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Minyanville on Debt



February 21, 2008 – Comments (9)

Debt is the main reason for my negative view of the market.  Historically I have not found a single example of an economy where excessive debt played out well.  Either economies cut back when they could make choices about how to cut back, or they were forced to cut back and had little control of who and what got slaughtered.

The US is the biggest economy in the world and that debt is no longer owed mostly to itself, but is spread out throughout the world.  Currently the GDP of the US is about $13.1 trillion and and all debt, government and personal debt, is estimated to be 342% of GDP.  That's a whopping $44.8 trillion, or, with a population of 302 million, $148k for every man, woman and child.  Calculate that debt only over the workforce and it is close to double that per actual producing worker...  And the median income is what?  I think roughly 1/3rd of the debt per person, and 1/6th per worker.  And this is spread throughout the world.  It can not end well.

So, looking on Minyanville yesterday a short piece titled "Is US Next Japan,"  where the debate rages between whether there will be hyper-inflation or deflation, is a range of opinions on debt:

 Mr. Practical:

The parallels are debt and huge amounts cross-collateralized through derivatives. The U.S. in this comparison is much worse off than Japan was.

The difference is creativity and cajoling by the government.

The result will be the same, just manifested differently.

Professor Scott Reamer:

Policy responses - fiscal, monetary as well as legislative on both the federal and state level - are not mitigating factors themselves, as Japan's experience and the U.S.'s during the 1930-1934 period suggests.

The only variable is whether the magnitude of the debt boom preceding the current bust was smaller or larger than the one in Japan during the 1980s and the one in the U.S. during the great depression. By all measures I have seen and analyzed, the current bubble is bigger than both in absolute
and relative (to GDP) dollars.

Professor Stephanie Pomboy:

I think a critical point to make - aside from the magnitude of leverage - is that what's 'different' in this cycle is the degree to which that leverage has been created outside the banking system over which the Fed (and other central banks) exert control.

This makes pulling the traditional levers less useful in preventing deflation 'this time.' Even the nontraditional measures (TAF, expanded collateral accepted at the Discount Window, etc.) are less useful in that they focus on the banks, which accounted for a meager 19% of credit creation over the last year.

9 Comments – Post Your Own

#1) On February 21, 2008 at 9:20 AM, AnomaLee (28.76) wrote:

"Currently the GDP of the US is about $13.1 trillion and and all debt, government and personal debt, is estimated to be 342% of GDP.  That's a whopping $44.8 trillion, or, with a population of 302 million, $148k for every man, woman and child."

Well, those numbers don't include the amount of assets that all these entities possess. That number is still higher than the total debt outstanding dwot.

If needed we could still sell those assets before they lose more value. Also, it is easier that we do owe foreigners. It's hard to wage war on your own people.... 


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#2) On February 21, 2008 at 9:38 AM, dwot (29.16) wrote:

Just doing my morning reading, behind from yesterday...

The index for Food At Home rose 0.9%, choice or not?  One thing about moving up north, I quite like that there isn't a single restaurant in town, not one.

This one's tragic, double digit spikes in hardship withdrawals on 401k...  Screw the idiots that are going on about mortaging your future by cashing out a 401k retirement plan.  If you've got expensive credit card debt it is in your best interest to reallocate your assets and get rid of that debt.  Every day you sit on it you pay for the spread on that debt, and don't kid yourself, taxes are going up and none of these things are calculated with realistic assessments of where taxes have to go.

This one gets to me... 

  "Based on current savings rates, the center estimates that 43 percent of households risk not being able to fund the same standard of living during retirement as they have in their working years. That percentage increases to 49 percent for Americans between 36 and 43 whose main retirement plans are 401(k) accounts, not employer-funded pension plans like older generations."

All the accusations this generation gets about being the "me" generation yet they truly are the first cut loose generation, with the change to the 401k plans.  They get to pay for older generation's retirement and their own.  Well, I no longer suspect it will work out that way because this debt crisis means that the older generation is going to have a hard time collecting on what they believe they are entitled to, and the younger generation, whom are expected to pay that entitlement, are simply going to say, screw you, you didn't even help me with my education. 

The new teachers I work with pay $600-800/month on their student loans and that debt looks like it continues into eternity for the amount of principal it paids back.  That 36 to 43 year old generation were also the generation to go through the grossly increasing cost of education and the dismantling of education supports.  The young simply don't know what was and simply aren't adequately represented due to lack of experience and understanding about what is happening.

This article is so much BS.  Sorry, but I was sucked in and pressured to follow  that BS against my better judgement and in hind-sight analysis it cost a bundle, and using the historical data, which is what they do to come up with this garbage, I wasn't able to show that we'd be better off paying off our mortgage rather than putting money into a retirement savings plan.  It is a battle I argued ardently against, lost, and it ended up being a very costly lost battle. 

Screw the way all this garbage is calculated.  The level of debt and bubbles everywhere can screw your economic future for life.  The safest and wisest investment is paying off your debt first, especially when you consider how periless the financial system and equity markets are right now.

