3 Keith Al. Carison Keith M. Car/son is an assistant vice president at the Federal Reserve Bank of St. Louis. Thomas A. Pollmann provided research assistance. The U.S. Balance Sheet: What Is It and What Does It Tell Us? USINESS ANNUAL REPORTS provide two basic accounting statements—a balance sheet, which is also termed a statement of condition, and an income statement. A firm’s balance sheet lists the dollar value of its assets and liabilities as of a specific date. A firm’s income statement lists its revenues and expenses (the difference being profit) for a year. Similar statements are prepared on a national level in the United States. Analogous to a firm’s income statement, a na- tion’s production of goods and services for a year (as well as its spending and saving deci- sions) are summarized in its gross national pro- duct (GNP) accounts. Analogous to a firm’s bal- ance sheet, the U.S. balance sheet lists the dollar value of assets and liabilities for U.S. residents. ‘I’he flows that are identified in the GNP ac- counts and elsewhere are linked to changes in he levels of assets and liabilities reported in this balance sheet. The GNP accounts receive the most attention simply because they focus on current produc- tion and income, which in turn, affects and is affected by, the level of employment. These ac- ounts provide vital information on the short- run performance of the economy. On the other hand, the U.S. balance sheet generally receives little attention. ‘this might be because it is in- complete, including only nonhuman wealth (see I 1 Board of Governors (1991). This is called the C.9 release. shaded insert on page 5), and seems to be more appropriate for long-term analysis. The purpose of this article is to provide an overview of the U.S. balance sheet. Its structure is explained and its usefulness is illustrated by examining trends in some individual balance sheet items. Further examples of its usefulness are given by examining balance sheet ratios such as the financial interrelations ratio, the net foreign balance ratio, the ratio of business capital to household capital and the relation of net worth to inflation. THE STANDARD U%S, BALANCE SHEET A balance sheet shows the position that a busi- ness or household, or the economy as a whole, has reached as a result of its past activity. It reflects flows of real and financial activity plus any revaluations of stocks because of price changes. Table I summarizes the U.S. balance sheet for 1990 as currently prepared by the Board of Governors of the Federal Reserve System. 1 General Definitions A balance sheet usually shows all assets and all liabilities, with the difference called net %vorth. a SEPTEMBER/OCTOBER 1991
Transcript
3
Keith Al. Carison
Keith M. Car/son is an assistant vice president at the FederalReserve Bank of St. Louis. Thomas A. Pollmann providedresearch assistance.
The U.S. Balance Sheet: WhatIs It and What Does It Tell Us?
USINESS ANNUAL REPORTS provide twobasic accounting statements—a balance sheet,which is also termed a statement of condition,and an income statement. A firm’s balance sheetlists the dollar value of its assets and liabilitiesas of a specific date. A firm’s income statementlists its revenues and expenses (the differencebeing profit) for a year. Similar statements areprepared on a national level in the United States.Analogous to a firm’s income statement, a na-tion’s production of goods and services for ayear (as well as its spending and saving deci-sions) are summarized in its gross national pro-duct (GNP) accounts. Analogous to a firm’s bal-ance sheet, the U.S. balance sheet lists the dollar
value of assets and liabilities for U.S. residents.‘I’he flows that are identified in the GNP ac-counts and elsewhere are linked to changes in
thelevels of assets and liabilities reported in
this balance sheet.The GNP accounts receive the most attention‘ simply because they focus on current produc-
tion and income, which in turn, affects and isaffected by, the level of employment. These ac-
counts provide vital information on the short-run performance of the economy. On the otherhand, the U.S. balance sheet generally receiveslittle attention. ‘this might be because it is in-
complete, including only nonhuman wealth (see
I1Board of Governors (1991). This is called the C.9 release.
shaded insert on page 5), and seems to be moreappropriate for long-term analysis.
The purpose of this article is to provide anoverview of the U.S. balance sheet. Its structureis explained and its usefulness is illustrated byexamining trends in some individual balancesheet items. Further examples of its usefulnessare given by examining balance sheet ratiossuch as the financial interrelations ratio, the netforeign balance ratio, the ratio of businesscapital to household capital and the relation ofnet worth to inflation.
THE STANDARD U%S, BALANCESHEET
A balance sheet shows the position that a busi-ness or household, or the economy as a whole,has reached as a result of its past activity. Itreflects flows of real and financial activity plusany revaluations of stocks because of pricechanges. Table I summarizes the U.S. balancesheet for 1990 as currently prepared by theBoard of Governors of the Federal ReserveSystem.1
General Definitions
A balance sheet usually shows all assets andall liabilities, with the difference called net %vorth.
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a SEPTEMBER/OCTOBER 1991
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The U.S. balance sheet is unusual, however, an economic unit there is a corre ponding ha-because the largest category of assets, human bility owed by another economic unit, Financialwealth, is not included. National net worth, as assets can be categorized as fixed claims or van-currently estimated, is all nonhuman wealth. able claims; variable claims are called equities.
