12/6/20: American Love Affair with Debt: Part 2: Leverage Risk

I have earlier updated the data on the total real private economic debt in the U.S. as of the end of 1Q 2020 here: https://trueeconomics.blogspot.com/2020/06/12620-american-love-affair-with-debt.html

So, just how much is the U.S. economic growth dependent on debt? And have this dependency ben rising or falling prior to COVID19 pandemic onset? Well, here is your answer:

Using data through 1Q 2020, U.S. dependency on debt to generate economic growth in the private sector shot through the roof (see dotted red line above). In other words, U.S. corporate sector is leveraged to historical highs when the corporate debt levels are set against corporate value added.

All we need next is to see how 2Q 2020 COVID19 pandemic figures stack against this. A junkie hasn't been to a rehab, and the methadone clinic is closed...

12/6/20: American Love Affair With Debt: Pre-COVID Saga

Latest data for debt levels at the U.S. non-financial businesses and households (including non-profits) is out this week. So here are the charts and some stats:

There has been a bit of rush back in 1Q 2020 (the latest data available) to load up on loans by both private households and private businesses. 

• Non-financial business debt rose 7.86% y/y in that quarter, before COVID19 pandemic fully hit the U.S. economy. For comparison, previous quarter, debt rose *just* 4.81% y/y and 8 quarters annual growth rates average through 4Q 2019 was *only* 6.21%. Not only the U.S. businesses levered up over the last two years at a pace faster than nominal GDP growth, but their reckless abandon went into an overdrive in 1Q 2020.
• U.S. households and non-profit organizations serving them were not far behind the U.S. businesses. Debt levels in the U.S. households & NPOs rose 3.75% y/y in 1Q 2020, up on 3.26% y/y growth rate in 4Q 2019 and on 3.32% average growth rate over the two years through 4Q 2020. