Asset-First Economics Update. We are not going broke.
The Q4/25 U.S. Balance Sheet—the Most Important Report You've Never Heard About.
Summary: With the world in such turmoil today, it is difficult to focus on the fundamentals . But we can’t afford to allow fear to drive our investment decisions. I am writing this to remind you that, no matter what is in the headlines or the economic reports, the future of our economy will be determined by the stability of our enormous balance sheet. So, I’m using this post to bring your attention to a little-known source of information you can count on when making long-term investment decisions.
The Q4/25 report on our big balance sheet, released late last week to a wall of silence from the Fed, the economics community, and the financial press, is more important for investors to understand than the employment report, the CPI report, or the FOMC minutes. On 12/31/25 total U.S. assets were valued at $618 trillion. That’s 19.7 year’s U.S. GDP ($31.4 trillion). U.S. households and businesses chose to hold $195 trillion (32%) of that in the form of tangible assets, like homes, used cars, and gold coins and $423 trillion (68%) as financial assets, like stocks, bonds, and money market funds.
Household net worth equals $184 trillion, which is worth 7.9 years of disposable income. Households own $206 trillion of assets, including $52 trillion of homes, of which 71% ($34 trillion) is net owners equity. They have just $21 trillion of total liabilities, almost all of which is home mortgages. Net worth has grown by about 7% per year for the last 50 years.
Remember these numbers the next time someone tells you we are going broke.
Asset-First Economics
Asset-First Economics is the key to understanding stock prices, home prices, and interest rates, as I have written here, here, here, here, here, and here and discussed with my dear friend Laurence Kotlikoff on his excellent podcast. (You should subscribe to it.) It’s foundations are simple, and they are rock solid.
Here is Asset-First Economics in 10 easy to digest bullet points:
The U.S. balance sheet is many times larger than the GDP accounts (see numbers above.) It’s health is more important than output, income, or GDP.
Asset supplies are fixed at a moment in time. They can only change slowly over long periods of time.
Asset prices are entirely determined by investors’ demand to hold assets, based on their understanding of relative after-tax returns.
Asset demand is information-dependent; it can change in a New York minute.
Seemingly small changes in relative asset demand can have huge and immediate impacts on asset prices, net worth, and the value of assets held as collateral.
The most important investor decision is the division of their net worth between tangible and financial assets.
Inflation and tax rates on different assets are the key to this decision. Higher inflation leads investors to shift a portion of their net worth from financial assets to tangible assets. As a result, real asset prices and interest rates rise; stock and bond prices fall.
Lower marginal tax rates lead investors to shift net worth from real assets to financial assets due to favorable treatment of real asset income in the tax code. As a result, stock and bond prices rise; real asset prices and interest rates fall.
The inflation rate that matters is not the CPI, the PPI, or the PCE, as commonly believed. It is the annual rate of increase in tangible asset prices because that’s a measure of the capital gains yield on tangible assets.
Real interest rates and the so-called neutral rate should be calculated using tangible asset inflation, not the CPI.
Readers Guide to the Q4/25 Balance Sheet report
Once each quarter, the Federal Reserve Board releases a document called Financial Accounts of the United States—Z.1 that contains information on the U.S. balance sheet. It is 212 pages long, so I will only give you a few of the key metrics to consider.
Financial Assets
My first question is always how big is the balance sheet. The value of total financial assets on 12/31/2025, as you can see in the upper right corner of the table above, rounded to the nearest trillion dollars, is $423 trillion.
Tangible Assets
Next we calculate the value of total tangible (nonfinancial) assets on 12/31/2025 from data found on p. 25. By adding the value of tangible assets held by Households (line 2), Nonfinancial noncorporate businesses (line 7), Financial noncorporate businesses (line 12), the Federal government (line 16), and State and local governments (line 20) we find that the value of total tangible assets on 12/31/2025 is $195 trillion.
Total Assets
Add these numbers together to get the value of the total U.S. balance sheet of $618 trillion. Of that total, $36 trillion (5.8% of total assets) is held in the form of Federal government securities, which is the gross value of the national debt that everyone hates so much.
Government Debt
At this point, it is worth making two comments regarding government debt. The first should be obvious. All existing government securities are already owned by someone at today’s prices so whatever effect that debt has on asset prices and interest rates is already baked into today’s the market prices of securities and interest rates. That doesn’t tell us how big that effect was. It just says that only future borrowing, not the size of the existing national debt is relevant for thinking about future changes in interest rates.
Second, the document tells us that the Federal government (line 16) only holds $4.9 trillion, which amounts to just 2.5% of total tangible assets which doesn’t ring true for anyone who has ever visited a national park. In the footnotes, elsewhere in the document, you find the reason. We know for a fact that the federal government owns some 700 million acres of land plus the 200 million acre continental shelf. Together with state and local governments, they own a third of all the land in the country.1 But the accounting geniuses at the Fed have excluded from the official figures the value of all the land, oil, gas, coal, iron ore, copper, gold silver and other commodities under the land, and all of the timber and other natural resources that sit on top of it. Oh, and they use the same sleight-of-hand accounting for state and local government-owned land and natural resources too. I call bullshit on both. Repairing this violation of accounting rules would make total assets, tangible assets, and net worth many trillions of dollars bigger and the size of the net national debt many trillions of dollars smaller than shown in the reported figures.