Currency and deposits, notes, bonds and mont-For the national balance sheet, assets are gages are all fixed claims. Corporate stock and
divided into two types—tangible and financial, the net worth of noncorporate business areTangible assets are economic goods that yield a equities. For a closed economy, financial assetsstream of services in kind. Plant and equipment, equal financial liabilities. For an open economy,housing, consumer durables and land are all ex- national net assets, or national net worth, is theamples of tangible assets. Financial assets are total of all tangible assets, U.S. monetary goldclaims or rights to amounts of money now or- in and SDRs (special drawing rights created andthe future. For every financial asset owned by distributed by the International Monetary Fund)
FEDERAL RESERVE BANK OF St LOUIS
1
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and net foreign assets—a balancing item (thedifference between foreign assets owned byU.S. residents and U.S. assets owned byforeigners) -
The Standard U.S. Balance Sheet in1990
Table 1 shows 1990 beginning-of-year andend-of-year values in current dollars. The dif-ference reflects saving and investment flows(net of depreciation) during the year plus revalu-ations of existing assets.2
For the economy as a whole, the bottom lineis national net assets, or national net worth. Itis clear that national net assets are dominatedby tangible assets.3 In fact, with the recent rapidgrowth in foreign ownership of U.S. assets, thevalue of tangible assets on U.S. soil has exceededthe value of the nation’s net assets (owned byUS, residents) since 1983
On the net worth side of the standard balancesheet no liabilities are shown. National networth is defined as the sum of private networth, public sector net assets and unallocatedfinancial assets (plus a balancing item for foreignand U.S. holdings of each other’s corporatestock).
Private net worth is broken down further bysector. Household “net assets” and private finan-
cial institutions sector “net assets” are presentedalong with the net worth of each type of busi-ness.4 This is useful for analysis, but one mustkeep in mind that households are the ultimateowners of businesses.
Our focus below is on long-term trends in theUnited States, but one development in 1990 isworthy of mention. As shown in table 1, na-tional net worth grew only 1.3 percent or, giventhe increase in GNP prices (GNP implicit pricedeflator) of 3.9 percent, it declined 2.5 percentin real terms. This weak performance is attribut-able, in part to, declines in real estate prices.
Trends in National Net Worth andGNP
One possible use of balance sheet informationis to view national net worth as a measure ofmacroeconomic performance over time. Does ityield information that differs from that of GNP?Many years ago, Raymond Goldsmith and RobertLipsey concluded that “National balance sheetsare not intended as a device to measure econom-ic growth over time, but they are essential tostudy the relations between the financial super-structure and the real infrastructure, whichconstitute an important aspect of economicgrowth.”~With 30 years of new data, does thisconclusion still hold?
2The Board’s 0.9 release also contains sector balancesheets for households, farm, nonfarm, noncorporate andcorporate business, private financial institutions and therest of the world. For definitions of sectors, see Board ofGovernors (1980).
3Tangible assets for federal, state and local governmentsare not included in the 0.9 release. For further discussionof the government balance sheet, see Boskin, Robinsonand Huber (1989).
4Equities and pension fund reserves are subtracted fromhousehold net worth to obtain net assets. Private financialinstitutions’ net assets are obtained by subtracting cor-porate equities and adding pension fund reserves to theirnet worth.
5Goldsmith and Lipsey (1963), p. 25. Also, see Goldsmith(1985, 1982, 1969, 1966).
FEDERAL RESERVE BANK OF St LOUISa
1 7
Figure 1GNP and National Net WorthRatro scareSintroos or 1982 dori&s4500
ecoO
3500
3000
2500
2000
1500
‘1000
Figure 1 shows real national net worth (NNW)and real GNP from 1948 to 1990.~Over the fullperiod, the growth rates are the same—3.2 per-cent. Real NNW is a relatively smooth series,while real GNP displays considerable volatility.Real NNW shows little cyclical movement, in-dicating that tangible assets are valued over along horizon, even if they are utilized more orless intensively during the business cycle.
Table 2 summarizes and compares GNP andNNW during the 1948-90 period. The referenceperiods were chosen to conform with differentinflation experiences. The 1948-54 period wasone of relatively low inflation, averaging 2.2percent per year. From 1964 to 1981, inflationaccelerated; it was 3.1 percent in 1965 and 9.4percent in 1980. The 1981-90 period is more
difficult to define—disinflation from 1981 to1985 and then moderately accelerating inflationover the past five years.
