I'm talking of total debt taken by all agents of the economy: governement but also households and business.
As GDP is the sum of government spending and other actor contributions, I don't think that government debt alone is pertinent when talking about GDP.
As of Q2 2006, total debt in the USA is 208% of GDP, in France it's 168%, so the total debt differential 40% of GDP, not a small number.
For sources see links here:
http://guerby.org/blog/index.php/2006/11/02/123-les-dettes
Note 1: I'm not including financial institution debt (column of the Fed Z1 flow of funds report and something similar from European central banks) because I don't know if it's meaningful to add them, I suspect yes but nobody has been able to answer my doubts yet.
Note 2: I don't think the data source I cited is that credible, but it seems to be based on Fed Z1 report (which is credible :).
Can you explain your doubts? Bush is a symptom, not the disease.
If you know someone proficient in central bank reports, I'd be very happy to know the answer there.
I'm talking about debt accounting only here.
Which just goes to show what utter and complete bollocks it all is.
Smoke and mirrors screening the totally unacceptable and unsustainable Reality of a deficit-based monetary system..
Consider UK Plc: it's the only Plc with no "Equity" on the balance sheet, and with accounts which show a debt, but not the assets they are secured against.
It's as though Mig's family accounts showed the mortgage, but not the house!
Instead, we see UK Plc's "assets" consisting largely of bank-issued claims over houses - over 70% of UK money supply.
Un-effing-believable. In every sense. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
As the risk of government default is almost by definition [or in theory] negligible, government debt doesn't need to be secured, does it? Bush is a symptom, not the disease.
Of course, there is then the issue of government being acually willing to reimburse its creditors, which affect the state rating. Un roi sans divertissement est un homme plein de misères
Gazprom had a better rating than Russia when it was using its gas export contracts as collateral, because the only way it could default on that debt was to stop delivering gas, a much more violent step nowadays, diplomatically, than just defaulting on payments.
That's why we were happy to lend money to Gazprom, effectively taking Gaz de France risk while being paid margins sized on Russian risk (then - Russian risk today pays very little). Ah, good ol' times... In the long run, we're all dead. John Maynard Keynes
And according to your figures, the difference is essentially in household debt, which in the USA is 90% of GDP. Ouch. Bush is a symptom, not the disease.
So that's not the driving factor.
The bubble is:
(that's debt to net disposable income, in various countries: US, UK, Japan on the left, Germany, France, Italy Spain on the right. Note the different scales) In the long run, we're all dead. John Maynard Keynes
According to the St Louis Fed, America is at about 69%. (The figures on younger buyers -- under 35 years old -- from '95 to '04 are interesting.) Ireland, according to the same report, comes in at a whopping 80%.
I'd be interested to know how these figures stack up against household debt. Britain is dealing with much higher price-to-income ratios on housing than America, -- a bit under six vs a bit under four -- so, knowing that home ownership rates are roughly the same, the UK should be enduring higher household debt. That chart seems to support it. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
As a result it's hard to find good rental properties, and most come fully furnished because there is/was a clause that reduced a tenants rights if the flat was furnished.
I guess I've just gone down this debt path before, and it's just complicated, and as I said, each time I've done it, full of errors in analysis. As you and Migeru point out in your discussion, you need to look at offsetting debt and think about how to treat it--when bank loan to banks, or financial institutions loan to each other, one parties asset is another parties liability.
And on the business side, you need to consider what lies behind the tradeoffs of financing companies through debt or equity. Both methods are ways of investing in business--the trade off being made is one between risk and reward. Straight debt, fully secured, is the least risky, but also with the lowest return. Straight common stock is the riskiest. And there is all of those financial instruments in between--debt with warranties, a combination of debt and equity. or preferred stock, less risk.
There are levels of debt that are good. Many companies should have far more debt than they have, so they can leverage their earnings--raise ROE higher than ROA.
What's wrong with homeowners having 20% of their homes owned by the bank--why not 30%, 40%, 50%. It depends of course on the individual home owner. There is a tax benefit in the US, for the right kind of homeowner, to have a $1 million mortgage. But most people don't do that--even those with the credit rating.
so with my business and home ownership examples, I'm getting at the debt/equity issues. and they are complicated.
but I understood you point.
