Public Sector Balance Sheets Leveraged to Offset Private Sector Deleveraging

From table D.3. of the Fed's Flow of Funds, we see that as the private sector deleverages, the public sector has added even more debt, which (in my opinion) has (thus far) prevented a debt deflation cycle.

Source: Federal Reserve

Interconnected Markets

In a recent conversation with a friend, we discussed how interconnected global financial markets were (the conversation began with my assertion that the European situation could cause a lot more pain the U.S. than consensus likely believes).

Below are a few charts that outline just how interconnected things have become.

The first chart shows the international investment positions of the U.S. (the level of U.S. owned assets abroad and foreign assets owned within the U.S.). I normalized the amounts by showing the level relative to the size of the U.S. economy. As can be seen, the level of ownership both in and out of the U.S. has spiked since the early 1970's, with foreign ownership of assets within the U.S. increasing at a faster pace (U.S. owned assets abroad by almost 15% of GDP or more than $2 trillion).

The next chart outlines what makes up that $2 trillion difference. While U.S. investors own more in terms of foreign equity (direct investment and stocks) than foreign investors own within the U.S., foreign investors are much larger creditors within both the public (government) and private (corporate) sectors.

Rather than make any bold statement of what this truly means (I am trying to digest it myself), I'll instead leave readers with two (conflicting) quotes:

“A creditor is worse than a slave-owner; for the master owns only your person, but a creditor owns your dignity, and can command it.” -Victor Hugo

“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” -Jean Paul Getty

Source: BEA

Federal Debt per Employee

This will be the last employment related chart for a while (I think) following recent posts This Time IS Different... Employment Edition and Breaking Down Productivity. This specifically outlines a much broader issue that will affect us over the long-term. Specifically, the level of U.S. debt and the number of workers available to pay down that debt.

The amount of debt per employed person has spiked in recent years to more than $100,000 per employed worker, up from ~$55,000-$60,000 throughout the 1990's.



There are a number of ways this problem can be solved / corrected:

• Economic growth (good)
• Higher taxes (not bad depending on your point of view, but not good for underlying growth expectations of the U.S. economy)
• Decrease government spending (good IMO, but also not good for underlying growth expectations of the U.S. economy)
• Inflation (decrease the "real" value of debt via a "tax" to savers / earners unable to keep up their returns / wages with inflation)
• Outright default (not feasible)

When evaluating the options, economic growth is the best, but difficult. Default is the worst and least likely. That leaves higher taxes, decreased government spending, and inflation as the most viable and likely (IMO).

All that said, debt deflation is still a major concern of mine due to the levels of debt and political grandstanding currently taking place in D.C. See Steve Keen's epic piece that changed my understanding of the economic collapse here for more on this possibility.

Source: Treasury Direct / BLS

Germany as the Poster Child for Fiscal Responsibility

In yesterday's post on European Debt, I noticed:

What is interesting (to me) is that debt levels in Germany are almost (or at least in the ball park) of Portuguese and Irish levels at 83% of GDP. While Ireland is WAY over their heads with a death spiraling economy, Portugal has actually been relatively lockstep with Germany; Germany's GDP and public debt levels have grown 2.7% and 32% since 2007, Portugal's 1.9% and 39%.

The below chart takes a look at Germany from a different perspective, comparing their debt dynamics (i.e. the responsible ones) to that of the U.S. (i.e. the wild child) rather than a country within the EU periphery.

While the United States has certainly outpaced Germany in terms of the amount of debt supported by the underlying economy, Germany is:

• Not far off
• Perhaps only lagging because they are a step or two behind (what do things look like post periphery bailout)

Source: Haver

European Debt Once Again Front and Center

Don't call me the Brett Favre of bloggers yet. I'm not officially back, but getting the itch and may post here and there (and likely more to be a long form post - we shall see). Not sure why the below is my first entry back (nothing epic or new about the below), but it piqued my interest as restructuring seems FINALLY likely to happen (thank goodness, especially for the individuals of Ireland who are currently in a severe downward spiral).

Bloomberg details the history of the liquidity solvency problem in the European periphery:

Today’s data brought the debt crisis back to where it started. Greece last year obtained a 110 billion-euro lifeline from European governments and the International Monetary Fund. Ireland followed with a 67.5 billion-euro package and Portugal is now negotiating for 80 billion euros in aid.

A bail out for Portugal? Must mean that things are improving (i.e. the bailouts helped) Greece and Ireland... or not.

Greece’s debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history, the EU figures showed. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP.

What is interesting (to me) is that debt levels in Germany are almost (or at least in the ball park) of Portuguese and Irish levels at 83% of GDP. While Ireland is WAY over their heads with a death spiraling economy, Portugal has actually been relatively lockstep with Germany; Germany's GDP and public debt levels have grown 2.7% and 32% since 2007, Portugal's 1.9% and 39%.

Source: Eurostat

Deficit Financing

The AP details:

Not since World War II has the federal budget deficit made up such a big chunk of the U.S. economy. And within two or three years, economists fear the result could be sharply higher interest rates that would slow economic growth.

The budget plan President Barack Obama sent Congress on Monday foresees a record deficit of $1.65 trillion this year. That would be just under 11 percent of the $14 trillion economy — the largest proportion since 1945, when wartime spending swelled the deficit to 21.5 percent of U.S. gross domestic product.

The good news (if you want to call it that) is that low borrowing costs via the Fed pushing rates (at the front-end of the yield curve) to zero has caused the borrowing cost (in the form of interest payments) to plummet as a percent of GDP, even in the face of record debt. Using interest expense figures from Treasury Direct, the chart below details the cost of debt financing (interest expense / total debt outstanding) and interest expense as a percent of GDP. Neither appears worrisome at first glance.

The concern is what happens when rates begin to rise, if there is not offsetting growth and/or inflation to keep costs low on a relative basis. Back to the AP:

"The moment when markets react negatively to our budget deficit cannot be known in advance, but we are absolutely in the danger zone," says Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business.

Higher interest rates would also raise interest payments on the federal debt. It would be costlier for the government to finance its operations. The interest payments themselves could then make the deficit increase, creating a vicious cycle.

Source: Treasury Direct (interest) / Treasury Direct (debt)

An Even Uglier Federal Debt Chart

In response to my updated More on Federal Debt post, reader dougiefreshhh comments:

for even more "on the street" bang, i'd plot this as a function of percent employed (non-public sector..as the gov't really doesn't produce anything).

Source: BLS / Treasury Direct

More on the Federal Debt

In response to my post on the Federal Debt Spike, reader Todd commented:

Would like to see this in real terms or as a percent of gdp. I bet the exponential increase would be even more pronounced.

Makes the Clinton years even more remarkable, the first 7 1/2 Bush years relatively quaint, and the recent response even more dramatic.

Source: Treasury Direct / BEA

The Federal Debt Spike

Morgan Stanley (via Self Evident)

A statutory limit on the amount of federal debt outstanding has been in place since 1917, when Congress enacted the Second Liberty Bond Act. The current limit is $14.294 trillion. Since 1940, the debt ceiling has been increased on 80 separate occasions.

Current levels are now north of $14 trillion, bringing increase #81 shortly.



What worries me is our ability / desire to get our act together. As can be seen above, the amount of debt is not just rising, but the rate of increase has been rising exponentially.

Source: Treasury Direct

Microsoft... Borrowing on the CHEAP

Bloomberg details:

Microsoft Corp., one of four non- financial U.S. companies with AAA ratings, sold $4.75 billion of bonds, including three- and five-year maturities at the lowest coupons on record.

The company’s $1 billion of 0.875 percent notes due in 2013 and $1.75 billion of 1.625 percent debt maturing in 2015 have the lowest interest rates of more than 3,500 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt.

Microsoft, based in Redmond, Washington, also sold $1 billion each of 10- and 30-year bonds, according to data compiled by Bloomberg. The 4.5 percent, 30-year debt tied for the lowest coupon with an issue last month from Johnson & Johnson.

The Household Sector is Deleveraging

Calculated Risk (via the NY Fed) details household debt is now down more than 6% from its peak:

The Federal Reserve Bank of New York today announced the release of a new quarterly Report on Household Debt and Credit and an accompanying web page. The report shows that households steadily reduced aggregate consumer indebtedness over the past seven quarters. In the second quarter of 2010, they owed 6.4 percent less than they did in 2008, the peak year for indebtedness.

Additionally, for the first time since early 2006, the share of total household debt in some stage of delinquency declined, from 11.9 percent to 11.2 percent. However, the number of people with a new bankruptcy noted on their credit reports rose 34 percent during the second quarter, considerably higher than the 20 percent increase typical of the second quarter in recent years.

Source: NY Fed / BEA

Publicizing Debt in Q1

The Federal Reserve details the latest flow of funds for Q1:

Debt of the domestic nonfinancial sectors is estimated to have expanded at a seasonally adjusted annual rate of 3½ percent in the first quarter of 2010, 2¼ percentage points faster than in the previous quarter. Private debt contracted again in the first quarter, while government debt continued to expand at a rapid rate.

