America Is Not Going Broke
When I speak at investment conferences, like Investment U's annual conference last week in Carlsbad, Calif., I often give an overview of The Oxford Club's investment philosophy, method of analyzing stocks and a few recommendations.
Then the inevitable hand goes up...
"But what difference does all this make when the country is going broke?"
You could easily get this impression listening to the national media or gloomy prognosticators - many of whom have held the same bleak view not just for years but for decades - but the truth is far different.
According to the Federal Reserve, the net worth of U.S. households and nonprofit organizations rose 14% last year to $80.7 trillion. Even adjusting for inflation, this is an all-time high. Thank rising home and stock prices. And, bear in mind, a net worth calculation is assets minus liabilities.
There is great inequality in the distribution of wealth in this country, of course. Many households have few assets or are swimming in debt. But the total net worth of Americans on the whole has never been higher.
Incidentally, at a recent conference a (lone) member of the audience suggested that this inequality was a strong argument for redistribution. Another attendee claimed that if you divided the world's wealth equally among all 7.2 billion people on the planet, you'd have the same mal-distribution in 20 years.
Not one person in the room challenged him as to why. The obvious feeling is that there are those who have ingrained habits of education, hard work, saving and risk-taking and those who do not.
Corporations Are Flush
As for corporate America going broke, forget about it. Corporate profits have never been higher. Corporate profit margins have never been higher. Corporate profits as a percentage of GDP have never been higher. And public companies in the U.S. are sitting on more than $2 trillion in cash. Those wondering why the stock market has hit one new high after another might want to read this paragraph again.
Then, of course, we must turn to Uncle Sam. Here the picture is not nearly so bright. The national debt is a hefty $17.5 trillion.
But as I mentioned in my last column, debt is meaningless except in relation to income and assets. The national debt is roughly equal to the national GDP, similar to a person with $100,000 in income having $100,000 in debts.
But that's just the income side of the equation. Total national assets are $112.2 trillion, a figure that dwarfs the national debt. Of course, we don't want to confiscate private assets to pay down the public debt. But you can't go broke unless your liabilities exceed your assets. National assets - and household net worth - are far greater than the national debt. And the annual deficit as a percentage of GDP is declining, not rising.
Yes, the debt is too large and we have work to do to get our financial house in order. Reforming the runaway entitlement system should be priority one. But the U.S. going broke? It isn't happening - and it won't happen.
As Warren Buffett wrote in his new annual report to Berkshire Hathaway shareholders, "The dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead."
P.S. Alex's column from last week is already generating some buzz among readers. To join the conversation or ask Alex a question, post a comment below.