What's wrong with homeowners having 20% of their homes owned by the bank--why not 30%, 40%, 50%. It depends of course on the individual home owner. There is a tax benefit in the US, for the right kind of homeowner, to have a $1 million mortgage.
If only banks' DID own a proportion of the property and we actually rented that proportion at (say) 20% of the market rental.
But they don't - they create credit on the back of their Capital base and secure it with claims over our properties.
To actually own our properties wouldn't be a very effective use of their Capital would it, not when they can use their Capital as a base for credit creation which allows them to finance a dozen houses for every one they could actually buy by investing their equity in property.
Banks could easily reinvent themselves so that they actually bring together investors in property with investments in property. That way they wouldn't need to put a penny of Capital at risk, as they currently do in the mad world of fractional reserve banking... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
I'd have to look into how the numbers work out, but most people seem to buy with a view to owning outright some time close - or ideally before - retirement. So when income drops, outgoings drop too, and they're left with a substantial pile of equity.
You might think that younger buyers would be interested in building up a transferable deposit with a combined buy/rent scheme, but it doesn't seem to work like that. I'm not sure why, because when property prices are exploding a part-share of equity is better than no share at all through renting, and potentially a reasonable investment.
My guess is the banks don't like the scheme because effectively they're forced into property price speculation. Normally it's the mortgage owner who takes all of the risk, and - obviously - even when equity is negative the owner is still responsible for the full amount of the loan.
So if banks co-owned property, a price crash would wipe maybe 10-20% off the nominal book value of the holdings.
But - when prices crash, mortgage defaults lose a similar amount from mortgage loans anyway. So the objection doesn't really make sense. And when prices are increasing, banks are missing out on a huge potential source of income.
your idea is not a bad one at all. but I imagine the banks don't want to do it because they think they already have a good business model.
but you would think if the idea is a good one, some other entrepreneurs would have gotten into this and made a good business out of it, and they have not, that I know of. Though I note ThatBritGuy says this is an option in the UK, but it has evidently not been to popular.
one problem I could see is that a shared equity arrangement is really a true partnership. what happens if the owner partner doesn't take care of the house--let's it run down? If he is a wonderful owner and fixes it up himself, how do you pay him for his effort? it might be very complicated for a large corporation to run such a program. while with a loan, it's a pretty straightforward transaction--as compared to equity ownership.
Banks obviously didn't move into this area, and perhaps they are just too closed minded, and set in their ways. that could be the same reason they are not moving into this idea you have.
I wonder though how receptive the home buyers would be--maybe they want all of the upside, so they'll save for a house of their own, and maybe even buy a smaller one to start.
But not for property purchasers, who, as you identify would not wish to share the gains they are accustomed to see as inevitable - the fact that these gains are caused by deficit-based money does not concern them, and why should it?
However, the possibility is nevertheless there for a purchaser to acquire property using this mechanism. And note that the actual finance cost may be minimised since there is no reason why investment in the capital value of the land need not be treated as "Equity" (unlike buildings, land/location does not deteriorate).
ie while a return on capital will be paid by the occupier on the whole investment, there will be no need to repay much of the capital.
However, the real opportunity using this new form of finance arises at the other end of the telescope.
Equity Release.
The "Capital Partnership" is the best form of Equity Release there is, and wipes the floor with the existing toxic alternatives of:
(a) "reversion" (when you sell part or all of your property to an investor who gambles on how long you live); or (b) a "roll-up mortgage" - where the interest rolls up - typically at 2% over base rate.
So Aunt Agatha sells (say) 10% of her £500k house to her pension fund, or someone else's, and simply pays 10% of the market rental of the property for as long as she uses the capital.
If she doesn't want to pay cash, she can pay in further equity shares instead.
Like all Equity release schemes, the equity will likely run out one day, but this structure gives : (a) Aunt Agatha the best deal there is; (b) Pension Funds a simple new REIT look-alike investment (since LLP and LLC vehicles are tax transparent or "pass through").
To see the extent of the opportunity, in the UK over £1 trillion in property is owned by over 65's free of mortgage. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
As far as I understand there is no monetary creation with equity whereas there is monetary creation for "classical" household or business loan, and I believe that's the criteria for defining debt in the central bank reports we're looking at (after all money creation is what central bank are supposed to regulate :).
