Net Worth--and the Dollar--Rise Again

Michael Mandel

The amount of (pessimistic) nonsense that is written about the U.S. economy is truly extraordinary. The usual rap is that the U.S. is borrowing its way into oblivion--and eventually we are going to get our come-uppance when the dollar plunges and no one wants to lend to us anymore.

But oblivion is looking pretty good these days. Despite all the pessimism and all the borrowing, the country's net worth continues to rise, according to the latest figures from the Federal Reserve!
What's more, the dollar is up as well in recent weeks.

These two facts are connected. Borrowing (trade deficits and government budget deficits) is sustainable as long as a country is generating enough wealth to cover its debts. So as long as net worth is rising, the downward pressure on the dollar is limited.

Let me say this again. Rising net worth = trade deficits are sustainable.

Let's look at a chart first. I calculate a concept that I call "real adjusted net worth per capita". That's equal to household net worth, minus government net debt, adjusted for inflation, and divided by the size of the population.

Here's what the chart looks like.

Real adjusted net worth per capita rose to $142,000 in the first quarter of 2006 (in 2000 dollars). That's up 6% over a year earlier, and higher than the previous peak.

You can see from the chart that there is a long-term upward trend, distorted by the late 1990s boom. So even with all of our borrowing, our net worth has been increasing.

What about the exchange rate? The yen-dollar exchange rate is at 114 as I write. That's roughly where it was in the early 1990s, despite all of the U.S. trade deficits since then. The euro-dollar exchange rate is at 1.26. That means the dollar has depreciated a bit since the end of 1998 (when the euro went live), but not very much.