EC Safe Assets In The U.S. Economy

from the St Louis Fed

--this post authored by Fernando Martin, Research Officer and Economist

In the postwar era, financial assets in the U.S. have grown significantly. Yet, the proportion of assets that can be deemed "safe" has remained remarkably stable.

These phenomena were documented and analyzed in a 2012 article by economists Gary Gorton, Stefan Lewellen and Andrew Metrick. [1]," American Economic Review, 2012, Vol. 102, Issue 3, pp. 101-106. In this post, I will revisit some salient points of their study, using the most recent data.

What Are Safe Assets?

Gorton, Lewellen, and Metrick applied a narrow definition to safe assets, including only those that are used, directly or indirectly, to facilitate transactions, i.e., in a money-like fashion. The reason some safe assets are used in transactions is that they are “information-insensitive:" agents do not worry about the health of the issuer.[2]

These safe, information-insensitive assets are a specific set of liabilities (i.e., debt) issued by the government and the financial sector. Some of these assets, like bank deposits, can be used directly to make payments or quickly transformed into means of payment; others, like Treasuries and securitized private debt, are widely used as collateral in financial transactions. On the other hand, bank equity is not an information-insensitive asset, as its value varies with the perceived health of the entity.

Share of Safe Assets

Between 1955 and 1980, the ratio of total financial assets to gross domestic product (GDP) was relatively stable, around five times GDP on average. This ratio then started a steady increase, briefly slowed down by recessions. Since 2017, financial assets have exceeded 12 times GDP. Despite this substantial growth, the fraction of safe assets relative to total financial assets has remained very stable, averaging 25 percent since 1955, as seen in the figure below.[3]

safe asset share

Besides the long-run stability of the fraction of safe assets, it is interesting to note that this proportion normally rises during recessions. This can be explained by the fact that recessions are often accompanied by a deterioration of the quality (creditworthiness) of financial assets in general, which makes safe assets more desirable.

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Disclaimer: Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

No content is to be construed as investment advise and all ...

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