The Debt Binge:Consumer Debt Outstanding and Total US Debt and US Debt/World Equity ratio
Total Credit Market Debt is Way High
The FT graph is a bit sly in its representation of government debt, as it almost seems the thing is contracting. Appearances are deceiving, as we see below.
The three graphs that follow, courtesy of Contrary Investor, give a better breakdown of the overall picture from the non-governmental side of things.
The rise of financial debt has been the most meteoric, growing from almost nothing in the 1950s to nearly 120% of GDP in 2008.
Household debt took off in the 1980s and is now about equal to GDP, way above the long term average.
Non-financial corporate debt seems a piker by comparison with these debt-imbibing sectors, but it too followed the trend, rising from less than 25% to nearly 50% of GDP since the 1950s.
Debt to GDP from 1920s
Note the big surge in the ratio that took place during the Great Depression. That was due not to the expansion of debt but to the collapse of GDP. The collapse of incomes and the deflation in prices made debts contracted during the 1920s boom two or three times more onerous than previously, precipitating default and bankruptcy.
History is Not Bunk
Here’s an even longer term view, though measuring non-public debt as a percentage of GDP (rather than, as in the previous charts, total credit market debt). The maker of the chart, with the red line, is suggesting the contours of a long or Kondratieff wave, but it is the gold line to which we draw attention here. It shows the unprecedented nature of current debt levels.
This is especially a problem for the Anglosphere–Britain and Australia also imbibed deeply the sweet elixir. The White Man’s Burden, it turns out, is debt. The chart below from Australian economist Steve Keen makes the point.
In the midst of a debt crisis, the question naturally occurs: how is it that the authorities seemingly took no notice as debt levels reached these historically unprecedented levels? What were they thinking? Keen supplies a disturbing answer:
“It has happened because Central Banks are run by economists, and the dominant “Neoclassical” faction within economics ignored the real lessons of the Great Depression.
The false lesson that Neoclassical economics preaches is that the market economy is fundamentally stable, and the Great Depression was caused by the monetary authorities tightening credit in the aftermath to the Stock Market Crash, rather than loosening it.
The real lesson of the 1930s is that a credit-driven market economy is fundamentally unstable, and a Great Depression occurs when debt-financed speculation results in excessive private debt at the same time as inflation is low.”
Under “the misguidance of conventional economic theory,” and with their “Neoclassical eyes fixated on the rate of inflation,” central bankers and other official organs ignored the huge buildup of private debt. “This is why the sudden collapse of the world economic order took economists by surprise. They were looking at their mathematical models, which ignore private debt (and indeed money!), rather than at the real world, where debt is king.”
10/27/08
Profits of Financial Firms
Debt Fueled the Equity Boom
In the first two quarters of 2008, the trend sharply reversed. See update from New York Fed (page 11).
11/28/08
Margin Debt
Traders on Wall Street were also highly leveraged. Margin debt topped out at $381 billion in July 2007, surpassing the $275 billion achieved at the top of the tech and telecom bubble in 2000. A collapse in margin debt is part of the general deleveraging now ongoing. It contributes to market volatility as traders are subject to margin calls and forced selling.The above chart, from the folks at contraryinvestor, is out of date, and margin debt fell sharply into the fall of 2008. The table below from the New York Stock Exchange shows it at $233 billion at the end of October 2008.
The column on the
It will be interesting to see if the November margin figures show a decline to 2002 levels. If not, that would be a significant divergence from the equity averages, which for a time went through the 2002-03 lows.
Investment Tools has updated charts on
11/28/08
right showing credit balances in margin accounts provides an even more dramatic picture of the deleveraging: it fell from an all-time high of $386 billion in August 2008 to $187 billion in October 2008, down over 50%.margin debt here.
Consumer Debt Outstanding
About That Loan
As households have gone deeper into debt, their “financial flexibility” has badly deteriorated, as Contrary Investor shows in this disturbing chart, definitely a contender for chart of the year.
Think about this in relation to the sudden increase in the cost of credit noted here and here, and you gotta conclude that household spending will decline precipitously.
This is our financial system: When going into debt would be bad for you, you can have all you want. When you need it, you can’t have it.
National Debt as Percent of GDP (from 1950)
This chart shows the great contributions to national indebtedness made by the Republican administrations of Reagan/Bush and George W. Bush. Thanks guys for the fiscal responsibility. Did you know that “defense is not a budget item”? Well, you haven’t been paying attention. “Deficits don’t matter,” as Vice President Cheney advised. Reagan proved it.The Two National Debts
How big is the national debt? $10.3 trillion? $5.8 trillion? Both those figures are bandied about, and both, strangely, are accurate in their way. The reason is that the government keeps two sets of accounts: the General Fund and various trust funds, the largest of which are Social Security and Medicare.
This chart is a snapshot from the moving clocks at zfacts.com, which are a wonder to behold. Clicking on the link (scroll down) shows a General Fund running deeper in the red and the trust funds as accumulating surpluses, such that the net national debt is now $5.8 trillion.
We know, however, that there will come a time when the trust funds for Social Security and Medicare turn from generating surpluses to deficits. The surpluses now accumulated, moreover, are not sufficient to cover the retirement needs of the baby boomers, and both Social Security and Medicare face severe long term funding problems. It is therefore reasonable to segregate the general fund from the retirement funds in estimating the national debt–that is, to place it at $10.3 trillion.
That figure is the debt we have accumulated to run the government, fight our wars, pay interest on the debt, and bail out our bankers. It, rather than $5.8 trillion, is the most apt figure for estimating the size of the public debt. As the national debt clock illustrates, that $10.3 trillion figure is growing rapidly. I mean, $16,637,366 in 174 seconds is pretty darn fast. But as the next chart shows, the $10.3 trillion figure actually understates the true dimensions of the fiscal gap.
October 17, 2008
Understated Obligations
As this alarming table from Grant’s Interest Rate Observer shows, the US government has obligations well in excess of that covered by its non-marketable securities and its bills, notes, and bonds.
*** Included in Grant’s reckoning are some $12.5 trillion in guarantees associated with the housing and financial sectors. A year and a half ago, the dominant view held these guarantees as very unlikely to be called and therefore not really countable against future demands on government resources. In 2008, we know better.
*** The Federal employee and veterans benefits, at $4.7 trillion, also do not appear in the official debt statistics, yet must be paid as surely as the interest on the Treasury bond.
*** Then there’s the cavernous future, the deep deep pit, that compromises Social Security, Medicare, and Medicaid obligations.
Stairway to Heaven: Yet More Unfunded Obligations
This graph from Grant’s Interest Rate Observer shows spending on Social Security, Medicare and Medicaid climbing relentlessly after 2012.
Alarming as this is, that stairway to heaven is unlikely to be climbed; surely a day of reckoning will come before the entire geriatric class is supported by a small band of workers taxed at a 90 percent marginal rate. But it’s undoubtedly a huge bill as the worker-to-retiree ratio slips downward from 3:1 to 2:1.
Charles Hugh Smith shows below that we will have to keep running just to avoid falling down.
Total US Debt and US Debt/World Equity ratio
Whatever the exact size of total US debt, it’s fair to say that it is practically equivalent to world GDP, estimated at $60 trillion. As we saw earlier, world stock market value reached a high of $62.57 trillion on October 31, 2007 but had fallen to $42.21 trillion on September 30, 2008. It then shaved off another $10 trillion as markets crashed into late October. Let’s peg it at around $30-35 trillion until updated figures come along.
Taking total US debt at $50 to $60 trillion, and world stock market capitalization at $30 to $40 trillion, we’ve still got total US debt at some 120% to 200% of world stock market value, gyrating daily. In other words, the debt owed by Americans is some 160% larger, give or take whatever, than the expected future earnings of all the world’s publicly listed corporations!
Can this possibly be sane?S. Surely econopicdata could serve us up with a nice set of charts showing variations on the “US Debt/World Equity Ratio.” Thanking you in advance.
P.
10/26/08
Sunday
2009 Deficit to $2 Trillion, 12.5% of GDP
This chart from the International Political Economy blog was a September 2008 estimate of the likely government deficit in 2009. But estimates keep rising. According to Morgan Stanley’s chief economist, ‘The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983.” Anyone for $3 trillion? Do I hear $3 trillion?
Maxims on Debt and Credit
“Debt is the slavery of the free.” Publilius Syrus: Sententiae, c. 50 B.C.
“Debt is better than death,” James Howell, Proverbs, 1659.
“Pride does not like to owe, and self-love does not like to pay.” La Rochefoucauld, Maxims, 1665.
“Better go to bed supperless than rise in debt.” John Ray, English Proverbs, 1670.
“Out of debt, out of danger.” Thomas Fuller, Gnomologia, 1732.
“Living upon trust is the way to pay double.” Ibid.
“Sins and debts are always more than we think them to be.” Ibid
“Debt is a preceptor whose lessons are needed most by those who suffer from it most.” R.W. Emerson, Nature, 1836.
“There are but two ways of paying debt–increase of industry in raising income, increase of thrift in laying out.” Thomas Carlyle, Past and Present, 1843
“A national debt, if it is not excessive, will be to us a national blessing.” Alexander Hamilton, Letter to Robert Morris, April 30, 1781
“I place economy among the first and most important of republican virtues, and public debt as the greatest of the dangers to be feared.”
Thomas Jefferson, Letter to Governor Plumer, 1816.
“The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Jefferson, Letter to John Taylor, 1816.
“It is incumbent on every generation to pay its own debts as it goes–a principle which, if acted on, would save one-half the wars of the world.” Jefferson, Letter to Destutt Tracy, 1820.
“Public credit means the contracting of debts which a nation never can pay.” William Cobbett, Advice to Young Men, II, 1829.
“We are opposed to the issuing of interest-bearing bonds of the United States in time of peace.” Democratic National Platform, 1896.
“He that hath lost his credit is dead to the world.” George Herbert, Outlandish Proverbs, 1639.
“Credit lost is like a Venice-glass broken.” John Ray, English Proverbs, 1670
“In this institution of credit, which is as universal as honesty and promise in the human countenance, always some neighbor stands ready to be bread and land and tools and stock to the young adventurer.” R.W. Emerson, The Conservative, 1841.
“No man’s credit is as good as his money.” E.W. Howe, Sinner Sermons, 1926.
“Credit, like a looking-glass
Broken once, is gone, alas!”
Author unidentified.
“As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible.” George Washington, Farewell Address, September 17, 1796.
“In those circumstances we cannot be too careful to preserve the friendships we have acquired abroad, and the Union we have established at home, to secure our Credit by a punctual discharge of our obligations of every kind, and our Reputation by the wisdom of our councils: since we know not how soon we may have a fresh occasion for friends, for credit, and for reputation.” Benjamin Franklin to President of Congress, October 22, 1783.
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