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The Long Term Economic Outlook in the US. Will the Empire Survive? Yannis Matsis November 2009
The Long Term
Economic Outlook in the US.
Will the Empire Survive?
Yannis Matsis
November 2009
To find fault is easy.
To do better may be difficult.
Πλούταρχος της ΒοιωτίαςΈλληνας ιστορικός, βιογράφος, δοκιμιογράφος και Mεσοπλατωνιστής45-120 μ.Χ.
Plutarch from BoeotiaGreek historian, biographer, essayist and Μiddle PlatonistAD 45-120
The relation between the
U.S. and the rest of the world
Chapter 1
Conservation of
Mass and Energy
Chapter 1
IN = OUT
IN
OUT
VALUE
ADDED !
Chapter 1
IN = OUT
Revision
OUT = IN
=
BALANCE
OF
PAYMEN
TS
1960
1962
1964
1966
1968
1970
1972
1974
197
6
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
US
International Transactions - Balance of Payments
Statistical discrepancyOther foreign assets in U.S.Foreign official assets in U.S.U.S. private assetsU.S. other government assetsU.S. official reserve assetsCapital account trnsctns, netUnilateral current trnsfrs, netIncome ReceiptsIncome PaymentsExports - ServicesImports - ServicesExports - GoodsImports - GoodsAll inflowsAll outflows
Year
US$
Trillio
n
Source: Bureau of Economic Analysis, U.S. Department of Commerce (www.bea.gov)Note: Actual data
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
199
4
1996
1998
2000
2002
2004
200
6
2008
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
US
International Transactions - Balance of Payments - Net Per Category
Statistical discrepancyForeign Assets (Capital Acct)Income Net (Current Acct)Services (Current Acct)U.S. Assets (Capital Acct)Other (Current Acct)Goods (Current Acct)Net inflowsNet outflows
Year
US$
Trillio
n
Source: Bureau of Economic Analysis, U.S. Department of Commerce (www.bea.gov)Note: Derived data by netting main categories and grouping smaller categories together.
1960
1962
196
4
1966
1968
1970
1972
1974
197
6
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
(1.0)
(0.8)
(0.6)
(0.4)
(0.2)
0.0
0.2
0.4
0.6
0.8
1.0
US
International Transactions - Balance of Payments - Net Per Category
Statistical discrepancyForeign Assets minus U.S. Assets (Capital Acct)Income Net (Current Acct)Services (Current Acct)Other (Current Acct)Goods (Current Acct)Net inflowsNet outflows
Year
US$
Trillio
n
Source: Bureau of Economic Analysis, U.S. Department of Commerce (www.bea.gov)Note: Derived data by netting main categories and grouping smaller categories together.
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
199
0
1992
1994
1996
1998
2000
2002
2004
2006
2008
(1.0)
(0.8)
(0.6)
(0.4)
(0.2)
0.0
0.2
0.4
0.6
0.8
1.0
US
International Transactions - Balance of Payments - Net Current and Capital Account
Net Capital AccountNet Current Account
Year
US$
Trillio
n
Source: Bureau of Economic Analysis, U.S. Department of Commerce (www.bea.gov)Note: Derived data by netting main categories and grouping smaller categories together.
1976
1977
1978
197
919
80
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
199
119
92199
319
9419
9519
9619
9719
98
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
(20.0)
(18.0)
(16.0)
(14.0)
(12.0)
(10.0)
(8.0)
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
US
International Position - Balance Sheet
U.S. private assetsU.S. other government assetsU.S. official reserve assetsOther foreign assets in U.S.Foreign official assets in U.S.Assets minus Liabilities
Year
US$
Trillio
n
Source: Bureau of Economic Analysis, U.S. Department of Commerce (www.bea.gov)Note: Derived data by netting main categories and grouping smaller categories together.
LIABILITIES(created byselling assets -capital account inflows)
ASSETS(created bybuying assets -capital account outflows)
DEBT
DEBT
STOCK
DIRINV
DEBT,STOCK,
&DIR INV
US External Balance Sheet 2008LIABILITIES ASSETS
GOLD
FOREIGN CCY
OTHER
GOVERNMENT
BANK, CORPORATE & INDIVIDUAL
US$4.5Trillion
US$7.9Trillion
US$1.8Trillion
US$2.6Trillion
US$12.5Trillion
US$16.9 Trillion US$13.4 Trillion
US$3.5Trillion
Putting US$3.5 Trillion into context
> The 2008 value of the U.S. external debt is US$3.5 Trillion.