During the period of relativel~’low inflationfrom 1948 to 1964, GNP and NNW grew at simi-
6The 0.9 release also includes data for 1945-47, but theseyears are omitted because of distortions caused by thetransition to peace from World War II. Real NNW wascalculated by using the Department of Commerce
Ratio scaleBillions of I 002 dollars
15000
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10000
7500
5000
lar rates in both nominal and real terms. Periodsof accelerating or decelerating inflation, however,produced differing growth rates for the twomeasures. From 1964 to 1981, both nominal andreal NNW grew faster than GNP. During the1980s, the opposite occurred; NNW growthslowed relative to that of GNP in both nominaland real terms.
Based on the post World War Ii experience,NNW shows the same long-term trends as GNP.While the growth rates of NNW and GNP candeviate for several years, for purposes of long-term analysis they appear to give the sameanswers. Goldsmith’s and Lipsey’s conclusionfrom almost 30 years ago appears to beconfirmed.
.AN ALT’ER.NATIVE VERSION OF’THE U~S.BALANCE SHEET
Since GNP accounts are limited to data on thecurrent production of goods and services andgenerally omit financial transactions, they are of
constant-cost net stock of fixed private capital, assumingthat the real value of land changed at the same rate asreal GNP and deflating all other components with the GNPdeflator.
w
II
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1950 1955 1960 1965 1970 1975 1980 1985 1990
aSEPTEMBER/OcTOBER 1991
8
Table 2A Comparison of GNP and NNW as Measures of MacroeconomicPerformance (compounded annual rates of change)Measure 1948-64 1964-81 1981-90 1948-90
little use in studying financial superstructureand the relation between real and financialassets.7 To achieve the purpose of understandingrelations between financial and real assets, thenational balance sheet has to be viewed morebroadly than NNW.
Financial assets play a key role in the economicdevelopment of market economies, enabling thetransfer of lenders’ excess purchasing power tofinance spending for borrowers. If an economicunit consumes less than its income, it accumu-lates assets or retires debt, thereby adding to itsnet worth. If an economic unit chooses to ac-cumulate tangible assets less than its saving, itmust accumulate financial assets or reduce lia-bilities. Similarly, if an economic unit chooses toaccumulate tangible assets in excess of saving, itmust borrow or sell off financial assets.
Because of this fundamental role for financialmarkets, it is useful to focus on national balancesheets that include the financial asset-liabilitystructure.8 A full understanding of the forcesthat are driving NNW requires a supplementaryanalysis of financial assets and liabilities.
sums the assets and liabilities for the separatesectors—households, businesses and private fi-nancial institutions. Even though there is doublecounting, this procedure preserves detailed in-formation about financial assets and liabilities.
Although the approach used here followsGoldsmith in principle, it is incomplete becausethe Board of Governors report does not provideestimates of tangible assets held by governments.By adding privately held financial assets to tangi-ble assets, the value of tangible assets held bybusiness and the equity claims on business heldby households are both included.
The assets and liabilities are for the privatesector, so the balancing item is really a mean-ingless residual that includes governmentliabilities, rest-of-world liabilities, as well asequities and net worth of the private sector.Consequently, this balance sheet is not offeredas a substitute for the standard Board of Gover-nors version, but as a supplementary summaryof the Board’s report with a focus on private sec-tor assets and liabilities.
The 1990 values in table 3 indicate that privatesector holdings of financial assets were 1.68times the value of tangible assets at the beginningof the year and 1.70 times at the end of theyear. The sector breakdown of this ratio sum-marizes the structure of the US. economy. Thehousehold sector’s holdings of financial assetsare about twice their holdings of tangible assets.
A Goldsmith-Type ILS, BalanceSheet in 1990
Table 3 summarizes the U.S. balance sheet ina Goldsmith-type format. It uses the same datathat are in the Board of Governors report, but
‘The term “financial superstructure” is attributable mainlyto Goldsmith. It refers to all aspects of the system of finan-cial markets that channels the funds of savers into invest-ment. For more detailed discussion, see Board of Gover-nors (1980).
8For a discussion of the importance of keeping financialassets and liabilities on the national balance sheet, seeGoldsmith and Lipsey (1963). I
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FEDERAL RESERVE BANK OF St LOWS
1 9
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Source: Board of Governors of the Federal Reserve System (1991L Follows Raymond Goldsmith’s procedure of combin-ing (adding) sector balance sheet items to derive a -tofal’ balance sheet. This balance sheet is incomplete, however,because it omits assets held by government and foreigners.
2Calculated as a residual Reflects considerable double counting ana also includes liabilities of government andforeigners.
The nonfinancial business sector, on the otherhand, holds financial assets equal to about 30percent of its tangible assets. Financial institu-tions, almost by definition, hold very few tangi-ble assets.
Financial assets can be compared with liabilitiesto show the net monetary creditor status of thedifferent sectors. Households hold financialassets about 3.7 times as large as their liabilities,with fixed claims almost 1.5 times as large asliabilities. Nonfinancial businesses have liabilitiesalmost twice as large as their financial assets,with the ratio about the same when variableclaims and liabilities are subtracted. Private fi-
nancial institutions are net monetary creditors,although not to the extent that households are.
