The Bigger Picture

Gary Moore

During the early nineties, the media, both secular and religious, convinced a large percentage of Americans that our $5 trillion federal debt was of earth-shaking proportions. (They did much the same in the late nineties during Y2K.) As Americans were living on about $25,000 on average in 1990, it is easy to see how that $5 trillion number could look like a giant in the promised land. And most people were quite surprised when I told them the White House had actually estimated that America’s net worth, after subtracting all debts owed to foreigners, was $66.4 trillion in 1990.

Today, media headlines are telling Americans the sub-prime debacle will cost Wall Street firms around $400 billion. While that is a huge number to companies like Bear Stearns who specialized in sub-prime mortgages, it is roughly 2 percent of the value of American stocks, a value that seems to come and go each day on Wall Street as a matter of course.

The most credible economist among the pessimists seems to be Professor Nouriel Roubini of New York University’s Stern School of Business. He has teamed up with UBS to tell us that residential housing values might fall as much as 40 percent, resulting in mortgage losses of up to $2 trillion. He believes there could be $700 billion of other losses during this credit crunch, suggesting losses to the financial system could reach up to $3 trillion. While that is less than the $5 trillion federal debt number back in the nineties, it is still enough to cause some pain to our banks, as well as some terrorizing headlines. The last might actually cause more harm to the real economy than the first. So it might be good to again put such large numbers into perspective.

In its 2009 budget, recently released, the Office of Management and Budget in the White House estimated the total assets of America to be $120.4 trillion at the end of 2007. We owed foreigners $8.3 trillion. That means our “net wealth” was $112.1 trillion. (Even after adjusting for inflation, Americans’ incomes had risen to over $38,000 on average at the end of 2007.) So if Professor Roubini’s gloomiest estimate of $3 trillion in losses to the financial system proves correct, it would be less than 3 percent of America’s net wealth as estimated by the White House.

Moral? Like the ancient Hebrews, we have two options: 1) We can listen to gloomy spies who have surveyed the promised land and turn toward forty years of wandering in the desert, or 2) we can “number” our assets—or count our blessings—as Moses did when he was headed for that promised land. It’s largely a matter of choice . . . and leadership.  

Gary Moore is an investment counselor and founder of the Financial Seminary.

1 Responses (comments are closed) • Provocations, Business, Leadership, Society, Mon 31 Mar 2008