This is a continuation of my previous post, United States’ Net Wealth. There I pointed out a new table which has been included in the Federal Reserve Statistical Release Z.1, Financial Accounts of the United States – Flow of Funds, Balance Sheets and Integrated Macroeconomic Accounts. This table in flow of funds report is B.1: Derivation of U.S. Net Wealth.

In the meanwhile, the Federal Reserve has released a note U.S. Net Wealth in the Financial Accounts of the United States which is worth your time.

In the note, the authors detail about the meaning of the measure of the “U.S. Net Wealth.” The definition is similar to the System of National Accounts 2008 (2008 SNA). The net worth of a nation is the sum of non-financial assets plus the net international investment position. The note says:

In estimating U.S. net wealth, we use direct measures of the value of households’, nonprofits’, noncorproate businesses’, and governments’ nonfinancial wealth. For corporate businesses, we use the market value of their outstanding equity shares to better capture the value of intangible assets, such as intellectual property. We then net out financial obligations between U.S. resident households, businesses, and government agencies and the rest of the world, because the concept of U.S. net wealth should exclude nonfinancial assets that are financed abroad rather than domestically, and include the value of nonfinancial wealth held by U.S. entities abroad. Taking all this together, we define net U.S wealth as the value of tangible assets controlled by households and nonprofits, noncorporate business, and government sectors of the U.S. economy, plus the market value of domestic nonfinancial and financial corporations, net of U.S. financial obligations to the rest of the world.

[emphasis, boldening: mine]

So what table B.1 does is that it uses non-financial assets for all sectors except when shares of companies are publicly traded.

There is however an issue here. Value of equities outstanding needn’t be a good measure. This is because firms issue both debt and equity. Imagine the case of a corporation which has a debt/equity mixture of 9:1.

Suppose the balance sheet is like this (in the SNA/IMA format):

Assets
Non-financial assets: $1 bn

Liabilities and Net Worth
Market value of bonds issued: $900 mn
Market value of equities issued: $90 mn
Net Worth: $10 mn

I am assuming that “non-financial assets” is the correct value of both tangibles and intangibles, which is $1bn here. But because of debt securities, the value of equities ($90 mn) is highly unlikely to touch $1bn. In other words, the total outstanding value of equities issued by the corporation is hardly a measure of non-financial assets in this case. Applying this idea further, it can be concluded that we need to keep track of the debt securities of the corporation as well. In summary, table B.1 needs to be updated conceptually.