Reproducible assets are divided into the samecategories as in table 1 and in the GNP ac-counts—residential structures, nonresidentialplant and equipment, inventories and consumerdurables, Financial assets can be divided intomany types, but here they are grouped into fivecategories—currency and deposits, credit marketinstruments, equities (both corporate equitiesand the net worth of noncorporate business),reserves (pension fund and life insurance) andother (which includes security and tradecredit),°
9”Credit market instruments is a core group of debt claimsthat is the principal medium used by nonfinancial sectorsin raising funds through formal credit channels” [Board ofGovernors (1980), pp. 42-43.) It includes all government
securities, corporate and foreign bonds, mortgages, con-sumer credit, bank (not elsewhere classified) and otherloans.
aSEPTEMBER/OcTOBER 1991
10
Figure 2Distribution of Tangible AssetsPercent
Trends in Total Assets
Postwar trends in total assets are summarizedby charting the components of both tangibleassets and financial assets relative to their respec-tive totals.
Tangible assets—Figure 2 summarizes themajor components of tangible assets in 1982dollars relative to the total of tangible assets, butbroken down by type of asset as in table 1 (thesame as in the GNP accounts). Vertical lines(1964 and 1981) correspond to the inflationepisodes in table 2, For inventories and land,the trend generally has been downwardthroughout the postwar period. In the case ofconsumer durables, the trend is upwardthroughout the period. For fixed residential in-vestment, the trend was upward before 1964but has been downward since then. Fixednonresidential investment has trended upward,although there appears to he a flattening in the1980s.
The relationship between the growth of realreproducible tangible assets and inflation wasexamined.” The conventional wisdom is that in-vestors view tangible assets as a good hedgeagainst inflation.” Table 4 shows the correlationcoefficients for the year-to-year percent changein reproducible tangible assets and inflation.None of the coefficients is significant and posi-tive for each of the subperiods. Explaining trendmovements in the components of tangible assetsis apparently much more complex than indi-cated by a simple inflation model.
Financial assets—Privately held financialassets were collected into categories as shownin figure 3. Currency and deposits (broadlydefined) drifted downward from the end ofWorld War Ii until the early lOGOs, stabilizeduntil 1972, shifted to a higher level and thenfell from 1984 to 1990. This category reflects anumber of financial innovations throughout theperiod, notably certificates of deposit in the
‘°Landwas not included because it is fixed andnonreproducible. Its real value can change but not itsquantity.
‘1Higher rates of inflation increase the uncertaintyassociated with rates of return on financial assets, makingtangible assets more attractive to investors. See Caganand Lipsey (1978).
I
Percent
1950 1955 1960 1965 1970 1975 1980 1985 1990
FEDERAL RESERVE BANK OF SIT LOUiS
Table 4Correlation Coefficients: Percent Change in ReproducibleTangible Assets (1982 dollars) and Inflation’
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‘Inflation is year-to-year percent change in GNP deflator
Percent
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lOGOs, money market mutual funds in the 1970sand the payment of interest on checkable ments, about half of the increase in the 1980sdeposits in the 198Os.12 can be traced to the rapid growth in the federal
The trend of credit market instruments wasdebt.
quite flat until the mid-197Os, shifted to a higher The equity portion of financial assets shows alevel until the early l98Os and rose sharply from pattern generally the opposite of that for credit1982 to 1990. Because federal securities are an market instruments. The downward trend in
“For a brief financial history of the United States, seeCouncil of Economic Advisers (1991), chapter 5.
SEPTEMBER/OCTOBER 1991
4
Table 5Correlation Coefficients: Percent Change in Financial Assets(1982 dollars) and Inflation1
‘Significant at the 5 percent levelilnflation is year 10-year percent change in ONP deflator
I
equities began in the high-inflation 1970s, butcontinued through the disinflation of the 1980s.13
These trends suggest a complementary relationbetween equities and credit market instruments(including government securities). The total ofthese two categories has varied between GO and70 percent of all financial assets since WorldWar H.
Life insurance and pension fund reserves rosegently until 1980, and then accelerated in the1980s. This recent acceleration is consistentwith a number of explanations. One would bethat it represented a favorable long-term plan-ning response to the deceleration of inflation.Another would be the demographics of the de-cade which included a rise in the average ageof the population.”
The residual component of financial assets,called ‘other,” reflects mainly trade and securitycredit, This category moved upward slowly butsteadily until the mid-1970s and then stabilized.
As with reproducible tangible assets, coeffi-cients were calculated for the cot-relation be-tween the percent change in financial assets in1982 dollars and inflation. These results aresummarized in table 5. Most of the coefficientsare negative, although most are insignificant.Even though nominal financial assets tend to in-crease with inflation, their growth is generallyoutpaced by inflation so that in real terms thereis an inverse relationship.
