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Hitting the Debt Ceiling
On this Sunday, May 18, 2013, the U.S. federal government will metaphorically max out its credit card. Jeffrey Sparshott of the Wall Street Journal‘s Real Time Economics blog reports:
The U.S. government will bump up against the federal debt limit this weekend, though a series of emergency steps will allow it to continue paying all of the nation’s bills until at least early September, Treasury Secretary Jacob Lew said Friday.
“Nevertheless, Congress should act sooner rather than later to protect America’s good credit and avoid the potentially catastrophic consequences of failing to act until it is too late,” Mr. Lew said in a letter to House and Senate leaders.
Lawmakers in January agreed to suspend the debt ceiling until May 18, allowing the White House and Congress negotiate new spending and tax plans. But the sides haven’t made a deal, so on May 19 the debt limit will be restored to its previous level, plus the amount of borrowing that occurred while the limit was suspended.
That means that the Treasury will be up against the limit on Sunday.
Fortunately, the U.S. Treasury can use what it calls “extraordinary measures” to hold total public debt outstanding of of the federal government to “just” $16.7 trillion, or about $138,560 per American household.
Those extraordinary measures involve things like a more careful management of the nation’s finances, which thanks to the recent surge of revenue for the federal government, could be sufficient to carry the nation through the end of the federal government’s current fiscal year at the end of September 2013.
That surge of revenue largely consists of three factors:
- Increased payroll tax collections, where all Americans who earn wages or salaries saw their taxes to pay Social Security increase by up to 2% of their paychecks on January 1, 2013.
- Increased revenue from Fannie Mae and Freddie Mac, both of which were taken over by the federal government in the aftermath of the first housing bubble collapse, who have benefited from the emergence and inflation of a new housing bubble in the U.S. in the second half of 2012.
- Increased tax collections for dividends and capital gains in 2012, much of which wasn’t paid until income taxes for that year became due on April 15, 2013. Here, following the re-election of President Obama, the fear having tax rates on dividends potentially triple as part of the pending “fiscal cliff” crisis at the end of 2012 drove many public companies to accelerate the timing of when they would pay out their dividends to help protect their shareholders from being exposed to the higher tax rates that would take effect after December 31, 2012. They did this by raiding a large portion of the funds they were setting aside to pay dividends in 2013, which they then paid out before the end of 2012 instead.
Only one of these three factors is likely to be sustained indefinitely, as there’s no telling how long the new housing bubble might last and the dramatic surge of capital gains and dividend tax collections seen at the end of 2012 is clearly the result of a one-time event. The chart below shows the impact of these changes in the Congressional Budget Office’s most recent projection for the next 10 years of the federal government’s budget deficits as a percentage of the nation’s GDP:
For now however, it means the federal government will run its lowest deficit in years, even though the national debt will still grow by hundreds of billions this year, as the U.S. is still far from a healthy fiscal situation in that its ability to withstand another major economic shock has not been restored.
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The US debt “at $65 trillion outstrips the economic output of the entire planet.” (Video)
Always good to have a little perspective. But debt and deficits don’t matter we are told. So don’t worry.
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Business • NYSE Margin Debt Approaches All-Time High
NYSE Margin Debt Approaches All-Time High
05/01/2013 AT 2:35 AMCULLEN ROCHE
Disaggregation of credit is the understanding that there are good forms of credit and bad forms of credit. A good form of credit is something like a standard business loan in which a company obtains access to a line of credit in order to make investments in the firm. It pays employees, invests in equipment, etc. This form of credit, when issued prudently, is usually productive in that it helps the company expand and it rewards the lender for having taken the risk.
As a credit based money system we rely largely on the health of these sorts of loans to keep the system running smoothly. But there are also bad forms of credit. For instance, when a homeowner decides they want to speculate on real estate as an investment because they (incorrectly) believe real estate can outpace inflation over the long-term. We could make this matter even worse by repackaging the original loan and selling it off to new investors as AAA rated securities. In other words, disaggregation of credit was a core piece of the 2008 crisis.
