PragCap: Fallacy of Composition – National Debt Edition

Long time readers of this blog know that Cullen Roche of the PragCap blog is my favorite economics blogger.  If you’re not reading him, you should. In a recent “Three Things I Think I Think” Cullen puts the US National Debt into proper prospective:

You know what really bothers a nerd like me?  When someone talks about one side of a balance sheet without acknowledging the other side. For instance, how many times do we hear about debt dynamics in solitude?  The most common one involves charts of either US aggregate debt or US government debt as a percentage of GDP.

Something like this comes to mind:

That sure looks scary. But what if I actually calculated the asset side of the balance sheet and then subtracted the liabilities?  What would the picture look like then?  You’d get something that looks like this:

Wait, it’s even higher!  That doesn’t fit my scary narrative.  Precisely. By looking at the balance sheet comprehensively you realize that scary charts aren’t always that scary. They just don’t tell the whole story and in the case of this story, it’s obvious that net wealth is actually higher which means the value of our assets vastly outstrip the value of our liabilities. Of course, this isn’t all good news. I’m just eye balling this chart, but it sure looks like it correlates pretty closely with assets bubbles in the Nasdaq, housing market and whatever this environment is….That might be a post for another day.

For those who don’t know Cullen:

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and FinanceUnderstanding the Modern Monetary System and Understanding Modern Portfolio Construction.


Leave a Reply