> Debt will be paid from future productivity gains.
> In today's free market economies the only entity able to produce within a country is its companies.
> The total valuation of all companies within a country shows us Mr. Market's present value expectation of the total future net productivity (net, after cost of production).
> It is this future productivity that is expected to "pay down" the country's debt.
Putting US$3.5 Trillion into context
> Total Market Cap of US Stocks Dec 31, 2007:US$14.8 Trillionsource: The Wilshire 5000 Total Market Index, Wilshire Associates Incorporated (www.wilshire.com)
> Sanity check: All U.S. Corporate Net Profits for 2007:US$1.54 Trillionsource: Bureau of Economic Analysis, U.S. Department of Commerce (www.bea.gov)
> Implies Price/Earnings (P/E) ratio of 9.6x (assuming all companies were quoted in Stock Exchanges).
> Let's assume Total Market Capitalisation of all U.S. Companies Dec 31, 2007:
US$20 Trillion
The U.S. has raised
US$3.5 Trillion
of net external debt.
Debt
Present Value of Future Productivity
US$3.5 Trillion
US$20.0 Trillion17.5%==
The U.S. has sold 17.5%
of its future productivity.
Have I forgotten that the majority
of wealth in the U.S.
(as in any country)
resides in the value of land,
infrastructure and property?
Map of North America
ALASKA
PURCHASED BY U.S.FROM RUSSIAN EMPIREIN MARCH 1867FOR US$7.2 MILLION(2cents PER ACRE)
The U.S. will not sell its land
or key infrastructure to foreigners.
Chrysler Building, New York New York
SOLD TOABU DHABI INTERESTSIN JULY 2008
A common misconception
> A company or individual can convert its property to cash by selling it (transferring it) to someone else, and therefore it would be appropriate for the property to be included in the company's or individual's net worth calculation.
> All the companies and individuals within a country cannot simultaneously convert their properties to cash. To whom would they sell to? They can only exchange them for one another. Therefore it is meaningless to talk about an aggregate total worth of all land, infrastructure and property in currency terms.
A common misconception
> Example:• Assume every house in the U.S. is worth US$100,000.• If there are 50m houses in U.S. to house the 300m+
population, this would imply a total worth of houses of US$5 Trillion.
• If there are 100m houses in U.S. to house the 300m+ population, this would imply a total worth of houses of US$10 Trillion.
> Does the latter example imply that the U.S. housing is worth double, and therefore the U.S. has the right to borrow double amounts than in the former case?
> Not all houses can be converted to cash.
A common misconception
> But then are we really saying that the total land, infrastructure and property have no aggregate wealth? Is it an intangible?
> Land, infrastructure and property are the basic ingredients needed for an economy to become productive.
> To have them in place frees up resources (that would otherwise have been diverted to build them) to focus on production.
> Therefore a country that has them in place, is richer than a country that doesn't, as the former can divert its resources on production whilst the latter has to divert them on building them.
A common misconception
> Everything else being equal, a country with extensive infrastructure and properties should have more productive companies than a country without the same infrastructure and properties.
> In fact, the value of the additional productivity that is gained by having the infrastructure and properties in place should be reflected in the aggregate valuation of all the companies within the country (assuming all means of production are controlled by the companies to begin with).
> Everything else being equal, a country with extensive infrastructure and properties should have companies with higher aggregate valuation that the aggregate valuation of companies within a country without the same infrastructure.
Assuming all means of production in a country
are controlled by companies,
then the value of all land,
infrastructure and properties (incl. private ones)
should already be incorporated in the
aggregate valuation of all companies
within the country.
U.S.
A brief look in the inside
Demographics
U.S. Population - Current and Projected
Ratio of population between 20 years to 60 years and rest.2008: 1.21:12028: 0.98:1
Age Bracket Percentage Percentage
Up to 20 years 83,539,751 27.5% 96,334,613 26.2%
20 years to 30 years 42,183,406 13.9% 46,958,152 12.8%
30 years to 40 years 40,480,868 13.3% 47,625,046 13.0%
40 years to 50 years 44,148,262 14.5% 45,854,174 12.5%
50 years to 60 years 39,990,756 13.1% 40,967,491 11.2%
60 years to 70 years 26,587,020 8.7% 40,764,624 11.1%
70 years + 27,298,194 9.0% 48,585,955 13.2%
Total 304,228,257 100.0% 367,090,055 100.0%
TotalPopulation
2008
TotalPopulationProjected
2028
A 20% drop!
Source:U.S. Census Bureau, U.S. Department of Commerce (www.census.gov)Note: Derived data by adding individual population categories to above groups.
Wealth Disparity
U.S. Families Net Worth - 2007
Source:Survey of Consumer Finances (SCF) 2007, Federal Reserve of the U.S. (www.federalreserve.gov)Note: Derived data by multiplying mean net worth per quantile with number of families in quantile.
Percentage
Less than 25% 29,025,000 (2,300) (0.1) (0.1%) 100.0%
25% to 50% 29,025,000 57,900 1.7 2.6% 100.1%
50% to 75% 29,025,000 227,000 6.6 10.2% 97.5%
75% to 90% 17,415,000 586,000 10.2 15.8% 87.3%
90% to 100% 11,610,000 3,975,000 46.1 71.5% 71.5%
Total 116,100,000 64.6 100.0%
Percentile ofnet worth
Numberof families
Meannet worth
US$
Total net worth for percentile
US$ Trillion
Cumulative Percentage
An imbalance betweenrich and poor is the oldestand most fatal ailmentof all republics.
Πλούταρχος της ΒοιωτίαςΈλληνας ιστορικός, βιογράφος, δοκιμιογράφος και Mεσοπλατωνιστής45-120 μ.Χ.
Plutarch from BoeotiaGreek historian, biographer, essayist and Μiddle PlatonistAD 45-120
U.S.
Budget Projections
2008
200
9
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
U.S.
Budget Projections
OtherOther revenuesSocial insurance taxesCorporate income taxesIndividual income taxesNet interestDiscretionary spendingCivilian and Military Retirement and VeteransIncome SecurityMedicaidMedicareSocial SecurityTotal RevenueTotal ExpenditureNet Budget
Year
US$
Trillio
n
Source: Congrassional Budget Office of the U.S. (www.cbo.gov)Note: Derived data by netting main categories and grouping smaller categories together.
2009
2010
2011
2012
2013
201
4
2015
2016
2017
2018
2019
(10.0)
(9.0)
(8.0)
(7.0)
(6.0)
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
0.0
U.S.
Cumulative Budget Projections
Cumulative Budget
Year
US$
Trillio
n
Source: Congressional Budget Office of the U.S. (www.cbo.gov)Note: Derived data by accumulating net annual budget.
So?
What can be done?
Possible solutions
1. Monetise debt!
Will lead to a collapse of:
• US$
• U.S. credibility
2. Increase net productivity, by:• Producing more, and/or,• Consuming less
A side note
> We have not talked about GDP!
> The U.S. is not alone in this position.• There are many other countries with similar imbalances
that have led to similar external liabilities (e.g., U.K.).
> The global imbalances in current and capital account flows are also a problem for the surplus nations.
• For example China will suffer great looses if US$ depreciates or if U.S. defaults in its debt obligations.
• More importantly...
The surplus nations have incurred a substantial
opportunity cost, by not focusing their
productive resources in increasing their own
internal infrastructure, which in turn would
increase their productive and consumption
capabilities and standard of living, but have
focused on producing goods for export to the
deficit countries and the associated
accumulation of deficit countries' loan assets
The example of the Chinese factory producing dolls...
Don't rule anyone out
just yet...
ww
w.b
ea.g
ov
To make no mistakes is notin the power of man;but from their errorsand mistakes the wise and goodlearn wisdom for the future.
Πλούταρχος της ΒοιωτίαςΈλληνας ιστορικός, βιογράφος, δοκιμιογράφος και Mεσοπλατωνιστής45-120 μ.Χ.
Plutarch from BoeotiaGreek historian, biographer, essayist and Μiddle PlatonistAD 45-120
Thank You
I am grateful for your attention!
Presentation posted on the websites of:
IMH: www.imh.com.cy
and
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