I think another sign of disaggregation of credit is the extraordinary growth in borrowing that occurs around stock market booms. As the market surges we inevitably see a sort of ponzi effect in the market where more confidence breeds more credit and the bidding up of prices. It works until it doesn’t and when it doesn’t the air sure comes out fast.
So it’s rather alarming to see NYSE margin debt just shy of its all-time high as of the March reading. My guess is we’ve actually already surpassed the all-time high though we won’t officially know until April data is released. Fun times knowing we live in a world that is built on such a fragile foundation.
http://pragcap.com/nyse-margin-debt-app … -time-high
Statistics: Posted by yoda — Wed May 01, 2013 9:35 am
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International News • Total Debt in Selected Countries Around the World
chart.pngTotal Debt in Selected Countries Around the World
http://www.gfmag.com/tools/global-datab … z2R7mt3vow
A country’s “total debt” includes government debt as well as the debt of financial institutions, non-financial businesses and households. For the 10 largest mature economies (Australia, Canada, France, Germany, Italy, Japan, Spain, South Korea, UK and US), total debt stood at nearly 350% of GDP in 2011. If one considers the economies of the PIIGS countries (Portugal, Ireland, Italy, Spain and Greece,) those worst hit by the debt crisis in Europe, total debt was almost 400% of GDP.
* Asset-backed securities are not included in data from McKinsey since underlying mortgages and other loans are already included and therefore it would reflect a duplication within the data, according to McKinsey. Other data sources, including the FT, The Economist and Morgan Stanley, do include ABS in total debt figures.
By Valentina Pasquali and Tina Aridas. Project Coordinators: Denise Bedell and Alessandro Magno
Read more: http://www.gfmag.com/tools/global-datab … z2R7nIVmuk
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* Including asset backed securities (ABS) US total debt would equal 350%-360%. Asset-backed securities are removed from McKinsey data since underlying mortgages and other loans are already included, so it would reflect a duplication within the data, according to McKinsey. Other data sources, including the FT, The Economist and Morgan Stanley, do include ABS in total debt figures.
Total Debt in Selected Countries around the World, latest data available, as percent of GDP, by sector
Click on the column heading to sort the table.
Read more: http://www.gfmag.com/tools/global-datab … z2R7oKRZQB
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Data is from McKinsey Global Institute (MGI), “Debt and deleveraging: Uneven progress on the path to growth,” January 2012.
Total Debt in Selected Countries around the World, 1980-2011, as percent of GDP, by sector
Debt consists of the outstanding financial liabilities arising from past borrowing. Debt may be owed to external or domestic creditors. Typically, debt financing is in the form of loans or bonds. The debtor may be either a public (government) or private sector entity. Included in the “total debt” figure are liabilities of the government, the financial sector, non-financial business and households. It is most often presented as a percent of GDP in a given year.
According to McKinsey, the deleveraging process that began in 2008 after the global credit bubble and subsequent financial crisis is proving to be “long and painful.” The truth is that total debt has actually grown in all the world’s largest mature economies since then, except for the United States, South Korea and Australia. This is due mostly to rising government debt.
PODCAST FROM MCKINSEY GLOBAL INSTITUTE’S CHARLES ROXBURGH AND SUSAN LUND
At 512% of GDP, Japan’s total debt remains the highest of the developed economies in Q2 2011. The United Kingdom comes in second with a debt-to-GDP ratio of 507%. And it leads the chart in terms of the largest percentage increase from 2000 (due mainly to the growth in the financial sector). On the other hand, Japan’s total debt had stabilized somewhat, with government debt rising and private sector debt falling in the same period.
The countries that have been hit the hardest by the European debt crisis, Portugal, Ireland, Italy, Spain and Greece, simultaneously experienced a large increase of their debt relative to their GDP. Italy’s total debt to GDP went from 235% in 2000 to 314% in the first quarter of 2011. Spain’s almost doubled, from 193% in 2000 to 363% in Q2 2011. In Q2 2011, Ireland’s total debt to GDP was the highest among PIIGS country, standing at 663%.
