We are investing under the belief that the growth in the nation’s debt, specifically public debt, is not thought to be a detriment to our economic well being, as long as the debt and the corresponding federal budget deficit remains within a certain range of GDP (Gross Domestic Product).
Total debt – consumer plus public debt – has risen every year since 1975 and so has GDP, but lately at a slower pace. Y Squared Advisors has developed an indicator, specifically an index, to measure the relationship between total debt per capita and GDP per capita back to 1975. A snapshot of this index – the “National Net Worth Per Capita Index” (NWI, copyright © 2009, Y Squared Advisors) - covering 5 year intervals is presented in figure 1.
Total debt – consumer plus public debt – has risen every year since 1975 and so has GDP, but lately at a slower pace. Y Squared Advisors has developed an indicator, specifically an index, to measure the relationship between total debt per capita and GDP per capita back to 1975. A snapshot of this index – the “National Net Worth Per Capita Index” (NWI, copyright © 2009, Y Squared Advisors) - covering 5 year intervals is presented in figure 1.
We are all familiar with the “T account” – the backbone of modern accounting that says the left side and the right side of the “T” has to add to the same amounts. The right side has two elements that when added together must equal the left side. These two elements are liabilities and equity, or net worth.
Now, see the “T Account” above for the U.S. economy. On the left, or asset side, are real GDP per capita amounts – the nation’s economic output credited to each citizen. On the right, or liability side, are the individual and government debt balances per capita. A positive difference derived by subtracting the right side from the left side equals net worth per individual. A negative amount means there is no equity, but a deficit instead. For the last 30 plus years our national net worth has been declining; and at a more rapid pace since 1995. As of the end of 2008, net worth per capita is gone. If these were the results for a commercial enterprise it would be bankrupt.
As growth in Real GDP per capita has leveled off since 2000, total household and public debt continued to rise and the direct affect appears to be a decline in average intermediate equity returns as shown in figure 2.
Now, see the “T Account” above for the U.S. economy. On the left, or asset side, are real GDP per capita amounts – the nation’s economic output credited to each citizen. On the right, or liability side, are the individual and government debt balances per capita. A positive difference derived by subtracting the right side from the left side equals net worth per individual. A negative amount means there is no equity, but a deficit instead. For the last 30 plus years our national net worth has been declining; and at a more rapid pace since 1995. As of the end of 2008, net worth per capita is gone. If these were the results for a commercial enterprise it would be bankrupt.
As growth in Real GDP per capita has leveled off since 2000, total household and public debt continued to rise and the direct affect appears to be a decline in average intermediate equity returns as shown in figure 2.
Projecting forward by using data extracted from the 2010 federal budget, the public debt portion of total national debt (obviously the largest component) is expected to rise at an average of $1.2 trillion per year from 2009 to 2019. A pace faster than any previous 11 year period and more than 3 times the average rate of increase of the previous 21 year period back to 1981.
While the size of the public debt is projected to more than double during the next 11 years, GDP will not. And, even though it will not, the 2010 federal budget projects the annual growth in GDP to surpass by 91% the average growth in GDP of the preceding 21 years. See figure 3 and 4.
While the size of the public debt is projected to more than double during the next 11 years, GDP will not. And, even though it will not, the 2010 federal budget projects the annual growth in GDP to surpass by 91% the average growth in GDP of the preceding 21 years. See figure 3 and 4.
Modeling 2019, the Net Worth Per Capita Index (Copyright © 2009 Y Squared Advisors) based on the 2010 budget assumes GDP grows by 4.1% annually and results in an index of -.277 in 2019; and it does not turn positive unless GDP grows at 8% annually. Using growth rates of 2% or 3%, which is more likely giving the current economic environment, the index would fall to all time lows with U.S. equity returns likely to do the same.
See figures 5 and 6.