Household debt contracted at an annual rate of 2½ percent in the first quarter, the seventh consecutive quarter of decline. Home mortgage debt fell at an annual rate of 3¾ percent, a significantly faster decline than in the fourth quarter, while consumer credit contracted at an annual rate of 1½ percent.

Nonfinancial business debt was flat in the first quarter, after four consecutive quarters of contraction.Bank loans and commercial mortgages continued to decline, while corporate bonds and commercial paper expanded.

State and local government debt expanded at an annual rate of 4¼ percent in the first quarter, about the same pace as in the previous quarter. Federal government debt increased at an annual rate of 18½ percent in the first quarter, significantly faster than in the previous quarter, but below the pace seen in 2009 as a whole.

The financial sector "shed" ~$1.3 trillion in debt (on an annualized basis) in Q1. Is anyone surprised the federal government added almost that same amount?

Source: Federal Reserve

U.S. Public Debt to Surpass GDP by 2012

Business Week details:

In the U.S., public borrowings passed $13 trillion for the first time this month, according to the Treasury Department. The debt will be larger than U.S. gross domestic product, now $14.2 trillion annually, in 2012, according to the International Monetary Fund.

Source: BEA / Treasury Direct

Public Debt to GDP: Fastest Jump Since WWII

The Atlantic reports the record setting April:

The United States set two budget records in April. First, the $82.7 billion monthly budget deficit was the highest ever for that month. Second, it was our 19th consecutive monthly deficit, the longest streak of red ink on the books.

Rolfe Winkler the broader meaning of deficits:

Don’t look now, but total U.S. public debt outstanding is approaching $13 trillion.

Each incremental trillion is going by so quickly, it’s hardly news anymore…

$6 trillion: February 28, 2002
$7 trillion: January 15, 2004 (22.5 months)
$8 trillion: October 20, 2005 (21 months)
$9 trillion: August 31, 2007 (22 months)
$10 trillion: September 30, 2008 (13 months)
$11 trillion: March 16, 2009 (5.5 months)
$12 trillion: November 16, 2009 (8 months)
$13 trillion: May-June 2010 (6-7 months)

While the pace is rather astounding, what is interesting (to me) is that the pace of increase is actually much slower in nominal terms (i.e. steepness of the blue line) than what we saw throughout the 1970's (due to higher inflation) and 1980's (due to massive tax cuts to "starve the beast").

Remarkably, the problem is currently less related to the level of nominal debt (still a problem) as much as the fact that our economy is not keeping pace (not a surprise as the increase in the level of debt was a response to the economic slowdown).

The result... the fastest increase in debt relative to GDP (i.e. the steepness of the red line) since WWII.

Source: Treasury Direct / BEA

The Great Reflate

Tony Boeckh (via John Mauldin):

To rescue the economy and financial system from near-total meltdown, the government created an unprecedented package of bailouts, stimulus, free money and massive fiscal deficits. It succeeded, and a 1930s style debt deflation and depression were aborted. Liquidity, on a vast scale was unleashed into the financial system, demonstrating, once again, the power of such flows to drive up the prices of stocks, commodities and other risky assets.

And those driven up returns through April (via Capital Spectator).



And the concern...

This effort to reflate—pump air back into the balloon—had to be on a scale at least as large as the bubble itself. It is an experiment never before attempted in the context of U.S. experience, and it will have consequences unlike anything seen before.

More here.

Source: Capital Spectator

The Changing Face of American Debt

The Federal Reserve released their latest Flow of Funds report, which contains TONS of great info. Below is a look at the change in debt outstanding by sector (as a percent of GDP) over a variety of periods since 1979.



1979 - 1989:

The "decade of debt" was led by the Federal government (Federal debt to GDP jumped from 26% to 41%) thanks to huge tax cuts, but businesses weren't far behind due to the leveraged buyout craze that saw over 2000 leveraged buyouts between 1979 and 1989 (and business debt to GDP from 53% to 66%).

1989 - 1999:

This decade saw continued growth in housing related debt (home mortgages grew from 33% in 1979 to 41% in 1989 to 47% in 1999). On the other hand, businesses and all three segments of the government delevered as there was a Federal budget surplus (seems impossible).

1999 - 2007:

In the next 8 years, the housing bubble was king. Home mortgages grew to 75% of GDP (2.3x the level of 1979) and helped keep consumer debt in check (have credit card debt? Simply take out a home equity loan to pay it down). Businesses once again levered up with cheap financing and a wave of private equity buyouts (business debt grew from 65% of GDP to 76%). The Federal government did continue to delever, as the economy outpaced the growth in the Federal government's debt (though the majority of this was due to a 5% decline in the Federal debt level from 1999 to 2000 (from 39% to 34%).

