$29.1 Trillion in American Net Worth
Kurt Brouwer September 21st, 2007
Over the past few years, you have no doubt seen stories about our ‘low’ rate of personal savings. The lament is frequently made that we are living beyond our means and mortgaging the future. Also, we’re told that people in other countries are saving much more than we. Here is a characteristic example from the Associated Press [emphasis added]:
‘People are saving at the lowest level since the Great Depression, and that could be a problem for the millions of baby boomers getting ready to retire.
In fact, the Commerce Department reported Thursday that the nation’s personal savings rate for all of 2006 was a negative 1 percent, the worst showing in 73 years.
The negative rate means people are spending all of the money they have left after paying taxes — and then some. They are dipping into savings or increasing their borrowing to finance current spending…’
This is a perfect example of the conventional wisdom on this issue and, in my opinion, it is flat out wrong. The reason it is wrong is that the Commerce Department’s Bureau of Economic Analysis (BEA) report that underlies the article looks at savings in a very narrow manner. Here is an excerpt from a paper we wrote a couple of years ago called, Our Double Deficit Disorder:
‘…When you read laments about our ‘low’ savings rate, you should bear in mind that this is a statistical item rather than a commonsense use of the term savings. The BEA’s methodology of calculating savings does not include certain critical components that most of us think of as savings. For example, the BEA’s calculations of income and savings do not include capital gains even though capital gains on stocks, real estate, businesses and other investments are a significant part of what we would consider our savings or increases in wealth. Also, the value of someone’s home equity and retirement plan holdings are also not fully-factored into this calculation of savings, so the published reports of National Savings significantly understate the true savings that Americans are making…
…those who bemoan the low rate of savings in our country seldom point out that most of us consider capital gains, retirement plans and home equity to be an important part of our overall savings…’
I believe these BEA statistics are useful for economists, but they have very little application in the real world. Most of us think of savings as the total of what we have in retirement accounts, investments, home equity, business equity and so on minus our liabilities or debt. When you view savings this way–as net worth–then it seems that Americans are doing very well.
Americans Have A $29.1 Trillion Net Worth
Another government report, compiled by the Federal Reserve, calculates the net worth of all Americans and the good news is that the Fed reports earlier this year that we have a combined net worth (assets minus liabilities) of $29.1 trillion. Yes, that’s right–$29 with a T after it.
I had a pretty good handle on the household net worth statistics, but I was happy to see an excellent piece, Running on Empty?, in the latest issue of The American. It was written by David Malpass, chief global economist for Bear Stearns [emphasis added]:
‘One of the enduring but incorrect concerns about the U.S. economy in recent years is that household savings are low and the consumer is weak because of it. The anxiety has been that consumer spending would hit the wall—Americans would run out of money, having depleted their savings…’
‘…The truth is that the U.S. isn’t running on empty. The household sector has the world’s biggest stock of financial savings, more than the rest of the world combined. How could such a huge sum accumulate if the savings rate is low?
The answer is simple: The published savings rate excludes the economy’s gains. Instead, it is calculated by subtracting personal spending from a narrow definition of personal income after taxes. But savings can grow even when you spend more than you earn in a particular month. For example, if you own $100,000 worth of stock and your portfolio rises by 10 percent (the annual average for the broad U.S. market), your savings rise by $10,000—a fact ignored in the official savings rate…’
‘…Rather than looking at the savings rate, I prefer to look at a clearer, simpler, and more meaningful number: actual savings. Every three months, the Federal Reserve publishes America’s household balance sheet, which shows assets (for example, houses, cars, stocks, pensions, life insurance) and liabilities (mortgages, credit card debt, auto loans). Through March, household financial savings reached a record $29.1 trillion. This is a very conservative figure since it includes only financial assets (not houses, for example), but it also includes all liabilities (such as mortgage debt).
The International Monetary Fund tracks financial savings measures for other countries. At the end of 2006, Japan had $9.8 trillion, the UK $4.8 trillion, and France $2.6 trillion; Germany, at the end of 2005, had $3.2 trillion. In other words, the U.S. had about 40 percent more in financial savings than all these countries combined. If houses and automobiles are counted, too, the broader measure of savings would show an even larger gap between the United States and other large savers. The U.S. advantage makes sense because, more than any other nation, we have focused on the kind of innovation that brings capital gains, which increase the value of underlying assets…’
That’s Mr. Pollyanna To You
Now, don’t get me wrong, I am not turning into a Pollyanna who thinks we have no problems whatsoever. Nor am I saying savings are unimportant. But, the next time you hear someone say we are not saving anything, just ask, how is it then that the aggregate net worth of Americans is going up? And, not only is it going up, but it is an enormous number–$29.1 trillion. In short, we are doing a lot of things right or we would not have built up such a net worth.
Could we and should we save more? Absolutely. Would it make sense for many Americans to cut back on spending and save more? Of course. Nonetheless, we have the world’s biggest nest egg and that’s pretty darn good news.
Update: I realized that the full import of how conservative this net worth calculation is may have slipped by because I did not put a number to it. Malpass wrote:
‘…This is a very conservative figure since it includes only financial assets (not houses, for example), but it also includes all liabilities (such as mortgage debt)…’
In other words, this net worth calculation does not include the value of real estate owned by Americans, but it does include mortgage debt. So, the $29.1 trillion net worth is low. Adding real estate would include another $20 trillion or so for a total net worth of $49 trillion.
To paraphrase a quotation generally attributed to the late Senator Everett Dirksen, “A trillion here and a trillion there. After a while it adds up to real money.”
Update: For more on this topic, see:
Why Americans Really Are Getting Richer
- Investing , Money , Personal Finance
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I agree that as long as equities are increasing, the savings rate is not that important of a number. However, what the savings rate does indicate is that the American public is outspending their income. Even though that 29 Trillion number may be accurate, if one looks at the net worth of the 2/3 poorest of America, it is very low per family. Since homes are ovef 50% leveraged on the average, a 15% drop in prices equates to a 30% drop in net worth. If the bottom 1/3 of homeowners tried to sell their homes, they would have NO EQUITY. The next 1/3 of America has seen equity go from $90,000 to $45,000. America can no longer outspend their incomes and the economy will suffer. See today’s employment numbers. 1/4/2008. Thanks for the ability to comment!