Italy’s government debt accounts for a substantial part of its total borrowing, and its total debt to GDP is above the median level of its peers. Until the sovereign debt crisis and the concurrent tightening of credit occurred, Italy’s high debt levels were mitigated by its strong debt service capacity, but things have become harder in the last several months.
France, too, had large increases in total debt relative to GDP. Its total debt grew from 234% of GDP in 2000 to 346% in Q2 2011.
US total debt was 279% of GDP in Q2 2011, a small but significant decline since the peak of the crisis in 2009, when it stood at 296%. The drop was due to a reduction in private debt, while U.S. Government debt continues to grow. In fact, financial sector debt is at levels not seen 2000, while households have reduced their leverage by 15 percentage points. At this rate, says McKinsey, “they could reach sustainable debt levels in two years or so.” In any case, households continue to account for the largest share of total debt in the United States, as well as in Canada.
Total-debt-to-GDP ratios are only one part of the total picture.
Whether the borrowing is from domestic creditors or foreign creditors is an important factor.
Foreign borrowing accounts for a large share of total debt in Europe, due to the integration of countries in the Euro area. Greece and Portugal have a large portion of their debt in the hands of foreign creditors.
By contrast, Japan’s government debt (which is the largest segment of that country’s overall debt) has traditionally been owned mostly by domestic investors; that, however, has been changing, as the country’s household savings rate has declined.
Like Japan, a large portion of the debt of both Italy is in the hands of domestic creditors.
SOURCES
Read more: http://www.gfmag.com/tools/global-datab … z2R7pRns3p
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Statistics: Posted by DIGGER DAN — Sun Apr 21, 2013 12:51 pm
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Business • Coutts warns clients of threat from debt markets amid bubbl
Coutts warns clients of threat from debt markets amid bubble fears
Coutts, the high-end private bank, has warned its clients against exposing their fortunes to a potential collapse of the high-yield debt market amid growing concerns of a new global credit bubble.
Fears have been raised as investors increase the risk they are taking on the bonds by borrowing further Photo: Alamy
By Harry Wilson, Banking Editor10:23PM BST 01 Apr 2013
Senior managers at the private bank, whose customers include a who’s who of British society, are being discreetly advised to reduce their holdings of high-yield bonds, according to an internal warning seen by The Daily Telegraph.
Sales of high-yield debt have exploded this year as investors chase returns in an environment of historically low interest rates and rising inflation. In both Europe and Asia, high-yield sales have reached all-time highs. In January alone, Asian companies sold just over $9bn (£6bn) of high-yield bonds, a year-on-year increase of more than 6,000pc, according to data provider Dealogic.
Fears have been raised as investors increase the risk they are taking on the bonds by borrowing further. Coutts’ investment strategy committee has become concerned at the use by some wealthy individuals of borrowed money to enhance returns from high-yield investments and is understood to have begun advising clients to avoid the practice.
“If and when yields rise, the impact of these bonds, magnified with leverage, could lead to serious losses,” said one investment manager.
The use of borrowed money to enhance returns has become particularly prevalent in Asia, where local and international private banks have used guarantees of access to loans to win business.
This practice has led to fears of a new bubble in high-yield debt as investors buy riskier bonds using more borrowed money.
Among the products causing most concern are CoCos – contingent convertible bonds – that either transform into ordinary shares or are wiped out when a bank’s capital levels fall below a given level.
One of Britain’s leading bond funds has warned against buying CoCos, claiming they are “dreadful” for investors. “By losing all value prior to existing credit and equity investors, this bond is essentially providing insurance to every other investor. In short, investing in these bonds is like being in a reverse lottery where someone gives you one pound every week and then suddenly turns up demanding millions,” said Christine Johnson, manager of Old Mutual’s corporate bond fund.
Lloyds Banking Group and Barclays have both issued CoCos. Barclays issued a $3bn (£2bn), 10-year bond in November that attracted orders of more than $15bn.