SOME USES OF THE BALANCESHEET
The U.S. balance sheet covers a relatively smallportion of the nation’s wealth. However, it canyield insights into particular relationships thatcannot be fully analyzed using information onlyfrom GNP accounts. The accumulation of flowsinto stocks provides a built-in long-term perspec-tive that is generally missing with GNP accounts.By lengthening the time perspective, balancesheet information can shed new light on somecommonly held perceptions about economictrends -
Financial Interrelations Ratio
One of the most important applications ofbalance sheet information is the calculation andanalysis of the financial interrelations ratio.”This ratio measures the size of the financialsuperstructure relative to the real infrastruc-ture. Specifically, it is the ratio of the value offinancial assets to the value of tangible assets,
The financial interrelations ratio provides aframework for the analysis of the relationshipbetween financial development and economicgrowth. However, as Goldsmith points out, “Eco-nomic growth is so complex a phenomenon, ob-viously determined or influenced by basic fac-tors of a physical, technological, and mass-psychological nature, that an attempt to isolatethe effects of apparently secondary forces such
“It was formerly believed that corporate stocks were ahedge against inflation. Fischer and Modigliani (1978) sug-gest that this changed when investors realized that higherinflation carries with it a higher real tax burden.
‘4Carlson (1990).lsGoldsmith (1966).
FEDERAL RESERVE BANK OF St LOUIS
13
Figure 4
Financial Interrelations Ratio1
1.6
1-s
1.4
1.3
1.2
1.1
‘Financisi assets reiaiive to tangibie assets (both in 1982 rIoters)
as the character of financial institutions and thenature of credit practices does not promise suc-cess.”10 Generally, the argument is that a rise inthe interrelations ratio indicates a broadening ofthe range of financial assets and institutions.This promotes the flow of saving into its mostproductive uses which stimulates economicgrowth and increases productivity.”’
Figure 4 shows the interrelations ratio for the1948-90 period. The factors influencing its move-ment are numerous and complicated, althoughinflation appears to have played a role. Prices oftangible assets, the denominator in the ratio,tend to increase more than other prices duringperiods of accelerating inflation, and by a lesseramount when it decelerates. The ratio fell to itspostwar low during the high-inflation period ofthe 1970s before rising during the disinflationof the 1980s. Such an explanation is simplisticbecause a full analysis of the interrelations ratiowould consider all other factors entering into its
determination. Nonetheless, inflation is a factorinfluencing the ratio.~
t On the other hand, realGNP growth does not appear to be relatedsystematically to the ratio, especially since themid-1970s. Thus, even though the financial in-terrelations ratio shows interesting movementsin the postwar period, it is only a starting pointin the analysis of financial structure and eco-nomic growth.”
One facet of the interrelations ratio that hasproduced concern in the I 980s is the rapidgrowth of credit market debt in the private sec-tor. Expansion of debt permits more spendingthan otherwise, but adds to the severity of arecession when the pace of economic activityslows. To maintain debt payments, householdsand businesses have to restrain their spendingor default on their loans. Widespread loan de-faults could endanger the economic health of thefinancial system.
“Goldsmith (1969), p. xi.“For more detailed discussion of this theory, see Goldsmith
(1969), pp. 390-401. Also see Shaw (1973).“Goldsmith (1969), p. 97.“Recently an argument has been offered challenging the
notion that growth in financial structure is alwaysbeneficial. See Fingleton (1991).
