Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Nation tends to borrow its way to prosperity

- by Alan Duvall 

Published in Dayton Daily News March 26, 2006  

Headlines have trumpeted news of historical highs in the level of the national trade deficit and federal government debt levels.

Purportedly, Americans are crashing into walls of debt and foreigners will soon own the country. 

But from 2001 to 2004, Americans’ net worth (assets minus debts) actually increased an average 6.3 percent.  As a whole, Americans are progressively getting wealthier – not poorer. 

How can this be?  Answer - the value of owned assets must have increased at a rate exceeding the rise in debt.  And studies by the Federal Reserve Board confirm most of the asset appreciation emanates from real estate. 

Assume an individual acquires a house for $100,000 - $20,000 equity and $80,000 mortgage.  In two years the house appreciates 10 percent to $120,000 with $40,000 equity.  New homeowner has increased debt but doubled net worth in only two years. 

Historically low interest rates have fueled a rise in home ownership as well as asset values.  In the three years ended 2004, the Federal Reserve study found the average home price rose 28 percent generating an average $54,000 increased equity per family. 

The construction boom has had a huge impact on the U.S. economy as well.  More headlines predict the housing bubble may soon burst.  If interest rates increase, homeowners with Adjustable Rate Mortgages will be squeezed by higher mortgage payments.  Loan defaults may escalate and home prices decline.  Lower home prices also reduce home equity loan borrowings, the money from which is used to buy consumer stuff essential to business growth. 

The potential for crisis is heightened by the decline in the U.S. savings rate that plummeted to negative territory for the first time since the Great Depression.  The Commerce Department reports in 2005, Americans actually borrowed more than they saved. 

Fortunately, the U.S. economy continues to expand at a comfortable pace, statistically high employment levels are enjoyed and interest rates should level in the near term.  As usual, Americans are out-running their insatiable appetite for more stuff and more debt.   

Life at a constant sprint can be exhausting and carries burdens of risk.  Catch your breath – spend less, pay down debt, save more.        

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.