We all read or hear about the US debt almost daily. What are our sources: Mass Media, Politicians, and the Financial Sector? Pardon my cynicism in believing any of these institutions would tell the truth, the whole truth, and nothing but the truth on the debt. So, who is mudding up the waters? Who is the small player and who is the big player on US debt? To answer this question, we need to take a non-agenda driven look at the US debt.
Assets vs Debts
Foreign investors own more than $15.6 trillion of US financial assets – or 107% of GDP. Americans own $11.5 trillion of foreign assets, approximately 78.9% of GDP. Foreign holdings of US assets are concentrated in debt. Americans own more foreign equity and foreign direct investment than foreign investors own in the United States, but foreign investors hold nearly four times as much US debt as Americans hold in foreign debt. Americans own foreign tangibles while foreign investors own American notes. In other words, the US is less vulnerable to debt default then foreign investors, and considering the shape of the rest of the world, this is a good thing.
15.2% of all US debt is owed to foreign investors. Of the $7.9 trillion Americans owe to foreign investors, $3.9 trillion is owed by the federal government. 48% of US treasury securities are held by foreign investors. Foreign investors hold $1.28 trillion in agency and government sponsored enterprise-backed securities and another $2.33 trillion in US corporate bonds. In other words, most of the US debt is owed to the American people not foreign investors and 35% of the debt owed to foreign investors belongs to US corporations rather than the government.
Government, Financial and Household Debts
In 1946 the total US debt-to-GDP ratio was 150%, with two-thirds of that held by the federal government. Since 1946 the federal government's debt-to-GDP ratio has fallen by nearly half to 54.8% of GDP in 2009. By contrast, the debt-to-GDP ratio of the financial sector has increased from 1.35% in 1946 to 109.5% (a factor of 81) of GDP in 2009. The ratio for household debt has risen from 15.84% of GDP to 95.4% (a factor of 6) of GDP. If you are wondering who the debt culprits are turn to the financial sector.
Derivatives
Figures of total debt typically do not include other financial obligations such as derivatives. The number commonly used by the media is notional value, which is a base value used to determine the size of the cash flows exchanged in the contract. Fair value is the value of the contract either on the open market or as it is appraised by accountants.
The notional value (net current exposure) of derivative contracts held by US financial institutions is $216.5 trillion – or more than 15 times US GDP. Net current exposure is the exposure that the institutions that hold them are risking if the originating institution defaults.
The fair value (market value) of US held derivatives contracts in the first quarter of 2010 was $4.2 trillion (.281 times US GDP) for positions with positive values (known as "derivatives receivables") and $3.886 trillion for positions with negative values (.273 times of US GDP). If you notice, receivables were larger and as long as they stay that way there is no problem.
Derivatives contracts are overwhelmingly held by large financial institutions. The five largest US banks hold 97% of derivatives by notional value; the top 25 hold nearly 100%. Banks currently hold collateral against their derivative exposures amounting to 67% of their net current credit exposure. Basically Five US banks are taking a long term risk to make a profit.
Options
After reading this article it should be obvious that the US financial sector is the biggest debt abuser. That would also mean this is where you will find the most risk. That leaves the private sector and tangible assets. The Federal Reserve’s non-existent short term rate makes it almost impossible to get a loan from the bank to start up or expand a business. Banks impossibly high lending criterion makes it difficult to qualify to invest in real estate. US Fracking and increased supplies is crushing oil prices and strengthening the dollar. A strong dollar is depressing commodities. What is left? It is time to look outside the box and start considering alternative tangible assets.
For the investor who is looking for wealth preservation, profit, diversification, tax benefits and estate benefits one possible alternative tangible asset is investment grade rarities. This is for the long term or generational investor who wants to protect part of their portfolio with a low risk and low maintenance tangible investment along the lines of the “Yale Endowment Investment Strategy”. In profitable order, some of your options are automobiles, numismatic coins, KFLII, art, stamps, watches, wine, etc. Of all of these, US numismatic coins are the least volatile.
