The wealth of nations is all relative. Especially when external factors are considered. But comparing countries can put debt, wealth, and financial crisis into context. For example, we have established that the Great Debt Explosion increased household net worth. And now, we can demonstrate it.
The year 2022 was a perfect storm. As in a previous blog post, we will use the Big Seven countries (U.S., UK, France, Germany, India, Japan, and China) to compare how economic systems have reacted to social and political events. In addition, we’ll use data from the OECD, Federal Reserve, and other key government authorities to try to replicate a consistent playing field.
So, let’s dive in.
Who Came Out on Top?
In 2022, the macrosector with the most considerable net worth was households across the board. This is because governments act as mechanisms to facilitate the accumulation of income and net worth by households and NFBs. The U.S. leads mainly, but only slightly in terms of the net worth of its households to GDP. Five of the seven other countries are tightly bunched. Germany lags somewhat behind because of the low relative value of its stocks. India registers a percentage far below the other six, partly because there is no reliable estimate of real estate values for India.
Comparing household net worth by country in dollars, the U.S. and China stand out, with the others grouped together and well below. This, along with the figures on stock ownership and real estate ownership, shows the sheer dominance in the size of the world’s two most economically powerful countries.
On a per capita basis, it tells a different story. This is where the U.S. most clearly pulls away from the other countries and where China descends closer to the level of India, with their 1.3+ billion populations.
Perceptions of American Spending
It’s a long-held belief that Americans are poor savers. This misunderstanding reflects a difference in the common understanding of the term savings. Average individuals believe savings is the amount individuals have in their checking and savings accounts, plus the money they have with their brokers and in their pension and other retirement accounts. Or essentially, how much of their household income exceeds expenses.
However, Americans are unequivocally the best savers among the group, with the second-best, Japan, lagging far behind. This is because net income (or “net saving” to economists) is a zero-sum game within an economy, and household “saving” is a function of the government deficit. If a household’s income exceeds its expenses, it is usually due to the government’s deficit spending. So, what is lauded as improved savings by an economist’s definition is a product of an increased government deficit.
The Game Changers
Since 60% to 70% of the net worth in each of these economies is in the form of either stocks or real estate, the differences in their net worth can best be explained by differences in these values. The U.S. shows the highest overall level of household equity to GDP and the sharpest increases. However, all six of the more developed countries show significant gains between 1995 and 2021. But in some cases, it’s like comparing apples and oranges. For example, cross-border ownership of stocks among EU countries is easier and more common, so the totals for France and Germany should keep this in mind.
The U.S. leads by a wide margin in the total value of listed or publicly traded stocks (“market cap”), followed by Japan, while Germany and China lag behind. The shortfall in German stock valuation explains much of its shortfall in overall country and household net worth. The fact that China’s households own so much more in stock than the value of its publicly-traded stocks means either that its households own an enormous slice of privately-held stocks or that the reported number is a misrepresentation of this value. Separate household stock ownership information for India is unavailable.
The U.S. Goes Gaga for Stocks
The U.S. stock market's value towers over all other stock markets on a publicly traded basis, partly because it is a more established destination for overseas investment. The value of its publicly traded shares is as large as the other six countries combined.
There is also a radical difference in who owns stock in the U.S. compared to the other six. For the U.S., and only to a slightly lesser extent in China, stock ownership is primarily by households. In other countries, large amounts of stock are owned by the government, NFBs, and financial companies, sometimes for tax reasons. Government ownership of assets in the U.S. differs markedly from the other countries in the Big Seven.
Of course, due to its political structure, the government of China owns a lot of its companies’ stock (its state-owned enterprises). But what is striking and somewhat more surprising is that Japan’s central government and central bank own an immense amount of the country’s financial assets. Also notable is the relatively large government ownership of domestic stocks in France and Germany. As a result, the U.S. stock market tends to command higher valuations for company stocks listed on other countries’ stock markets even when those companies are otherwise very similar. This is evident in the higher price-to-earnings ratios of company stocks. That’s why you’ll find over 494 non-U.S. stocks from forty-five countries listed on the New York Stock Exchange.
So, how does the valuation of all stocks in China compare to U.S. stocks? This comparison is problematic for two primary reasons. First, according to China’s National Institution for Finance and Development, more of China’s stocks are privately held. Second, we cannot accurately identify assets held by private financial companies also held by households to eliminate double counting. However, with what we can see, we would tentatively suggest that the aggregate value of all such stocks are valued at a level reasonably close to U.S. stock values, even with the disparity in debt and losses. If so, it is only possible through the intervention and support of the central government.
Then There’s the Real Estate Market
The other essential category of net worth is real estate. Unfortunately, real estate is one of the more problematic categories to assess confidently in the aggregate. It isn’t easy to know whether the Fed, OECD, and other sources have included everything and whether they’ve used appropriate valuations. But even with these limitations, the data give us a general sense of the relative holdings.
Total household real estate value as a percent of GDP is tightly bunched among the countries. France leads the group, and its strong real estate values explain why France’s overall household net worth to GDP ranks high despite its low household ownership of stocks. We also see a low value for U.S. real estate. The extraordinary valuation of stocks held by U.S. households explains why they lead all other countries, despite their comparatively lower real estate valuation.
In Japan, real estate values are declining as those in other countries increase. For example, in the late 1980s, during its lending euphoria, real estate in Tokyo sold for prices as high as $139,000 per square foot, nearly 350 times as much as in Manhattan. For at least a short period, the land under the Imperial Palace in Tokyo was worth as much as all of California. The total Japanese property market was four times more than the U.S. property market.
Since that peak and the massive banking crisis that inevitably followed, Japan’s real estate prices collapsed in the early 1990s and have since drifted even lower over several decades as a percent of GDP. As of 2022, they had only very recently posted their first gains since that unhinged era. Japan’s experience may suggest that there is a law of diminishing returns—of diminishing asset growth from higher debt levels as that debt gets extraordinarily high. An acceptable valuation for India’s real estate is also unavailable.
Values in the U.S. and China have been accelerating over a few years, while values for Japan are comparatively stagnant. China’s recent reversal in some real estate values is much in keeping with the correction in real estate values seen in Japan beginning in the 1990s.
Why Does It Matter?
Comparisons of the Big Seven countries provide essential insights and debunk assumptions. For example, contrary to conventional wisdom, Americans are the best savers of the bunch. Likewise, the U.S. has the greatest per capita net worth, and in contrast to China and Japan, most assets are owned by households rather than governments. Watching these aggregate trends helps us understand their consequences.
This blog is adapted from The Paradox of Debt: A New Path to Prosperity Without Crisis by Richard Vague.
For more insights on the vital role of debt—both government and private—in our economy as well as policy provocations that attempt to tame the dark side of debt while allowing it to continue to create wealth, be sure to pre-order your copy today!