Category Archives: Debt crisis

12/6/20: American Love Affair with Debt: Part 2: Leverage Risk


I have earlier updated the data on the total real private economic debt in the U.S. as of the end of 1Q 2020 here: https://trueeconomics.blogspot.com/2020/06/12620-american-love-affair-with-debt.html

So, just how much is the U.S. economic growth dependent on debt? And have this dependency ben rising or falling prior to COVID19 pandemic onset? Well, here is your answer:


Using data through 1Q 2020, U.S. dependency on debt to generate economic growth in the private sector shot through the roof (see dotted red line above). In other words, U.S. corporate sector is leveraged to historical highs when the corporate debt levels are set against corporate value added.

All we need next is to see how 2Q 2020 COVID19 pandemic figures stack against this. A junkie hasn't been to a rehab, and the methadone clinic is closed...

12/6/20: American Love Affair With Debt: Pre-COVID Saga


Latest data for debt levels at the U.S. non-financial businesses and households (including non-profits) is out this week. So here are the charts and some stats:


There has been a bit of rush back in 1Q 2020 (the latest data available) to load up on loans by both private households and private businesses. 
  • Non-financial business debt rose 7.86% y/y in that quarter, before COVID19 pandemic fully hit the U.S. economy. For comparison, previous quarter, debt rose *just* 4.81% y/y and 8 quarters annual growth rates average through 4Q 2019 was *only* 6.21%. Not only the U.S. businesses levered up over the last two years at a pace faster than nominal GDP growth, but their reckless abandon went into an overdrive in 1Q 2020.
  • U.S. households and non-profit organizations serving them were not far behind the U.S. businesses. Debt levels in the U.S. households & NPOs rose 3.75% y/y in 1Q 2020, up on 3.26% y/y growth rate in 4Q 2019 and on 3.32% average growth rate over the two years through 4Q 2020. Which, in part, probably helps explain how on Earth financially-stretched American households managed to buy up a year worth of toilet paper supplies in one week in April.
Thus, overall, real private economic debt in the U.S. has ballooned in 1Q 2020, rising to USD 33.092 trillion. This marked y/y growth rate of 5.80% in 1Q 2020, up on 4.03% growth in 4Q 2019 and on 4.73% average growth over two years through 4Q 2019:

 
And yes, leverage risks in the private sector have increased as the result of these figures. At the end of 1Q 2020:
  • U.S. non-financial businesses debts stood at 78.07% of GDP, an all-time high since the post-WW2 data started;
  • U.S. households and NPOs debts stood at 75.6% of GDP, marking an official end to the post-Global Financial Crisis 'deleveraging' period that saw debt/GDP ratio declining to the low of 74.2% in 4Q 2019.
  • Total non-financial private real economic debt stood at 153.67%, the highest level since 1Q 2011.

8/3/20: Global Economy’s Titanic: Meet Your Iceberg


Here's that iceberg that is drifting toward our economy's Titanic... and no, it ain't a virus, but it is our choice:

Via: @Schuldensuehner

Years of easy credit, easy money. The pile of debt from Baa to lower ratings is the real threat here, for its sustainability is heavily contingent on two highly correlated factors: cost of debt (interest rates) and availability of liquidity. The two factors are closely correlated, but are also somewhat distinct. And both are linked to the state of the global economy.

There are additional problems hidden within A and even Aa rated debt, since these ratings are vulnerable to downgrades, and current Aa rating shifting to Baa or Ba will entail a discrete jump in the cost of debt refinancing and carry.

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble


Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

  • Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
  • The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
  • Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
  • As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.


As noted by BIS: “...financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".


Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see http://trueeconomics.blogspot.com/2018/07/14718-second-longest-recovery.html).

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...