http://www.youtube.com/watch?feature=player_embedded&v=f7iK4DHPr9E#!
[23 minutes]
Real Recovery: America’s Debt is on the Decline
[A new report from the McKinsey Global Institute] estimated that home equity loans and cash-out refinancing increased consumer spending by a percentage point to 3 percent growth a year during the housing bubble years. But with that source of debt financing gone, retailers are more likely to see 2 percent annual growth over the next few years, which is about where it has been in recent months.
Canada’s Household Debt Is Rising – WSJ.com
OTTAWA—Increased household debt in Canada, underpinned by rising house prices and low interest rates, poses a key domestic risk to financial stability, the Bank of Canada said on Thursday.
The finding, contained in the central bank’s quarterly economic review, was the latest in a series of warnings from economists and Canadian officials that high consumer borrowing has emerged as one of the economy’s biggest risks. Household debt stood at over 150% of personal disposable income as of the third quarter of last year, the report noted.
Greek death spiral accelerates – Telegraph Blogs
Ambrose Evans-Pritchard: This is what a death spiral looks like. It is what can happen if you join a fixed exchange system, then take out very large debts in what amounts to a foreign currency, and then have simultaneous monetary and fiscal contraction imposed upon you.
Germany discovered this on the Gold Standard when it racked up external debt from 1925 to 1929 (owed to American bankers) in much the same way as Greece has done.
When the music stopped – ie. when the Fed raised rates from 1928 onwards – Germany blew apart in much the same way as Greece is blowing apart. This is not a cultural or anthropological issue. It is the mechanical consequence of capital flows into a country that cannot handle it, as Germany could not handle it in the late 1920s.
Australia: Credit growth
Latest stats from the RBA show that the sharp contraction in business credit has slowed, but growth of personal credit (mainly mortgage finance) is at its lowest rate since the early 1990s and is trending downwards. Credit growth does not have to fall below zero for it to have a negative impact on the economy. A fall in the rate of credit expansion will slow the rate of economic growth.
What’s Going on With Debt in U.S.? – Real Time Economics – WSJ
The chart shows clearly the build up of debt heading into the bust, and the subsequent deleveraging. Overall public and private debt, by this measure, peaked at 302% of GDP in the first quarter of 2009. Since then, it has fallen to 279% as the economy has grown and some private players have lightened their debt loads.
via What’s Going on With Debt in U.S.? – Real Time Economics – WSJ.
Comment: ~ The Financial sector can be ignored as this merely acts as a conduit for, and mirrors, the other sectors. My concern is that Government debt is growing at a faster rate than the fall in Household and Nonfinancial Corporations debt. That is unsustainable and is likely to reverse after the November elections. At which point the economy will contract.
Nouriel Roubini’s Global EconoMonitor » The Straits of America
Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy cannot address only liquidity problems – and banks are flush with excess reserves.
Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.
via EconoMonitor : Nouriel Roubini’s Global EconoMonitor » The Straits of America.
Westpac: Follow that Flow
- The US recovery from the 2007–2009 recession has been particularly disappointing, in part due to the moribund state of the housing market.
- The state of the housing market is in part a symptom of excess leverage, the US’ core concern.
- Excess leverage will continue to weigh on US economic growth, restricting it to a sub-trend pace for the foreseeable future, resulting in a need for further QE.
….. Given the size of the US’ debt stock and the lack of assets set aside to fund future pension liabilities, it is logical to conclude that above-trend growth conditions are a long way off. In the meantime, households and government authorities will remain heavily exposed to any further deterioration in conditions, whether it be domestic or foreign (i.e. Europe) in origin.
QE3 will be needed merely to help protect against a further deterioration in economic conditions. Such a program would have to be large in scale and in coverage, likely covering USTs, mortgage securities and, with time, the existing debt of SLGs.
A final point: the degree of easing required to alleviate the financial stresses the US economy currently faces (and hopefully at least maintain the current level of activity) has not been recognised by markets. Given the precarious state of Europe, the market will likely take its time in coming to terms with the US’ own concerns. But, when the spotlight falls on the US, we expect a greater awareness of US credit risk and the absence of near-term growth prospects will see yields rise and the US dollar fall.
