The Only Report Investors Need to Read - Asset-First Economics, the U.S. Balance Sheet

Summary

The most important economic report for investors is not the Employment Report, the CPI report, or the GDP report. It’s the 210 page Z.1 report on the U.S. balance sheet that the Fed publishes once a quarter but no one ever talks about. It’s more important because, in the most recent report, total U.S. assets of $576 trillion and Household Net Worth of $186 trillion dwarf our $31 Trillion GDP and our $2 trillion budget deficit. As you know from my earlier posts, Asset-First Economics is based on the idea that all major economic events take begin in the balance sheet and the only economic policies that really matter are the ones that trigger changes in people’s decisions on which assets to own. The most important decision is always how to divide wealth between tangible and financial assets. Gold, silver, platinum and copper markets show which way they are going today. Hint: I own more gold today than any previous time.

The Z.1 Report

If you are going to build an asset-first economic framework you’re going to need a source of good information on the values of assets, liabilities, and net worth on household balance sheets. Problem is, most of the economic reports you hear about on TV and read about in the Wall Street Journal were designed to measure what’s happening to flows of spending, employment and production in the national income (GDP) accounts, not stocks of assets.

There’s only one place to get good balance sheet information—the quarterly Z.1 report Financial Accounts of the United States published by the Federal Reserve Board. Before you download it, I should warn you that it is a 210 page report so you will need a little time to dig through it. But it’s time well spent.

Key balance sheet metrics

Some of the more important metrics from the current Z.1 report for Q3/2025 are summarized in my hand-written notes from my initial reading of the current report below.

Dr. John notes on the Q3/2025 Z.1 report

At the top of the page, you will see that on 9/30/2025 the U. S. balance sheet contained $383 trillion of total assets (approximately 20x 2025 GDP.) The net worth of households and nonprofit organizations was $181.6 trillion (roughly 6x 2025 GDP.)

The yellow highlighted Box 1 on the upper left reports the details of the U.S. worth calculation on page 8 of the report. According to the Fed’s methodology, the U.S. net wealth is the result of adding the market value of tangible (nonfinancial) assets owned by households and nonprofits ($61.2 trillion), nonfinancial noncorporate businesses ($19.2 trillion), financial noncorporate businesses ($0.158 trillion), corporations ($90.2 trillion), the federal government ($4.9 trillion), and state and local governments ($17.1 trillion), then subtracting an estimate of net foreign assets owned by people in other countries. That leads the Fed to conclude that U.S. net wealth (the whole country, not just households) on September 30, 2025 was $167 trillion, up by $5.2 trillion, or 3.2%, over the previous quarter.

Wait a minute! Why did they just add up the tangible assets? What about all of the paper assets? Their logic, which (mostly) makes sense, is that every piece of paper that one person owns is a liability of the person who issued it so financial assets all cancel out. Read below for the reason I said “mostly.”

It shouldn’t surprise people that the balance sheet numbers are so big, both as absolute numbers and as a multiple of GDP. After all, the pile of existing tangible assets contains all of the natural resources that we received from Mother Nature plus everything that we have produced over the past 250 years that we didn’t consume yet or didn’t wear out. For example, there are 142 million existing homes already in place. Since we only produced a little over 1 million homes last year (that’s the figure that will appear in the GDP accounts) the supply (stock) of homes is fixed. So the only thing that can change their prices in a period as short as a year is a change in asset demand.

In spite of the fact that the reported numbers are so big, there are two important reasons why I believe they are significantly understated.

1. First, all government balance sheets (federal, state, and local) intentionally (and nonsensically) exclude the value of all land and other non-reproduced natural resources from the balance sheet. That means the Federal government has properly reported the value of all the mail trucks and black Cadillac Escalades they own but they forgot to include the value of 700 million acres of federally-owned land. Oops. I have no idea how they convinced the accountants to go along with it but excluding the value of the 700 million acres of land owned by the Bureau of Land Management and other agencies and all of the timber, minerals, and other natural resources is nuts.
2. Second, for some reason, the official balance sheets treat the value of corporate equities as liabilities in calculating net worth. As a result, for example, the market value of Apple and Microsoft stock owned by households is completely erased by subtracting the same number from the net worth of the corporate sector. That would make sense if they were debt securities but makes no sense at all for equities. Creating a business that is worth more than the initial capital invested in it is literally the entire purpose of corporations. Adding it back in would increase net worth by about half.

