Wednesday, January 30, 2013

Does Modigliani-Miller apply to countries?

If it does, the capital structure of the US is just fine.  Current GDP is 15.8 trillion.  Let's apply a  real discount rate of 4 percent (which is probably high, given that the yield on 10-years TIP is negative), and assume a real long-term growth of 2 percent (which is likely low).  This means the country is worth about $316 trillion (this figure includes human capital as well as asset values).

Total debt outstanding in the US, public and private, is $55 trillion.  So we are about 17 percent debt funded, which means we are about 83 percent equity funded.  This should be OK.  What I am missing here?

(note: it was Matthew Yglesias' Slate piece today that got me thinking along these lines).