Monetary creation is a factor for the value of the dollar hence the value of US assets.
For home ownership, the right number is of course total equity of the "owner" of the house. Owners with little chance of paying back their loans are counted in the "owner" share of the population without ponderation otherwise. I haven't seen international data with total equity.
Also in France there is very limited borrowing against your current home value (it's legally possible but rarely used up to now at least) so the impact on GDP via consumption is lower than in the USA.
For public companies in the US, most of their loans are in the form of bonds, that are traded on the public markets. the bonds are held by various types of investors. while the bonds are put on the market by investment banks, this is a different process. So if I understand this right, you do not get the multiplier effect, and the money creation impact on these types of borrowings. (I guess individual bondholders could decide to borrow on margin--though actually I'm not sure if bonds are considered marginable, like stocks--but even then, margin requirements are much tighter than bank reserve requirements.)
I'm interested in your comments. I haven't thought about this element of borrowing--margin versus bank reserve requirements--in a long time, maybe never. I'm learning. -:)
To be honest, I don't understand enough of the USA mortgage repackaging business to know what share of household debt ends up in the form of bonds vs classical bank loans. I even wonder if someone knows :).
http://calculatedrisk.blogspot.com/
An articles in the ubernerd serie:
http://calculatedrisk.blogspot.com/2007/04/mbs-for-ubernerds-i-gse-pass-throughs.html
Polical moves around bondholders liabilities:
http://calculatedrisk.blogspot.com/2007/04/bagholder-bondholder-liability-cant.html
(a) the asset of the portfolio of household loans is replaced in the Bank's books by the asset of an interest-free loan from the Central Bank aka cash, to be immediately put on interest-bearing deposit (ie other banks and the Central Bank replace the householders as debtors to the Bank);
(b) the equal and opposite liability the Bank had to depositors/the banking system remains exactly as it was.
The original loans, and therefore the original Money, remain in existence, although the counterparty has changed. It is only when loans are paid off, or written off, that the original money created is cancelled or "destroyed".
I do not see how "static" money "tied up" in land and property - while it may have inflated asset prices when it came into being - can possibly cause retail price inflation.
It is not clear to a Bear of Little Economic Brain like me that monetarists have ever distinguished adequately between "asset-backed" (ie secured) credit/Money, which is for the most part "static" and unsecured credit/Money - which is free to circulate ie "dynamic" - and hence may potentially cause inflation.
As far as I know the vast bulk of Money created (>70% in the UK) is mortgage-backed and may be characterised as "static", therefore. Similarly any other secured loans, and any money invested in shares of limited companies may equally be characterised as "static" and IMHO for the most part (the exception being when Equity Release takes place upon the creation of the loan) non-inflationary.
As far as I can see, monetarism bears very little relation to Reality. ie in technical terms, it's almost complete bollocks. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But I think all that has happened is a bank has sold a portfolio of mortgages and therefore gets some extra cash in place of the paper. But (in the perfect world of theoretical economics) that cash is drawn out of other banks. So cash reserves in the system are net zero.
The real economic consequence of the transaction is it moves the risks of the mortgage portfolio, and of course the rewards of the mortgage/interest payments, from the bank and into the hands of investors--individuals like you and I, pension funds, etc.
Thanks for discussing this. and thanks for the links, I'll peruse them as soon as my head stops hurting. -:)
That is not the case.
I am saying (and you are agreeing) that once the loans = Money are created then while selling them on may change the counterparty of the loan, the "new" "asset-backed" Money created in the first place remains in existence.
As I said earlier, it just goes to show how obscure the system is, and how its fundamental flaws are entirely hidden from view behind smoke and mirrors.. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The household got the created loan money and this amount won't go away in existence and in the bank book until repayment of the loan.
One thing is that the bank having repackaged might be able to do more loans because some regulatory limit is lowered by the lowered (or cancelled) risk of the bank.
The Bank frees up its regulatory capital. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
In fact, couldn't the bank just loan the money back to Metrovacesa? Bush is a symptom, not the disease.
