Friday, July 20, 2012

What's Everything Worth?

A recent article in The Economist (The Real Wealth of Nations, discusses a new report published by the UN and Cambridge University that adds an interesting perspective to our country's macro financial position.

The UN report attempts to quantify assets of each of the world's largest economies.  The most common measure of economic position is GDP which is a measure of a country's total annual economic output.  But as the article points out, looking at GDP alone is like trying to assess a company's financial performance by looking at its income statement and ignoring its balance sheet.  To get a complete picture of financial health, you must look at performance in the current year (income statement) as well as wealth accumulated over many prior years (balance sheet).

The UN study attempts to quantify three major assets groups - physical (a country's stock of buildings, factories, roads, bridges, dams, ports) natural (the country's fossil fuel reserves, mineral deposits, forests, arable acreage) and human (the education and skills of a country's populace).  Are these are the right groups?  How do you quantify a country's human capital?  Doesn't a balance sheet need liabilities too? Obviously the valuation task here was difficult and inexact, but the study has put in a stake in the ground that can hopefully be improved with time.

So what did they find?

Coming in #1 with a total asset base of $117.8 trillion was the US. Also on the medal stand (hey, the Olympics start next week) at #2 was Japan at $55.1 trillion, and #3 was China at $20 trillion.

With total assets, there are a lot of useful comparisons one can look at.

What's our total public debt vs GDP?  $15+ trillion v $15+ trillion. I don't feel so good.

What's our total public debt vs total assets? $15+ trillion v $117.8 trillion. I'm feeling better.

What's our total public debt + private debt + state/county/city debt + present value of unfunded Social Security, Medicare, Medicaid, and our new nationalized healthcare liabilities + present value of unfunded public employee pensions + present value of private employee pensions (those we've been stuck with + the ones we'll get stuck with later) vs total assets? A very big number with the suffix 'trillion' stuck on the end of it v $117.8 trillion. I definitely need to go lie down.

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