Friday, April 22, 2005

Too Much Debt - Or Too Little?

Forbes columnist Kenneth Fisher has a very interesting take on the level of debt in the US. Link.
The debt worriers have been with us for a long time, and they've always been wrong. Their economic prescriptions are born of a moral philosophy that says debt is bad and more debt is worse. They don't like to see the U.S. importing capital from abroad at the rate of $600 billion a year. What the worriers fail to contemplate is the uses to which that capital is put.

What is the right debt level for society to carry? The answer is: that level where our marginal borrowing costs approach our marginal return on assets. [...]

The U.S. is nowhere near there. As a result, we need more debt to get more income, so people can become wealthier.

The Federal Reserve counts $97 trillion of assets in the economy, offset by $44 trillion of debt, leaving (with rounding) $52 trillion of net worth. [...] And we're getting a great return on that $52 trillion. Our national income is $12 trillion.
A $12 trillion return on $52 trillion of debt indicates a 23% return. Actually, the true return is somewhat lower, since the capital figure should include equity as well as debt, but that will still show a higher rate of return than we pay on our foreign debts.


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