I
III
IIIII
I
1950 1955 1960 1965 1910 1975 1980 19851.1
1990
III1III1a SEPTEMBER/OCTOBER 1991
14
Figure 5Credit Market Debt Relative to Tangible Assets
Percent Percent
““ ‘~“N‘~‘~ ,‘NN, ~“-‘“NNN’N ‘N ‘N~N5,C’ ~~ “’N” ~“NNN,NNN ‘N~~N’ ,‘N ‘~N’ ‘N,~ ~ ~ ‘N ‘~N,,N’,’N ‘N
N”,, , ‘ ‘ , ‘“,, “N ‘ ,, N’
C ~‘ C~’ “‘‘~1 ~t”~50 V” ‘‘ “ N N ‘‘N’/’, “N’” N’” ‘, , / ,“t’N’ cj~-~t50
N’ N, N,,, ~,‘ N, ~/ ,‘,‘ N ‘, ‘ ‘N ~‘N‘ N N , /
N’’ N’ ‘/~ —C”~ >‘N N’N’N”,’’N’N’~~, “N‘ N~N”N’1
NN:N/NNY,,N’,’’N’N, ,N<’/NNN’/
~I~ ‘N~<’ N’N ‘N N ~‘ 454Ø~N’ ‘N N’N ‘‘N’tNN’ ~‘, ~‘N;, ‘N, N’’L~L~’’ “> IF-,N’~ 40
‘N, ,, ,N~,, ,,~N’ ‘ , ,,N/NN , ,‘N’
‘N N,,, ,, ~ ‘‘‘NN’NJtN’ , /‘N,’ ‘N / , N, ‘~“~ ‘N N/ N’ / ‘ ‘ N
/ / , ‘ N, N’, ,,, ‘ ‘N “N , ‘N~‘ ‘N
35 >N’N N’’’’’ NN ,,~/ ,,, ‘ , ,‘N ‘N ‘NN”N, / ,“NN 35
N’ “ N ‘N ‘N
30 ‘‘N’N N ‘N~’~’
‘N’ ~‘‘N’N” NN~/’ N’
N, N; N,’N C’ ~C”N\ ‘,,‘‘ N’’ ,‘ ,, ~N’’ ‘N ‘ ‘NC’25 /‘N ‘N /
Figure 5 puts the 1980s expansion of debt intoperspective. All credit market debt of households,private nonfinancial business and private finan-cial institutions is included and measuredagainst total privately held tangible assets. Debtexpanded at an 11 percent annual rate from1983 to 1990, pushing the ratio of debt to tangi-ble assets to a historical high of 0.52. The ex-tent of the increase is dampened somewhatwhen the ratio is calculated with 1982 dollars,but 1990 is still at a historical high; it appearsto be leveling off, however. Whether this debtburden is “too high” will probably not beanswered until the strength and duration of therecovery from the recent recession is clear.
Inflation and the Distribution ofNet Worth
An additional use of balance sheet informationis to analyze the effect of inflation on the networth of various sectors. The standard theoryof such effects is outlined in the shaded insert
2oNo attempt is made here to measure anticipated inflation.However, based on current procedures, the variances ofchange in inflation and the unanticipated change havebeen found to be similar. See Ball and Cecchetti (1990),p. 242.
at right.~°Figure 6 shows the distribution ofprivate net worth among sectors.
The proportion of private net worth held byhouseholds gradually increased from 1948 untilinflation accelerated sharply in the mid-1970s; itthen declined until 1981, Since then, households’share of net worth has risen as the disinflationcontinued through most of the decade. Theseresponses are typical of a sector that is a netmonetary creditor.
The nonfinancial business sector has shown avariety of long-term trends, but the response tothe acceleration and deceleration of inflation issimilar for the three subsectors because theyare all monetary debtors. Farm business hasbeen in a long-term decline throughout the post-war period, interrupted by a slight increasefrom 1971 to 1980 which primarily reflected arise in farm real estate values. Nonfarm noncor-porate business declined as a share of privatenet worth until 1976, increased until 1980, and
FEDERAL RESERVE SANK OF St LOUfS
15II Inflation and the Balance Sheet
lnll,ilion has inai~~c’lti’i’l’,, but nlijsl t!k- unit,, ale net inoitelai~ cn’diror~ Net wurw—cu~wdan’ it~t’tir’t’ls on 11w tli~Irilttition ul tars ri’edituN an’ harmed l)_\ irilailtiiiJ)eiti’i!in(tilni anti ~teaRi~. It intlaliun ~~en’ fulI~ inilanun bet—ansi’ the nn’i’Imsing prn~erutanti i ui rink aritinpuled iminmal iriter’t’sl their moneta i-~-~t~.,t’t,,tin-Imi’,, man- than lu’
I alt’s on jut! tl,iirn Li,’sl’t,, ~~iiultl atljiisl Ii) real altic’ ut tht’ii mnnelai’t Iiahihtit’s Siini-Imipinsati’ or the declining pnrchasing I~m~— laiR iit’t innrletal’\ clehitir, Ix’nr’lil I ‘inn tin-t’] 0! till’ pi’m pal. (.i’rii’rall~ Iio~vc’~-r’r-,iii antiripatt’d in! Iatit)n. ihese ci teds takt’ plare
IIt!lesl inun ha\ I’ rii.it cnmj}Ii’tl’I\ ic,llljmn,,aliri! ~ [hunt an~LitEton on the part (ii the eto-lor’ ittlation .\., Li i’t’stilt j;t’iit~dctil illilittit)r) niiinjt LItlit and leJll’t’st!nI a passi~c’it’disti’ihii-ha\ V ht’t’t’i ]it’d inpai’ued iw arhili-an trans- non ui n ealthJers ol real net \\ oil ii li’tim net jnoiietai ‘,-
I crwhtors to nit moneuirv debtors u hen iritla- I.~tn if inlialion i~ ailticiI)aIecI and it’ulc’t’ti’tItiun k accelerating or ice eisa n hell it is ~ ~ iiWfl’St rates added unceitaint~tleieIt’i-1iting about Itittite jn-it’i’s rail a! tt’t’l iUt)iti.itiiit tIN-i-
I lhr’ kt~~at fur’s in uIt’tr’i’niming ~ liethet’ Sions! As a result econontic tillits xviii al-t’tt)llotnit unils ~viil Ijeneiit I tutu. t;l- he hal iii— tempt ti) ;‘t’disli’ihtile their’ assets mi pi-t)tiR—ccl by. illti;tticnl art’ II] ~vht’thc’i’ lilt! inFlation lion From inflation. I his nil! eln,ite pt-n’s 0!
i~anticipated and (21 ~vIietiir.r’ liii’ r’conojnic’ tangible a~wtnrelatn i’ to finaritial assets.