2011 Financial Report Of The U.S. Government – David Merkel
To pay down liabilities like these would require the permanent allocation of an additional 8% of GDP. Where would we find the will to do that? I suspect as a result that we will see real decreases in Medicare benefits — things that won’t be eligible for payment. Hospice care will be indicated at higher frequency when healing an old person would be costly. So just be aware that something has to change, either taxes have to rise, or Medicare benefit levels have to fall.
via 2011 Financial Report Of The U.S. Government – Seeking Alpha.
The path to recovery: how to bring the debt binge under control
The debt binge since 1975, fueled by an easy-money policy from the Fed, has landed the US economy in serious difficulties. Wall Street no doubt lobbied hard for debt expansion, because of the boost to interest margins, with little thought as to their own vulnerability. There can be no justification for debt to expand at a faster rate than GDP — a rising Debt to GDP ratio — as this feeds through into the money supply, causing asset (real estate and stocks) and/or consumer prices to balloon. What we see here is clear evidence of financial mismanagement of the US economy over several decades: the graph of debt to GDP should be a flat line.
The difference between domestic and private (non-financial) debt is public debt, comprising federal, state and municipal borrowings. When we look at aggregate debt below, domestic (non-financial) debt is still rising, albeit at a slower pace than the 8.2 percent average of the previous 5 years (2004 to 2008). Public debt is ballooning in an attempt to mitigate the deflationary effect of a private debt contraction. Clearly this is an unsustainable path.
The economy has grown addicted to debt and any attempt to go “cold turkey” — cutting off further debt expansion — will cause pain. But there are steps that can be taken to alleviate this.
If private debt contracts, you need to expand public debt — by running a deficit — in order to counteract the deflationary effect of the contraction. The present path expands public debt rapidly in an attempt to not only offset the shrinkage in private debt levels but also to continue the expansion of overall (domestic non-financial) debt levels. This is short-sighted. You can’t borrow your way out of trouble. And encouraging the private sector to take on more debt would be asking for a repeat of the GFC. The private sector needs to deleverage but how can this be done without causing a total economic collapse? The answer lies in government spending.
Treasury cannot afford to borrow more money if this is used to meet normal government expenditure. Public debt as a percentage of GDP would sky-rocket, further destabilizing the economy. If the proceeds are invested in infrastructure projects, however, that earn a market-related return on investment — whether they be high-speed rail, toll roads or bridges, automated port facilities, airport upgrades, national broadband networks or oil pipelines — there are at least four benefits. First is the boost to employment during the construction phase, not only on the project itself but in related industries that supply equipment and materials. Second is the saving in unemployment benefits as employment is lifted. Third, the fiscal balance sheet is strengthened by addition of saleable, income-producing assets, reducing the net public debt. Lastly, and most importantly, GDP is boosted by revenues from the completed project — lowering the public debt to GDP ratio.
Public debt would still rise, and bond market funding in the current climate may not be reliable. But this is the one time that Treasury purchases (QE) by the Fed would not cause inflation. Simply because the inflationary effect of asset purchases are offset by the deflationary effect of private debt contraction. Overall (domestic non-financial) debt levels do not rise, so there is no upward pressure on prices.
Infrastructure investment should not be seen as the silver bullet, that will solve all our problems. Over-investment in infrastructure can produce diminishing marginal returns — as in bridges to nowhere — and government projects are prone to political interference, cost overruns, and mismanagement. But these negatives can be minimized through partnership with the private sector.
Projects should also not be viewed as a short-term, band-aid solution. The private sector has to increase hiring and make substantial capital investment in order to support them. All the good work would be undone if the spigot is shut off prematurely. What is needed is a 10 to 20 year program to revamp the national infrastructure, restore competitiveness and lay the foundation for future growth.
There are no quick fixes. But what the public needs is a clear path to recovery, rather than the current climate of indecision.