However, that million of cash came from many sources, but (perfect world of economics thinking) wouldn't it come out of other banks in the system. Banks C, D, and E for example might have the three of us as customers, and we bought the bonds, paying for them from our bank accounts. And as we do so, banks C, D and E have a negative money multiplier that offsets the positve one of bank A.
However, that does leave us with the $1 million of bonds in our hands. But of course we are not banks. So it's a different process from here for us. For example I would likely have my $300,000 of the bonds in a brokerage account. I would have probably sold something, bonds or stocks, to pay for the bonds. So my financial assets are somewhat the same, with a slightly different mix of assets. Investors like me, us, can buy on margin, but I'm fairly risk adverse and my borrowings are normally below 5% of financial assets--never above 10%. and this new mortgage bond wouldn't change my thinking about risk levels. (and also I'm not sure that changes the money supply anyway--I'd have to brain crunch through the whole margin process to figure that impact. But let's ignore that for the moment.
Where does this original concept of Laurent's thinking break down? a $1 million positive impact at Bank A and the resulting positve multiplier effect, perfectly offset by $1million negative impact in banks C, D and E.
PS: I don't know if we want to go there, but WSJ had an interesting article that relates to the "margining" process I guess I'm suggesting that we put aside for the moment: OUTER LIMITS As Funds Leverage Up, Fears of Reckoning Rise Fed and SEC Question Wall Street on Policies; 'A Mockery' of Margin By RANDALL SMITH and SUSAN PULLIAM April 30, 2007;
Hedge-fund manager John Paulson made $1 billion using a complex financial instrument to pump up a bet that the subprime-mortgage market would crater. The parent company of retail giant Sears made $74 million using a similar device to boost its wager that a basket of stocks would rise in value. Both were playing with leverage -- the magical power that allows investors to make big investments without putting big money on the table. These days, they have lots of company. Thanks to advances in financial engineering, investors have never had so many different ways to make commitments that exceed their bankrolls. And never before has leverage wormed its way into so many nooks of the financial world. We're living on planet leverage, and regulators and market gurus are growing nervous. How did this happen? For starters, hedge funds and leveraged-buyout funds have proliferated. They're pioneers in boosting returns using borrowed money, the most traditional form of leverage. Also, investment banks are pumping out newfangled leveraging tools such as derivatives, complex securities that allow hedge funds and other investors to add leverage without borrowing money. Finally, mainstream America has gotten into the act. Once-conservative institutions are copying hedge-fund tactics. The Pennsylvania State Employees' Retirement System has begun dabbling in derivatives. Mutual-fund companies such as Easton Vance Corp. and Federated Investors Inc. have launched funds that rely heavily on derivatives. Garden-products maker Scotts Miracle-Gro Co. and other public companies have loaded up on debt to improve returns. This leveraging binge has regulators and others worried. In the first place, no one knows how much leverage there is. Much of it is hidden, because investors aren't just juicing returns with borrowed money, but with derivatives, which are harder for regulators to track. No one is sure what will happen to this complex brew in the event of a serious market downturn. When markets turn bad, leverage can create a snowball effect. Lenders and derivatives dealers demand that investors provide them with more collateral -- the stocks, cash or other assets they pledge to cover potential losses. Sometimes, investors dump stocks and bonds to raise cash. Prices drop more, losses accelerate, and more selling ensues. Some Wall Street analysts have taken to referring to a nightmare version of this scenario as "The Great Unwind." Timothy Geithner, president of the Federal Reserve Bank of New York, said in an interview that the torrent of money flowing into hedge funds has coincided with a troubling erosion in lending practices. The Fed, the Securities and Exchange Commission and European regulators have spent months trying to gauge the risk by gathering information from hedge funds and Wall Street firms. They've asked the brokerage firms, among other things, how much collateral they're demanding from hedge funds when they provide financing.
Both were playing with leverage -- the magical power that allows investors to make big investments without putting big money on the table. These days, they have lots of company. Thanks to advances in financial engineering, investors have never had so many different ways to make commitments that exceed their bankrolls. And never before has leverage wormed its way into so many nooks of the financial world.
We're living on planet leverage, and regulators and market gurus are growing nervous.