See Bach and Stephenson 09741, sagan and Lipsey 2See cagan and Lipsey 0978
I f1978~.conard (19641. Fischer and Moaigltani f19761and Kesset and Alchian 119621
I -.-.
I Figure 6Distribution of Private Net WorthPercent Percent
IIIIII Not assets
I
1950 1955 1960 1965 1970 1975 1980 1985 1990
aSEPTENISER/OCTOSER 1991
16
Figure 7Net Foreign Assets Relative to Total Assets Heldby the Private SectorPercent Percent
4
2
0
—2
since then has moved back to its 1976 level.Nonfinancial corporate business is difficult tocharacterize for the full period. Its response tothe acceleration and deceleration of inflationseems quite clear, with its net worth proportionincreasing during the acceleration and then fall-ing back during the disinflation.
The net worth of private financial institutionsdoes not seem to be affected much by swings ofinflation, contrary to the well-known problemsof the savings and loan industry. Private finan-cial institutions are net monetary creditors, butthe difference between their financial assetsand their liabilities is very small.~’
Foreign Ownership of U~S~Assets
Another application of the U.S. balance sheetis to examine concern about the accumulation
of U.S. assets by foreigners during the 1980s. Acommon perception is that foreigners couldeventually own more than 50 percent of businesscapital leading to the potential for foreign con-trol of the U.S. economy. This would threatenU.S. economic sovereignty and national securi-ty.22 Balance sheet data can be used to examinethis concern.
Figure 7 shows net foreign assets as a percen-tage of total assets in the United States. It isclear that the proportion of U.S. assets held byforeigners has increased sharply since the early1980s. Foreign direct investment, however, hasincreased from only 0.4 percent in 1980 to about1 percent of U.S. total assets in 1990. With con-tinued growth at this pace, foreign ownershipwould not exceed 50 percent for 800 years.23
Rather than “signaling an economy in decline,
2llt is difficult to relate to the private financial sectorbecause of its heterogeneity. It consists of commercialbanking, savings institutions, insurance (including privatepension funds and state and local government retirementfunds) and other (including finance companies and mutualfunds).
22This concern and several others are examined in Ott(1989).
23These trends in foreign ownership are unlikely to continue.For example, assets of U.S. business acquired or
established by foreign investors dropped by 25 percentfrom 1989 to 1990. See Fahim-Nader (1991).
1950 195$ 1960 1965 1970 1975 1980 19e5 1990
‘II
FEDERAL RESERVE SANK OF ST. LOUISa
17
Figure 8Ratio of Business Capital to Household Capitall
.875
.850
.825
.890
.775
.750
.725
plant and equipment divided by resldentiai structums pius consumer durabies(sit in 1982 doitsrs)
such investment by foreigners is a measure ofthe economy’s vigor.”~~On a worldwide basis,foreign direct investment increases economicwelfare by moving resources from less to moreproductive uses.
Ratio of Business Capital toHousehold Capital
Another concern that developed in the 1980swas that the United States was not channelingits saving into the “right” kind of investment.25Mainly because of a combination of inflationand tax shelters, savings were directed towardhousehold capital rather than productive busi-ness capital.z5 Business investment in plant andequipment is a major vehicle for increasing eco-nomic growth. It boosts productivity by provid-ing more capital per worker and also embodiestechnological improvements. Household capital,on the other hand, provides services to con-sumers but does not add directly to productivecapacity. Figure 8 shows the ratio of nonresi-
24Ott (1989), p. 63.25This view is developed in Rutledge and Allen (1989).26For a discussion of the effects of the Tax Reform Act of
1986, see Fazzari (1987) and Slemrod (1990).
.875
.850
.825
.800
.775
.750
.7251990
dential plant and equipment to household capi-tal—the sum of consumer durables and residen-tial structures.
Following World War II, households enlargedtheir stock of capital until 1964. From 1964 to1970, growth of business capital stock exceededthat of household capital stock. For the next 12years, business and household capital grew atroughly the same rate. Since 1982, however, thegrowth of household capital has exceeded thatof business capital. Boosting the overall level ofsaving is the primary vehicle for stimulatingeconomic growth. There is also potential forfaster growth by designing policies that directthe flow of saving away from household capitalinto business capital.27
SUMMARY
Economic analysts rely mainly on the nation’sGNP accounts as a source of information oneconomic performance. For purposes of under-
27For a more complete discussion of saving and its role ineconomic growth, see Cullison (1990) and Harris andSteindel (1991).