2007 - 2009:

The financial crisis wiped out a significant share of these debt levels, with home mortgages declining 2.5% and consumer credit a bit less than 1%, though as discussed earlier this was due to default vs. paydowns. The big story of course has been the change in outstanding debt issued by the Federal government (from 36% of GDP to 55% in 2 years!).

Source: Federal Reserve

Update: Changed the title of this post based on a title given to it when linked to by Real Clear Markets... credit, where credit is due

Treasury Debt to Receipts over the LONG Term

In response to my post on Treasury Debt to Receipts Spiking an anonymous reader asked for data going back further than the early 1980's. Using data from USGovernmentRevenue.com, the chart below shows debt to receipts going back to the mid 1800's.

So how does the recent spike compare?

Click for Ginormous Chart


The Good:
Debt levels have been higher relative to receipts

The Bad:
Those levels were only after the Civil War and Great Depression

Treasury Debt to Receipts Spiking

For those that haven't yet had the opportunity to read Steve Keen, an economist out of Australia who has had some very insightful posts in the past (February's The Roving Cavaliers of Credit is a great 'out of the box' piece that I've reread multiple times), I recommend his latest piece 4 Years Calling the GFC (i.e. the Global Financial Crisis). He noticed that Australia and the United States have been able to service a growing level of debt (which has driven a significant portion of past economic growth) due to interest rates that have moved lower and lower, resulting in servicing costs that have stayed relatively flat.

The issue is what happens when you hit the zero bound and can no longer lower rates (or when the marginal buyer is not willing to accept those lower and lower levels). The best case is lower growth as those debt levels are worked off / inflated away gradually. A worst case is when those levels reach an unsustainable level and default is brought into question (the U.S. really can't default, but bringing out the printing press just to make payments would result in a situation just as bad in my opinion).

The level Steve Keen chose to look at to see just how much debt the U.S. has piled up was debt as a level of GDP. Why?

In dynamic terms, the ratio of debt to GDP tells you how many years it would take to reduce debt to zero if all income was devoted to debt repayment. That is an extremely valid indicator of the degree of financial stress a society (or an individual) is under.

That makes sense, but I thought debt levels relative to the actual receipts brought in by the government to service that actual debt would be interesting / instructive. As a result we have the below chart, which is marked by a collapse of tax revenue at its most recent point, but the result is frightening none-the-less.



Sources: Government debt outstanding (per Treasury Direct) divided by the twelve month rolling level of receipts (per the Treasury )

Why the U.S. is Broke... Personal Current Tax Edition

Always lots of interesting information within the Personal Income and Outlays release. Here is one such area... personal current taxes, which:

Includes taxes paid by persons on income, including realized net capital gains, and on personal property.

For all we complain about taxes, our current rate as a percent of personal income is a measly 8.8% down a whopping 60% from 2000 levels.

In real per capita space, while our economy has grown 62% per capita since 1979, personal current taxes paid (again in real per capita terms) is only up 13%.

And we wonder why our country is so indebted?

Source: BEA

Saddled with Debt

Ed from Credit Writedowns reminds us that national income alone does not provide a full snapshot on the well being of the economy.

GDP is an inadequate measure for understanding how healthy an economy is. Nobel Prize-winning economist Joseph Stiglitz brought this issue into the public domain last week when he spoke in Paris, calling the focus on GDP a ‘fetish’ and favoring a broader measure of economic health.

Stiglitz was responding to reporters after a study on alternative measures of economic growth commissioned by French president Nicholas Sarkozy was released. At the time, Bloomberg reported Stiglitz saying:

GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one…

So many things that are important to individuals are not included in GDP. There needs to be an array of numbers but we need to understand the role of each number. We may not be able to aggregate everything together.

Stiglitz is talking about the social costs of growth here. Think about pollution, infant mortality rate, healthcare, life expectancy, or rates of obesity to name a few. And his views are echoed in an article which prompted this tirade from me called “Emphasis on Growth Is Called Misguided" by Peter Goodman in [the] New York Times. Read it.

However, in this (go here to read it) post, I want to focus on one narrow issue: debt.

Ignoring the massive spike in government related debt (Federal, State, AND Local) for the time being and focusing instead on household liabilities as a percent of the national income, we see mortgage debt is now at 70% of GDP (more than double the level seen in the 1980's and 50% more than that seen at the beginning of this decade) and consumer debt is now at 18% of GDP.



The importance of all this is of course that all that debt that has been added over the years has been a huge contributor to that GDP. The fear is that the debt has just pulled a lot of consumption forward rather than infrastructure or other long term investments that will provide future growth opportunities.

Source: BEA / Federal Reserve