How did this happen? For starters, hedge funds and leveraged-buyout funds have proliferated. They're pioneers in boosting returns using borrowed money, the most traditional form of leverage. Also, investment banks are pumping out newfangled leveraging tools such as derivatives, complex securities that allow hedge funds and other investors to add leverage without borrowing money.
Finally, mainstream America has gotten into the act. Once-conservative institutions are copying hedge-fund tactics. The Pennsylvania State Employees' Retirement System has begun dabbling in derivatives. Mutual-fund companies such as Easton Vance Corp. and Federated Investors Inc. have launched funds that rely heavily on derivatives. Garden-products maker Scotts Miracle-Gro Co. and other public companies have loaded up on debt to improve returns.
This leveraging binge has regulators and others worried. In the first place, no one knows how much leverage there is. Much of it is hidden, because investors aren't just juicing returns with borrowed money, but with derivatives, which are harder for regulators to track.
No one is sure what will happen to this complex brew in the event of a serious market downturn. When markets turn bad, leverage can create a snowball effect. Lenders and derivatives dealers demand that investors provide them with more collateral -- the stocks, cash or other assets they pledge to cover potential losses. Sometimes, investors dump stocks and bonds to raise cash. Prices drop more, losses accelerate, and more selling ensues. Some Wall Street analysts have taken to referring to a nightmare version of this scenario as "The Great Unwind."
Timothy Geithner, president of the Federal Reserve Bank of New York, said in an interview that the torrent of money flowing into hedge funds has coincided with a troubling erosion in lending practices.
The Fed, the Securities and Exchange Commission and European regulators have spent months trying to gauge the risk by gathering information from hedge funds and Wall Street firms. They've asked the brokerage firms, among other things, how much collateral they're demanding from hedge funds when they provide financing.
In my own mind, I think of the money multiplier effect of the banking system in one compartment. Then I think of the whole world of investments, swaps, and margining as a separate compartment, since different rules outside the banking system apply--and admittedly because this is a set of rules, that is this article shows, is evolving and controversial. Maybe this is my mistake, and you and Chris are including this aspect in your thinking, as one compartment?
Why is Return on Equity better than Return on Assets? Bush is a symptom, not the disease.
And as for "gearing" and "leverage" - it is precisely this phenomenon that is the direct cause of asset price inflation. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
I believe the average company in the S&P 500 is earning about 15--16% return on its assets--basically total assets minus short term liabilities like accounts payable. and that calculation is after-tax. I believe such a company can borrow on the markets, issue corporate bonds, with an interest rate of roughly 7%. So the company can borrow money at 7% to finance its growth in its business, which will yield a 15% return. But there is an additional benefit because the interest on the bond is tax deductible. Assuming the 35% corporate tax rate, this means that the after tax interest cost is 4.55%. So this is very favorable for the owners of the company, the stockholders--borrowing money at 4.55% and earning a 15% return on those borrowed funds. The alternative of issuing more shares to raise the money would dilute the ownership position of current shareholders, and they would get a smaller % of the growing pie (earnings pie, I guess?).
If the company is in a reasonably stable business, I think most people would be comfortable if they borrowed up to, say, 20% of their capital structure--so the company is financed with 80% equity and 20% borrowings. Thus the Return on Equity is higher than the Return on Assets--they are earning the 15% ROA on the total capitalization, but the bondholders are happy with 7% (which is 4.55% to the company), leaving the extra 10.45% (15%-4.55%) to be spread to the shareholders, either in dividends are share price growth.
But what I left out in my comment is that there is too much of a good thing. If a company raises its debt/equity ratio to much, say to 50%, it can put itself into a very risky position (not unlike the subprime borrowers of today). Stuff happens in business, and things don't always go to plan. You're legally commited to make those bond payments. If your earnings fall perilously close to what the interest payments are, there are covenants and you may find other people coming in to run your business and restricting your efforts to safeguard the bondholders at the expense of the shareholders--as they should, btw, bond holders are assuming they have much less risk than shareholders.
so it's better if management is prudent, and successful. Generally company share prices will fall and remain under pressure if it lets its debt/equity ratio get too high--a "good' thing can become a bad thing, if misused, or some unforseen circumstance occurs.