My conclusion is it is more likely for the debt – a controllable variable -to grow to the levels projected in the budget than it is for GDP to grow to its projected level, since GDP is an uncontrollable variable and therefore has a more uncertain outcome. The result, in my opinion, is more pronounced systemic risk for investors for the next decade which will constrain U.S. equity returns – hyper taxation is more likely than hyper inflation to be the drag on the U.S. economy for generations to come.
We are entering an extended transition period that will likely run until 2022 – when the bulk of the “B” Generation has fully retired and generations X and Y can stand on their own economically and politically. The consequences of more debt and less GDP per capita, along with rising income taxes per capita, will manifest itself in a brutal decline in the standard of living for the “B” generation.
There are no historic parallels in America for this transition because this era is unprecedented due to demographic and economic conditions that we have never experienced before. There are 4 generations of cohorts living at the same time. The oldest generation is the only one that is solvent. Whatever wealth they have not consumed for their long term care needs will be transferred to the “B” generation, who will likely use it to fund their large and growing retirement and health care liabilities. This occurs as the general population tries to figure out how to recover from a decade of no returns on equity investments following the almost complete demise of the traditional pension benefit in the private sector, and now a permanent decline in home equity.
The chart in figure 7 illustrates what a boomer who only has a 401k account (hopefully making maximum contributions) needs to accumulate in assets and realize in equity returns if they hope to retire with something close to the quality of life they have now.
Investors would be better off in the international markets, particularly in countries with low consumer and public debt and rising GDP. The problem for many U.S. citizens is they have to be weaned from their home country bias when they invest.
It’s not just “Good night and God bless America” but “Good luck America, and may God bless you”!
We are entering an extended transition period that will likely run until 2022 – when the bulk of the “B” Generation has fully retired and generations X and Y can stand on their own economically and politically. The consequences of more debt and less GDP per capita, along with rising income taxes per capita, will manifest itself in a brutal decline in the standard of living for the “B” generation.
There are no historic parallels in America for this transition because this era is unprecedented due to demographic and economic conditions that we have never experienced before. There are 4 generations of cohorts living at the same time. The oldest generation is the only one that is solvent. Whatever wealth they have not consumed for their long term care needs will be transferred to the “B” generation, who will likely use it to fund their large and growing retirement and health care liabilities. This occurs as the general population tries to figure out how to recover from a decade of no returns on equity investments following the almost complete demise of the traditional pension benefit in the private sector, and now a permanent decline in home equity.
The chart in figure 7 illustrates what a boomer who only has a 401k account (hopefully making maximum contributions) needs to accumulate in assets and realize in equity returns if they hope to retire with something close to the quality of life they have now.
Investors would be better off in the international markets, particularly in countries with low consumer and public debt and rising GDP. The problem for many U.S. citizens is they have to be weaned from their home country bias when they invest.
It’s not just “Good night and God bless America” but “Good luck America, and may God bless you”!
(The data used in this document was obtained from official U.S. Government sources including the Bureau of Economic Analysis in the Commerce Department, the U.S. Treasury, the U.S. Census Bureau and the NY Federal Reserve. Graphs and analytical diagrams were prepared by Y Squared Advisors and may be used without permission. The National Net Worth Per Capita Index is a proprietary index developed by Y Squared Advisors, Copyright © 2009 all rights reserved.)
This is not investment advice nor is it meant to provide any specific investment strategy or recommendation.
Thomas Warren, CFP®
The direction our government is currently leding us will produce 3 type of people. The 1st are those that are looking for the hand out and wish to be taken cared of without any responsibility on themselves. The 2nd is the elitist class, that are extremely affluent and consider themselves above policy and expectations of the rest of the population. Which brings us to our 3rd category of people, the working class. This will be the majority of our population that still believe in personal accountability and responibility. These are the elderly who have worked all their lives to secure an enjoyable retirement. These are the baby boomer generation that have been the backbone of our economy. These are generation x that have matured and become part of this working class and are now experiencing for the 1st time in their lives difficult times. These are the collegiates who are rebellious and very liberal. These collegiates are also very bright and will soon realize that their future is being given away. I believe that will lead the revolution back to conservatism, God, family and personal accountability.
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