But there are concerns that many investors have little appreciation of the risk. “Many buy based on superficial factors – such as the coupon [interest rate] and name rather than the terms and conditions of the bond,” said one senior investment strategist.
Last week, the Bank of England’s Financial Policy Committee said it had identified a £25bn capital shortfall in British banks and it is likely that at least some of this will be raised through new sales of CoCos.
“It appeals to senior management at the banks because it doesn’t dilute equity. And it appeals to regulators because it explicitly takes the pain… In short, good for regulators, good for bondholders but dreadful for those who buy it,” said Ms Johnson.
http://www.telegraph.co.uk/finance/news … fears.html
Statistics: Posted by yoda — Tue Apr 02, 2013 12:30 am
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Nassim Taleb: How Debt Ruins Systems
Nassim Taleb, author of the bestselling The Black Swan talks to Reason Magazine about systems and how they become what he calls “anti-fragile.”
He’s a very interesting guy who had one of the best timed economic book releases of all time. He integrates concepts of sustainability and resiliency into his thinking, 2 areas of economics I am very interested in. Our worldwide economic system is neither sustainable nor resilient. I fear it is becoming less so with each day.
The post Nassim Taleb: How Debt Ruins Systems appeared first on AgainstCronyCapitalism.org.
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Debt Limit- A Guide to American Federal Debt Made Easy
This 3 minute satirical film looks at the national debt and how it might apply to one family. Since this film was made, the national debt has climbed another $2.7 trillion. To calculate your portion of the federal debt, visit MyGovCost.org and see how much Washington is costing you.
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How Much U.S. Debt Has the Fed Monetized Since 2009?
The answer is revealed in the chart below, which appeared as part of Dylan Grice’s commentary in the March 13, 2013 edition of the Edelweiss Journal:
The chart shows the accumulated amount of U.S. government-issued debt for each quarter from 2009-Q1 through 2012-Q3. The Federal Reserve began accumulating U.S. government-issued debt once again in the fourth quarter of 2012 as part of its latest round of quantitative easing.
With the Fed having accumulated over half of all the U.S. government-issued debt during this time, has the federal government been running the Fed over the last four years or is it the other way around? And does that explain the U.S. Department of Justice’s curious lack of prosecutions for U.S. banks and other financial institutions?
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Canadian • Canadian debt at record highs, even as net worth increases:
Canadian debt at record highs, even as net worth increases: report
The Canadian Press
Published Friday, Mar. 15 2013
Debt levels remained at record highs in Canada in the fourth quarter, even gaining slightly from all-time marks set in the third quarter of 2012.
A report from Statistics Canada said the household credit market debt to disposable income was still sitting at almost 165 per cent. Which means Canadians owe $1.65 for ever dollar of after tax income they earn.
However, the report notes overall leverage was largely unchanged in the quarter, with owner’s equity as a percentage of real estate remaining just under 69 per cent.
Household borrowing in consumer credit, loans and mortgages totalled $14.7 billion in the fourth quarter, led by $11 billion in mortgage borrowing.
By the end of the quarter, mortgage debt hit $1.1-trillion, consumer credit debt stood at $477-billion and the level of debt was up 5.5 per cent on an annual basis.
In addition, the national net worth increased to $6.9-trillion in the fourth quarter, up one per cent from the third quarter of 2012.
It says higher prices for many assets led the advance, while national saving accounted for 29 per cent of the increase in national net worth.
Household net worth rose 1.4 per cent in the fourth quarter, led by gains in the value of equity holdings and pension assets.
http://www.theglobeandmail.com/report-o … le9812639/
Statistics: Posted by yoda — Fri Mar 15, 2013 1:12 pm
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Canadian • How Canada Became A Country Drowning In Debt
From micro to macro: How we’re becoming a country drowning in debt
TAVIA GRANT
The Globe and Mail
Published Saturday, Mar. 09 2013
This article is part of The Paycheque Project: Bold Canadians talk to The Globe and Mail about how they spend their incomes and their tough choices for the future.