The Case of the Missing Corporate Equity
Now for another anomaly. I promise it’s the last one I’ll show you today. Based on the way they tote up the numbers, the Z.1 report records the net worth of all of the corporations in America and all of our banks, investment banks and financial institutions as negative numbers.
In Table 1, we saw that Americans own corporate equities (line 24) worth $111.4 trillion on 12/31/25. But Table 3, above, tells us that the net worth of the entire corporate business sector is minus $52.6 trillion and the net worth of all of our financial institutions is minus $25.3 trillion. Where did it all go?
The geniuses at the Fed canceled it out, I believe inappropriately. In the second column from the right Table 1, you can see that when the sectors are added together, most of the rows show total liabilities equal to total asset value. That makes sense for debt securities because every IOU has both a person who owns it (the lender) and a person who owes it (the borrower). So, when you add them together the asset and liability cancel each other out.
But that’s not true for equities. The market value of a stock represents the value of the stream of future cash flow that investors collectively believe the company will produce. There is no offsetting liability. If I am right, then total assets, total financial assets, and net worth are all understated by more than $100 trillion.
Adding the bizarre multi-trillion dollar “government-owned land and natural resources don’t count as assets” accounting gimmick and the equally bizarre “the entire $111.4 trillion value of U.S. corporate equities should be counted as a liability and subtracted from net worth” claim together, as I think is appropriate, would result in total assets, tangible assets, and financial assets many trillions of dollars higher and net worth perhaps twice as large as shown in the official numbers posted in the report. All of which reinforces the principal arguments of Asset-Based Economics. Pay attention to the balance sheet; forget GDP.
Household Net Worth
Households (real people like you and me) are the largest sector in the economy. We own $206 trillion of assets including $52 trillion of tangible and $144 trillion of financial assets, as shown in Table 4.
Our biggest holdings are $53 trillion worth of homes and $47 trillion of corporate equities. We owe $22 trillion of debts, almost all of which ($21 trillion) are home mortgages. We have $34 trillion in homeowners equity, which amounts to 71% of home values. Our net worth was $184 trillion, which is 7.9 times last year’s ($23 trillion) disposable income and 5.9 times as large as last year’s GDP.
And the balance sheet grows almost every year. Net worth has increased by an average of 7% per year over the past 50 years.
So What?
I have several reasons for giving you this information.
First, I want you to be aware of this incredible document so you know where to get all the delicious information you want on the U.S. balance sheet. I have found this information to be extremely valuable in making investment decisions.
Second, I wanted to give you a short summary (the ten bullet points at the top of the post) of what I mean by Asset-First Economics so you can start using it yourself.
Third, I want you to see how big these numbers are compared with the usual numbers people worry about in the financial press and compared with anything in the national income accounts. And wouldn’t it be shocking if that were not true. The balance sheet is a huge pile of stuff, basically equal to everything we received for free from Mother Nature, plus everything that everybody who has ever lived here has produced that didn’t wear out yet. (Think Ben Franklin and the Liberty Bell.) Plus whatever we have produced in our own lifetimes (142 million homes, 285 million used cars, and the sofa in your living room) that we haven’t worn out yet.
Why does this matter? Because it will help you sleep better at night. Whatever your politics, it is clear that there are some big messes in the world that we have to clean up. But the sheer size and duration of our stock of assets should give us a lot of comfort that no single group of policy makers from either party can destroy the engine that powers the U.S. economy. So, although I keep my eyes open for the credit crises2 we get whacked with once every decade or so, I have faith that this economy will hold together and keep growing for a long, long time. Stay invested in great U.S. companies and hold plenty of cash to buy the best assets at fire-sale prices every time we run into tight credit.
Dr. John
If you hack your way through the nest of footnotes and websites, you can actually find the reason they claim this is a good thing to do. All of that land and all of the natural resources, they say, aren’t actually “owned” by the government. The government is just “holding them in trust for future generations.” (Try finding that in a GAAP accounting textbook.) On that basis, all of those assets are actually owned by nobody leading to the nonsensical conclusion that, if the government were to buy an acre of land from a private citizen, both the value of U.S. assets and our net worth would shrink. On a more positive note, I have decided to try their logic out on the IRS when I file my taxes next year. I’m going to tell them that I no longer own my house or my eTrade account because I am “holding them in trust for my children and grandchildren.” That should give me a very attractive refund next April.
Speaking of credit crises, we are about due for one. Historically, about once each decade the economy finds itself in the irony that things have been so good for so long that we just can’t stop ourselves from going crazy, driving price-earnings multiples up to unsustainable levels and making loans that will never be repaid. It happened in the dot-com crash. It happened in the subprime debt crisis. And it may be happening now with the runaway Artificial Intelligence train. One of the first signs of trouble is usually when banks pucker up and stop lending to ordinary businesses; this has already happened. Another is increased attention to credit quality, like the recent gating of redemptions from some of the big private credit portfolios. I have never been smart enough to know when we are going to hit the next air pocket, but I know they happen, so I always hold what most advisors would describe as “too much cash” so I can buy great companies at fire-sale prices when they do. Spoiler alert: at today’s prices I am a buyer of the best (and only the best) private equity and private credit names. They will have permanent homes in my portfolio.
Highly insightful, as always. I also very much appreciate your footnote that translates this into practical thinking for investors.