Transcription
Translator: Walaa Mohammed
Reviewer: Mohamed Salem
I want to start with a pop quiz. In 2020, with COVID and all the related relief spending, the US federal government deficit was $3 trillion, and obviously, its net worth went down by that staggering amount. What happened to household net worth in that exact same year? US household net worth went up by $14.5 trillion in 2020. Why? Well, the thing to note is that when the government spends money, it doesn't disappear. Instead, it gets put into household checking accounts. And here we see, in 2019, the government deficit was negative $1.37 trillion. And household net income was $870 billion. So not exactly the same thing, but very simple and similar. There are some other things going on. By the time you get to 2020, the year we just talked about, the government deficit was negative $3.21 trillion. Household income went up to $2.52 trillion. When the government spends money, it doesn't disappear. It goes into household checking accounts. Expenses must equal income. And in case you're wondering if that's just in 2019 and 2020, we see US net income as a percentage of GDP from 1945 to date. And as you can see, this dark black line is the government deficit as a percentage of GDP. You can see it ends here at this dotted black line, maybe a polka dot line, perhaps, is household income and you can see that it's inverted. The more the government loses, the more households gain. When the government really loses a lot, households gain a lot. There's an inversion between household income and government deficit. And let's see how that flows into the net worth data for these entities. Obviously, this slide is busy, but I'll make it easy for you. Here is federal government net worth at the end of 2019, which was negative $15 trillion. Household net worth in the same year was a positive $116 trillion. Household net worth dwarfs the federal government deficit. Here, you can see with the $3 trillion loss we just talked about, federal government net worth goes down to negative $18 trillion. Household net worth goes up to $131 trillion. There are three components to that. The first is financial assets which are basically checking accounts. And that goes from $48 trillion to $52 trillion. So you can see money flowing into household accounts. But the two largest components of household wealth are real estate and stocks. And the flow of money that came into the economy due to government spending, it drove up the value of household real estate and stocks. Here, you can see, real estate went from $33 trillion to $36 trillion. And the biggest change of all was stocks, household stocks went from $45 trillion to $52 trillion. And the three things together are what made up that $14.5 trillion gain. And again, we see that not just in these two years but from 1945 onward. Here you can see household net worth as a percentage of GDP. Back in 1950, about 350% of GDP. You can see that by the time we get to the present time, it's gone up to almost 600% of GDP. It dwarfs what's happening in government net worth, where government's net was in 1950 about 40% to GDP, and it gets to about -84% of GDP. The gains on the household side are overwhelming the increasing deficit in net worth on the government side. Looking at the three full years of the pandemic, you know, let's assume it ended in December of last year, state and local government net worth went down by $1.7 trillion. The federal government portion of that went down by $6 trillion. Household net worth went up by $30 trillion over that three-year period. So why is that happening? To explain that, we first need to clarify that debt always grows. This is one of the most ignored and misunderstood facts in all of macroeconomics. Here is debt, total debt, government, household, and business to GDP from 1970, excuse me, to date. And you can see for the US, which is this dark black line, it goes from about 125% to GDP to 260% to GDP. In Japan, it goes from 125 to 400. China goes from very little to where it's almost tied with the US in terms of debt. Debt exceeds GDP in basically all economies. Debt growth is a feature of the system, not a bug. Deleveraging, politicians and economists talk again and again and we're going to deleverage. Deleveraging basically doesn't happen in any economy. When it does, it's short-lived and creates negative conditions. Why does debt grow to GDP? Because it takes debt for economies to grow. If you want to build a new building, if a company wants to build a factory, if you want to build a new house, almost without exception, it takes debt to do that. And here we have a chart where we plot the growth in GDP, which is the red line to the increase in what I call Type 1 debt. Debt versus spending rather than debt to acquire assets like a building or a company. So debt versus spending boosts GDP. Again, you can see how close that correlation is in this particular chart. Wealth grows because debt grows. As we mentioned earlier, government spending goes into household accounts. And government spending impacts the value of real estate and stocks. It floods the market with new money, driving those values up. I want to show you more clearly. The relationship between growth and debt and growth in household net worth. Here you see government debt to GDP and it was basically flat until about 1980. And you can see household net worth was flat to GDP until 1980. Government debt was actually improving, but private sector debt was growing on the net and this flattening that we see. Then in 1981 begins what I call the great debt explosion that continues to the present day. And you can see that total debt to GDP goes from the 125% we've already talked about to 260%. And that's when we see a steady upward march in household net worth. Debt growth actually drives growth and household net worth. So if debt is always rising and when it rises at asset prices, wealth and GDP rise, what's the problem? Well, there are two problems and they're big problems. The first problem is that rising debt tends to increase economic inequality. You can see here that the net worth of the top 10% of households since 1989, which goes back a long way where we can get a good sense of this to the present day, goes from 150% of GDP to 300%. That's a doubling of net worth for the richest households. You can see that the net worth of almost everyone else is very flat. Here's why. Most net worth is stocks and real estate. Most net worth is stocks and real estate, and the top 10% of the country owns 65% of all the stocks and real estate in the country. The bottom 60%, that's six zero, that's the middle class, owns only 14% of the stocks and real estate in the country. So as asset prices rise, inequality always widens. It's the central fact that drives inequality in our country. The second problem is thinking only about private sector debt and household debt. And the higher this number, the higher this number, the more of people's income gets diverted to paying interest in principle on their debt. We call that the debt service ratio, the amount that you have to pay as interest in principle, relative to your disposable income. And from 1950 to date, for the bottom 50% of the country, that goes from about 15 to 18% of their disposable income to 20, almost 27%. That's why the economy grows today more slowly than it did in the 1950s and 1960s. We can see for the top 10%, it barely budges. It's not a problem for the rich. It's a material, significant, everyday issue for the middle class and in fact for most of the country. So that's the story. If you want to understand inequality, if you want to understand wealth formation, the place to start is to look at debt. Then you can start to ask legitimate, directed, and correct questions about what we're doing to correct the situation. And a lot of our work surrounds this question. It can involve debt restructuring in a much more profound way than we have today. It can involve cyclical deleveraging strategies, which are actually outside of what we consider today in economic policy. It can involve tax policy. If there's this much inequality, can we use tax incentives to incentivize stock and real estate ownership? Can we increase income so people can start to accumulate wealth and put it into stocks and real estate? Maybe we should accelerate job training on a massive scale across the country. Anyway, these are my remarks and I appreciate your time today. Thank you. (Applause)