Which is the bigger burden?
September 15, 2011 1 Comment
Every so often, the Establishment likes to work itself up over the magnitude of the U.S. government’s debt, invariably on behalf of “the children.” But the government’s debt is small potatoes compared to the other liabilities on the American balance sheet. We ignore those at our peril.
Total government debt held by the public now amounts to about 82% of GDP if you include states and localities. That sounds like a lot. Without a frame of reference, however, the observation is meaningless.
The government is only one kind of debtor in the economy. People take on debt to buy houses, go to school, and live beyond their means. Businesses borrow to invest in new projects or to buy up their own equity (thereby boosting the CEO’s pay package).
Unlike the government, however, households and businesses do not generate revenue by taxing a broad swath of the world’s largest economy. The government’s collateral is its claim on a piece of the nation’s future output. Unless knowledge is forgotten, the land permanently blighted, and the population wiped out, this claim is one of the world’s safest assets. On the other hand, the private sector’s main assets—stocks and real estate—lose their value when the economy goes sour.
Private debts are not safe havens during a financial crisis. And, of course, households and (most) businesses cannot get the Fed to lend them cheap money if they need help paying their bills. This is why private debt is always riskier than sovereign debt.
Maybe the private sector borrows more efficiently than the government. Perhaps a McMansion in the middle of the Nevada desert really does generate a better return than nation-building in distant lands, but it seems unlikely.
Bearing all this in mind, what are the relative magnitudes of public and private debt?
(Source: Federal Reserve’s Flow of Funds)
Even after reducing our debts since the peak of early 2008, the American private sector (excluding financial firms) still owes nearly $24 trillion. A majority of that debt is mortgages and credit cards.
This seems like a much bigger burden than the government’s debt, yet we hear far less about it. Curious, no?