Canada’s overseas-bound central banker suggests he’s got the country’s debt problems licked. Those left behind may feel less jaunty.
Bank of Canada governor Mark Carney, who will move to the Bank of England later this year, implied this week that the need for higher interest rates is less imminent as Canadians heed the call to curb borrowing.
But households are still sitting on record levels of debt. And Mr. Carney’s usual ally, Finance Minister Jim Flaherty, criticized the Bank of Montreal this week for reducing mortgage rates, saying, “I encourage responsible lending.”
Given muted wage growth, tough choices lie ahead: It seems 2013 might turn out to be the hangover after the great Canadian debt party.
A new analysis paints a picture of just how pinched households have become, at a time when house prices are expected to fall and amid weak income gains, poor job prospects for young people and growing income inequality.
For most of the past five years, what stood out was how much better the Canadian economy fared than in most other western nations. Those days might be coming to an end.
“We’re in for a difficult time,” says Roger Sauvé, economist and author of the Ottawa-based Vanier Institute of the Family’s annual studies on the state of Canadian family finances, including the one to be published this month.
Since the recession, Canadians have been saving much less, at rates about a quarter of what they were in the early 1990s. Household debt levels have soared past those of the U.S. and the U.K. in recent years, reaching an average of just over $110,000 dollars per household in the third quarter of last year – more than double the level of $50,691 in 1990.
Meanwhile, disposable income hasn’t changed much since 2008. Which means one thing: “Debt that’s been created by boomers and older people is coming to roost,” Mr. Sauvé says.
One central factor in this is real estate: Canadians have bought pricey homes, taken out big mortgages and used them as cash machines by drawing on home-equity lines of credit to pay for renovations or other purchases.
But an expected drop in house prices – on the order of 10 per cent in some markets in the next year or two, according to some economists – poses another challenge.
Of course, most Canadians bought their houses assuming prices would go up reliably. At 52, Cindi Thompson, in Kamloops, B.C., for example, views her townhouse as a key part of her retirement plan. Now she is worried, as it’s lost $35,000 in value since she bought it in 2009.
As the Vanier Institute report warns, many Canadians will see their “nest eggs” shrink, which has all kinds of repercussions, from keeping older people in the work force longer to the need to scrimp on discretionary spending such as vacations and restaurant meals.
Therefore, many economists are predicting this year will see a great pivot, when consumers pull back from spending and focus instead on budgeting – making tough choices between a night out, new clothes or a car repair.
This year is “back to reality,” says Benjamin Tal, deputy chief economist at CIBC World Markets.
Consider Stephanie Adams, a 25-year-old kinesiologist who lives in Burnaby, B.C. Having paid off her credit-card debt, she’s still saddled with student loans. So she’s become thrifty, living in a basement apartment, cooking at home and studying four grocery-store flyers before shopping.
It’s not all grim news: Canada’s labour market has held up much better than others in recent years, and youth joblessness, although bad, isn’t nearly as dire as in other countries.
Some segments of the population are even faring better today – the poverty rate among female single parents, for example, is now less half of what it was in 1990.
But while income inequality – the gap between the rich and the poor – isn’t nearly as stark here as in the United States, it is growing in Canada, too. The most recent data on distribution of incomes shows more inequality now than in the entire 34 years for which this measure is available, the analysis says.
Spending habits have changed, too. The fastest growth in spending in the past four years has been in expenses related to higher pension fund fees. We’re also spending more of our budgets on new vans and SUVs, parking and funeral services. Spending on pets, curiously, has soared 25 per cent on average per household since its pre-recession peak. By contrast, we’re spending less on cameras, toys and appliances.
In the next year or two, “the Canadian consumer will be a shadow of its former self,” says the CIBC’s Mr. Tal.
That might mean more slow growth. But a return to old-fashioned savings, prudent shopping and more affordable real estate might not be a bad thing, given the excesses of years past.
http://www.theglobeandmail.com/news/nat … le9562947/
Statistics: Posted by yoda — Sat Mar 09, 2013 4:09 pm
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