minus the GAAP Obligation shown in Chart 1.
Chart 2: U.S. Private Assets vs. "Real Net Worth "
Chart 2 shows how private U.S. Total Assets (as determined by the Federal Reserve) compares with what I call the "real net worth" (U.S. Total Assets minus the GAAP Obligation) of all U. S. Households, Corporations, and Small Businesses. Wealthy households and wealthy businesses would not be nearly as rich as they now appear to be if the Government was taxing them as required to meet the future financial commitments the Government has made for social benefits. The need for this level of taxation would be recognized and reported if the Government were using GAAP accounting.
Chart 3: "Real Net Worth" % U.S. Total Assets
Chart 3, above, clearly demonstrates that our private sector "real net worth" (U.S. Total Assets minus the GAAP Obligation) has been steadily declining, as a per cent of U.S. Total Assets, since USAPonzi was launched in FY1969.
The bottom line is that the wealthy people and wealthy businesses are not nearly as wealthy as they appear to be because of the devastating distortion in our U.S. financial system caused by the fraudulent accounting of the Federal Government. If we are going to meet the social benefit commitments that the Government is currently promising then the wealthy households and businesses will have to turn over about 86% of their wealth to the Government.
It is incumbent on the Congress to come to a compromise that yields a balanced GAAP basis fiscal budget for the U.S. Government. This compromise will require that the wealthy must give up a lot to provide the underprivileged with even a minimally sustainable standard of living. The wealthy must give up a whole heck of a lot (86% of their wealth) to the meet current commitments to the underprivileged. But the sooner we start that negotiation and rationalization the better off we will all be. This is the scope of what the people in Washington call "The Grand Bargain". I would bet that this is a whole lot "GRANDER" than they are contemplating.
The wealthy have already started their negotiation tactics by saying: "it will all get better if we lower taxes on the wealthy households and corporations". Just how asinine is that position when they have been given $94.3 Trillion (as of March 1, 2014) of undue tax relief over the last 46 years.
U.S. Total Assets Bubble (March 1, 2014)
It is the $94.3 Trillion (GAAP Obligation as of March 1, 2014) of undue tax relief that has created the bubble in our U.S. Total Assets which are now valued at $109.9 Trillion (U.S.DebtClock as of March 1, 2014). This assessment would indicate that the current (Mar 1, 2014) "real net worth" of all households, corporations, and small businesses, as a first order estimate, has a value of about 14 cents on the dollar. (($109.9T-$94.3T)/$109.9T= 0.142)
Because of this fraudulent accounting, the wealthy seem to be 7 times more wealthy than they really are and all because of a simple little accounting trick that LBJ pulled on the U.S. citizenry in FY1969. That is why the wealthy can buy $50 million mansions and $500 million islands and $200 million yachts. That is why the wealthy can buy $75,000 Tesla cars like they are a bag of popcorn. That is why we have been able to build $1.3 billion football stadiums for the Dallas Cowboys and $60 million football stadiums for high schools like Allen, TX. That is why Boone Pickens has been able to give $650 million to Oklahoma State University. That is why Bill Gates and Warren Buffett can comfortably give away 50% of their net worth. That is why Gucci and Tiffany are doing so well right now selling trinkets to the rich. $94.3 Trillion will buy a lot of stuff.
That is why every company that can come up with a reasonable business plan wants to go public right now because they want to capitalize on the now $6+ Trillion dollars of "new money" that USAPonzi is throwing off every year. I am anxiously awaiting the analysis of the GAAP basis financial report for FY2013 by John Williams of Shadowstats.com to see just how much money that Congress gave to the rich last year. This report was released by Treasury on Feb 27, 2014 and we will have the real numbers by Mar 5, 2014 from Shadowstats.com. (see FY2013 GAAP basis Results)
USAPonzi has made the wealthy feel like they are filthy rich. But that is also why the underprivileged are now in a desperate situation because USAPonzi has left their promised social benefit trust funds totally bare.
Yes, USAPonzi has created a massive asset bubble that is causing devastating distortion in the U.S. financial system. This would be quickly resolved with GAAP accounting and a balanced budget. It will be devastating to our economy when that happens, GDP will be cut by one third to one half or even more, but at least it will put us on a realistic and sustainable fiscal path.
Next page: Asset Prices to Infinity