I
IIIIIIIIIIIIIIIII Ia SEPTEMSER/OCTOSER 1991
18
standing the forces at work in the determina-tion of current production, GNP accounts areindispensable. Generally overlooked, however, isanother source of information—the nation’sbalance sheet. Business accounting relies greatlyon the balance sheet as a tool for analyzing afirm’s financial health. Similar practices do notprevail in national economic accounting.
What would appear to be one of the most im-portant items in the U.S. balance sheet is themeasure of national net worth. When comparedwith GNP as a measure of long-term economicperformance however, it does not seem to of-fer much added information.
Probably the most important use of balancesheet data is to analyze the role of financialstructure in the process of economic growth. Avariety of other questions, however, can also beexamined by developing ratios of particularbalance sheet items. The chief benefit of theU.S. balance sheet, as it is currently prepared,seems to be that it forces the user to take along-term perspective to detect changing trends.What appeared to be major concerns during the1980s sometimes took on a different interpreta-tion when viewed from the perspective of theU.S. balance sheet over the entire post-WorldWar II period.
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Bach, 0. L., and James B. Stephenson. “Inflation and theRedistribution of Wealth,” Review of Economics andStatistics (February 1974), pp. 1-13.
Ball, Laurence, and Stephen 0. Cecchetti. Inflation andUncertainty at Short and Long Horizons,” Brookings Paperson Economic Activity, 1 (1990), pp. 215-45.
Board of Governors of the Federal Reserve System. BalanceSheets for the U.S. Economy 1945-90 (March 1991).
______ Introduction to Flow of Funds (June 1980).
Boskin, Michael J., Marc S. Robinson, and Alan M. Huber.“Government Saving, Capital Formation, and Wealth in theUnited States, 1947-85,” in Robert E. Lipsey and HelenStone Tice, eds., The Measurement of Saving, Investment,and Wealth (University of Chicago Press, 1989), pp.287-356.
Cagan, Phillip, and Robert E. Lipsey. The Financial Effects ofInflation (Ballinger Publishing Company, 1978).
Carison, Keith M. “On Maintaining a Rising U.S. Standard ofLiving Into the Mid-2lst Century,” this Review (March/April1990), pp. 3-16.
Conard, Joseph W. “The Causes and Consequences of Infla-tion,” in Inflation, Growth and Employment, A Series ofResearch Studies prepared for the Commission on Moneyand Credit (Prentice-Hall, 1964), pp. 1-144.
Council of Economic Advisers. 1991 Annual Report (GPO,February 1991).
_______ 1987 Annual Report (GPO, January 1987).
Cullison, William E. “Is Saving Too Low in the UnitedStates?” Federal Reserve Bank of Richmond EconomicReview (May/June 1990), pp. 20-35.
Eisner, Robert. The Total Incomes System of Accounts(University of Chicago Press, 1969).
Fahim-Nader, Mahnaz. “U.S. Business Enterprises Acquiredor Established by Foreign Direct Investors in 1990,” Surveyof Current Business (May 1991), pp. 30-39.
Fazzari, Steven M. “Tax Reform and Investment: How Bigan Impact?” this Review (January 1987), pp. 15-27.
Fingleton, Eamonn. “Highly Speculative,” At/antic (June1991), pp. 22-25
Fischer, Stanley, and Franco Modigliani. “Towards anUnderstanding of the Real Effects and Costs of Inflation,”Weltwirtschaftliches Arch/v (1978). pp. 810-33.
Goldsmith, Raymond W. Comparative National BalanceSheets: A Study of Twenty Countries, 1688-1978 (Universityof Chicago Press, 1985).
_______ - The National Balance Sheet of the United States,1953-1980 (University of Chicago Press, 1982).
_______ Financial Structure and Development (Yale Univer-sity Press, 1969).
_______ “The Uses of National Balance Sheets,” Review ofIncome and Wealth (June 1966), pp. 95-133.
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Juster, F. Thomas. “A Framework for the Measurement otEconomic and Social Performance,” in Milton Moss, ed.,The Measurement of Economic and Soc/al Performance (Na-tional Bureau of Economic Research, 1973), pp. 25-109.
Kendrick, John W. The Format/on and Stocks of Total Capital(National Bureau of Economic Research, 1976).
Kessel, Reuben A., and Armen A. Alchian. “Effects of Infla-tion,” Journal of Political Economy (December 1962), pp.521 -37.
Ott, Mack. “Is America Being Sold Out?” this Review(March/April 1989), pp. 47-64.
Rutledge, John, and Deborah Allen. Rust to Riches (Harperand Row, 1989).
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