I don’t like gross domestic product (GDP). Its uses are limited, for example with regard to its distribution. GDP per capita is merely an accounting result — try spending it. We smash together a top-down indicator when what matters is income and wealth of people and households. So it’s encouraging that net American wealth grew 18 percent to $137 trillion in 2021. This is our full economy. Among many other things, it enables our global leadership.

The US has done very well in wealth terms for years.
National wealth has more
than doubled since the end of 2012. The net worth of American
households alone hit $142 trillion at the end of last year, 14 percent
higher than 2020 and also doubling since
2012.

This seems suspiciously good, and in two related, vital
respects it is. At the end of 2001, the wealth ratio between the richest 1
percent of Americans and the poorest 50 percent was below 9.1. At the end of 2011, it was a horrifying 49:1.
Without even correcting for inflation, the absolute wealth of the bottom 50
percent dropped more than two-thirds over that decade.

The strong 2012–2021 results are partly just the US climbing
out of our own hole. At least we’re headed higher now. At the end of 2021, the
1 percent to 50 percent ratio was a bit over 12:1. The wealth of the bottom 50
percent has increased by a factor of 10, or $3 trillion, since the end of 2011.
But the most recent part of that recovery is unsustainable.

Disposable personal income per capita, an annual input to wealth, approached $55,000 in 2021. It spiked higher than that twice during the year, due to COVID-related federal aid. Federal debt outran personal income, adding 7 percent in 2021 on top of a 2020 surge, to pass $25 trillion. It has more than doubled since 2011. (Corporate debt remains larger but is growing more slowly.)

There are many domestic implications of all this, since we
must somehow maintain wealth growth for poorer Americans without heavy
borrowing. Internationally, the main event is the future of the dollar as
global reserve currency, which is by far the most important element of US
economic leadership.

The intense discussion of economic sanctions against Russia
reinforces that sanctions work primarily because everyone uses the dollar. People hold dollars in part
because of the huge stock of wealth backing them. In turn, the risks to the
dollar are net borrowing devaluating the dollar and years of absurdly loose monetary policy reducing the return to
holding it.

Sanctions will continue to be effective only if America can
manage wealth growth, less borrowing, and higher real returns to holding
dollars. The dollar remains dominant in allocated foreign exchange reserves at
a 59 percent global share in the third quarter of 2021
(latest), but the share was 70 percent in 2016. We’re making it less
attractive.

That’s the threat, not digital currencies, the Chinese yuan,
or the digital yuan. According to Credit Suisse, Chinese wealth was $50 trillion lower than
American in 2020. Credit Suisse has repeatedly revised the People’s Republic of
China’s (PRC’s) wealth higher just to get to that sized gap. Chinese personal
income is about 10 percent that of the US. Through the third quarter of
last year, the Bank of International Settlements estimates the PRC’s debt
burden as slightly
heavier than ours.

The yuan has been steady against the dollar, but its true value is unknown because Beijing doesn’t allow free capital movement due to fears about financial stability. Digital or paper, people have to be able to move money or they won’t hold it. Nor does digitization change the fact that the PRC has much less wealth backing the yuan. Under these conditions, China can keep gaming the dollar system, but can’t challenge it.

The enormous, growing stock of US wealth and 10-fold advantage in personal income over China make clear that global economic leadership is America’s or no one’s. This could empower more stringent sanctions than imposed on Russia, if desired. But if we can’t sustain wealth gains while adopting responsible fiscal and monetary policies, no one will lead. And our ability to respond to events like the invasion of Ukraine will erode.

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