So, after my morning rant, I have not done much reading at all... 

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#3) On February 21, 2008 at 10:04 AM, AnomaLee (28.76) wrote:

...all you needed was a calculator to prove your point


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#4) On February 21, 2008 at 10:07 AM, CycleFreak7 (< 20) wrote:

If people badly in debt are walking away from their homes, what makes you think they'll pay off unsecured credit card debt?

Answer: They won't.

Banks have yet to reveal the trouble that truly is brewing under the thin veil of rosy future prospects. 2nd and 3rd quarter reports are going to be worse or, at best, not as good as expected.

Watch as the number of personal bankruptcy filing skyrocket this year. 

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#5) On February 21, 2008 at 10:21 AM, GS751 (26.89) wrote:

I have wondered for awhile if ther eare any publically traded bankrupcy consulting firms. 

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#6) On February 21, 2008 at 10:34 AM, GS751 (26.89) wrote:

after this weathers I could see extreme leverage becoming a dinosaur.

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#7) On February 21, 2008 at 2:40 PM, dwot (29.16) wrote:

This is what I've been getting at...

I've done a few calculation in my gross poliferation of posts recently along the line of the minyanville post above, on treasury bills.

This is an incredible mess.


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#8) On February 22, 2008 at 7:31 AM, TheGarcipian (34.84) wrote:

Hi D,

I totally agree. Bill Moyers had Scott Bittle and Jean Johnson on his PBS show last week. These are the authors of the very informative book (so I'm told), entitled "Where Does the Money Go?". You can find it on Amazon here:

I'm considering buying it for my next business trip or when I can shake off the current depressive mood I'm in. Don't think I can handle the grim circumstances this book describes, the current financial mess our government is in and how we need to solve it in the next 5-7 years. It sounds to be good writing with solid facts from a non-partisan group (they blame Democrats and Republicans alike for this mess). If you couple the extremely weak position our Federal Government is in currently with our  ebbing financial strength against the backdrop of enormous over-leveraging by major banks and financial houses and the skyrocketing personal Debt/Equity ratios, it is extremely scary. You are exactly right: there will be little or no Y-Gen'ers and fewer X-Gen'ers to pay the Boomers' Social Security entitlements because a sizeable number of them will be focusing on their own struggles with 401k funding, decreasing wages, and evaporating jobs. We are entering a time of deflation, much as Japan had (and still has!) some 20 years ago. No, I don't think our forthcoming predicament will last two decades (but it could) simply because so many peoples/countries around the world own our devaluing paper, and thus have a collective incentive to help us out of the gigantic hole into which we are just now beginning to fall.

BTW, the national debt load is currently $9.3 TRILLION. That's the federal debt load only, not including the personal debt that your number above did. It is so large that the Debt Clock in downtown Manhattan will not be able to display the "1" when we roll over to $10 Trillion later this year or next, unless they remove the dollar sign. That hefty price tag averages out to a bill of $78k+ for every taxpayer in America, or about $30k for every man, woman and child.

Welcome to America. Please pay in cash. Drink up this page along with your morning coffee.
But don't choke, just rant away!


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#9) On February 27, 2008 at 1:39 PM, TMFKopp (97.59) wrote:

Maybe this is just because I spend all day looking at stocks and have largely abandoned my econ roots, but I look at this all a bit differently...

First of all, evaluating almost any number in a financial analysis is pretty useless when you look at that number in isolation. Company X had $3B in revenue... so what? Is that up from $1.5B, down from $6B? How much of that $3B ends up as profit?

The same goes for debt. Company Y has $500m in debt... so what? Is it the size of Microsoft? Or does it have a book value of $50 and is just waiting for lenders to sell its computers to cover the loans?

I have yet to see a single place where you can get comprehensive numbers on US debt across the board, so feel free to argue with my numbers, but I'm mainly looking at this broadly.

The debt service ratio (ratio of interest payments to income) in the US right now is about 14.5%, flip that around and you could say that interest coverage is 6.9x. Financial obligation ratio (a broader measure of obligatory payments) is a higher 19.5%, but it still works out to a 5.1x coverage. Were I looking at this in a company, I would probably like to see them pay off some debt, but I would be comfortable with interest coverage of almost 7x. (note the above is on consumer debt)

I'm sure I'm not the first one to make this point either, but as absolute necessities become a smaller portion of the budget (food, utilities, etc), it's more feasable to spend more of the budget on interest payments for, say, a larger house or a boat.

Interest coverage is only part of it, though. When I'm looking at a company I'm not concerned with the absolute value of its debt, I'm looking at its debt in the context of its assets. Ahh yes, debt ratio! I'll run with Deb's $13.1 trillion number since it sounds pretty comprehensive. Compare that to the $69.6 trillion of US financial assets and you get a debt ratio of 18.8%. I can't say I'd be worried if a company had that amount of debt...

I should point out that I'm writing this in part b/c I believe it, but also because when I hear too many people preaching the same story I get the inexplicable urge to play devil's advocate (as Deb knows...) 

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