U.S. Isn’t Broke, Dollar Won’t Fail, Capital Economics Says

The U.S. isn’t broke, and the dollar isn’t in danger of collapse even after unprecedented stimulus measures enacted following the worst financial crisis since the Great Depression, according to Capital Economics Ltd.

Taking into account total domestic assets and liabilities, the U.S. economy’s overall net worth is about 550 percent of gross domestic product in 2011, Paul Ashworth, the chief U.S. economist at Capital Economics, wrote in a research note. That compares with official figures showing U.S. GDP at close to $15 trillion, while national debt has ballooned to $16.8 trillion after nearly tripling since 2001.

The report adds to the global debate over deficits and fiscal austerity, which is being waged from the euro area, whose economy is forecast to contract for a second year, to the U.S., which has grown for three years even as it was downgraded by Standard & Poor’s in August 2011 for failing to rein in its growing debt burden.

“At first glance it does appear that America is caught in some sort of debt super cycle,” Toronto-based Ashworth wrote yesterday. After accounting for increases in domestic asset values “the rise in credit market debt and total financial liabilities does not look particularly egregious.”

The best-known study of the ramifications of a country’s ratio to gross-domestic-product is by economists Carmen Reinhart and Kenneth Rogoff, which found that nations with debt loads greater than 90 percent of their economies grow more slowly.

‘Absolutely Nonsense’

“That tipping point of 90 percent is absolutely nonsense,” Joseph Stiglitz, Nobel Prize-winning Columbia University economist, said today on Bloomberg Television’s “Surveillance” with Tom Keene and Sara Eisen. “We had a much higher debt-to-GDP ratio at the end of World War II. After World War II ended, we had the fastest rate of economic growth, shared prosperity.”

Reinhart and Rogoff said in a 2010 paper that once debt rises beyond 90 percent of gross domestic product for advanced economies, median growth rates are 1 percentage point lower. The U.S. passed the 90 percent mark in early 2010, according to the International Monetary Fund.

The U.S. isn’t deeply in debt to other nations, according to Capital Economics’s Ashworth. Taking into account U.S. holdings of foreign bonds and cross-country holdings of other types of assets, net external liabilities are a “fairly modest” 30 percent of GDP, he said in the report.

Market View

“Under these circumstances, there is little danger of a collapse in the dollar or a spike in long-term interest rates,” he wrote.

Three years after a government spending surge in response to the recession drove the nation’s total debt to $16.7 trillion, or 106 percent of the $15.8 trillion economy, key indicators reflect gathering strength. Businesses have increased spending by 27 percent since the end of 2009. The annual rate of new home construction jumped about 60 percent. Employers have created almost 6 million jobs.

“The overall balance sheet position of America is not a disaster,” Ashworth said in a telephone interview today. “It is important to look at both sides of that balance sheet because both sides have been expanding.”

Even as the U.S. continues borrowing to cover this year’s projected $845 billion deficit, bond markets remain untroubled. Yesterday’s 1.91 percent yield in New York on the 10-year Treasury note was lower than on the day President Barack Obama was sworn in for his first term. It’s lower than on Aug. 5, 2011, when S&P lowered the U.S. credit rating. And it’s well below the 5.3 percent average over the past 25 years.

Dollar Gain

The U.S. Trade Weighted Major Currency Index, which measures the greenback against the currencies of Europe, Australia, Canada, Japan, Sweden, Switzerland and the U.K., has risen 4 percent since January 2008 to 76.04. The dollar’s share of global foreign-exchange reserves stands at 61.8 percent, up from 60.5 percent in mid-2011, the latest Washington-based International Monetary Fund data show.

Unemployment in 17-nation countries using Europe’s common currency has climbed to a record 12 percent under a German-led austerity-first strategy.

U.S. payrolls grew by 88,000 in March, the smallest gain in nine months and less than the most-pessimistic forecast in a Bloomberg survey, raising concern that higher taxes and federal budget cuts may be sapping growth in the world’s largest economy.

The ratio of U.S. debt to GDP climbed to 74 percent last year from 38 percent in 2008, data compiled by Bloomberg show. Eurostat data show the euro zone’s climbed to 87 percent at the end of 2011 from 66 percent four years earlier.

“There is no instance of a large economy getting to growth through austerity,” Stiglitz said. “You need to stimulate the economy. And right now, monetary policy has very little effect. You need fiscal stimulation.”

Before it's here, it's on the Bloomberg Terminal.