Box 2 on the upper right shows the calculation of U.S. total assets ($576 trillion) as the sum of total tangible assets ($193.3 trillion) from Box 1 and total financial assets ($383 trillion) from page 3 of the report. Tangible assets make up 33.5% and financial assets 66.5% of that total. (Note: tangible assets made up more than 50% of total assets when I first started tracking this in the late 1970s.

Box 3 is a calculation I keep track of to help me not lose sleep over the national debt. Federal debt of $33.2 trillion amounts to 5.8% of total assets, 19.9% of national wealth, and 18.3% of household net worth. More on that below.

Box 4 on the balance sheet of households and nonprofits is the really interesting one to me. Households own $202.8 trillion of total assets, made up of $61.1 trillion (30.5%) of tangible assets and $141.2 trillion (69.5%) in financial assets like stocks, bonds, and bank accounts. In the tangible asset detail, households own $50.2 trillion of real estate and $8.5 trillion of sofas, dishwashers, used cars and other durable goods. Household net worth, at $181.6 trillion, about 6x last year’s GDP and 7.9x the annual Disposable Personal Income of everybody in the country.

Households have liabilities too (mostly mortgages) of $21.2 trillion, which is just 11.7% of household net worth. After subtracting (paying off) mortgages, households own $33.4 trillion in home equity, which is 71.6% of the value of their homes.

So What?

OK, people have a lot of assets and a huge net worth. So what does that mean? I have gone over the implications of Asset-First Economics in some detail in recent text, audio, and video posts. Here are a few of the reasons why that’s important.

1. The fact that Asset markets are way bigger than goods and services markets implies that most of the big economic stories in our lifetimes have been balance sheet stories. That’s what investors need to keep track of.
2. Asset markets are different. The fact that stocks are so much bigger than flows means that the supply of assets can’t materially change over the course of a year. That means almost all asset price changes (which is what investors care about) are the result of changes in demand, not supply. As a corollary, the much-lamented housing affordability crisis is entirely the result of houses being expensive, not supply restrictions. Houses are expensive because households really want to own their house.
3. As a result, asset prices are almost entirely determined by how households choose to divide up their net worth between tangible and financial assets. That decision is strongly influenced by government policy on tax rates, interest rates, and inflation because those policies directly affect the total return of different kinds of assets. For example, inflation (inflation of tangible asset prices, not consumer prices) matters because it measures the capital gains yield on the stock of tangible assets. And the deductibility of mortgage interest and the ability to expense capital spending matter for the same reason.
4. And finally, I will drop in one fact that almost everyone reading this is going to hate. We all hate debt. We especially hate big budget deficits and the national debt. But federal debt only amounts to 5.8% of total assets and 18.3% of household net worth. And remember, net worth grows over time, both because we produce new assets and because their market prices go up. Over the past 50 years, household net worth has increased by an average of 7% per year, which households will dutifully allocate to different categories of tangible and financial assets in their portfolios. One of those categories is Treasury securities. If household net worth grows by 7% ($12.7 trillion) next year and they want to keep the same percentage of net worth in Treasury securities as they held this year. To do that, they will have to add an additional $2.3 trillion to the Treasury securities they already own. The only way to do that would be for the government to sell $2.3 trillion in new Treasuries—run a $2.3 trillion budget deficit—next year in addition to rolling over any securities that reach maturity. If they do so, people will gobble up the new Treasuries and there will be no meaningful pressure on asset prices or interest rates.

I will give a longer treatment of budget deficits, the national debt, and interests rates in more detail in my next post.

Dr. John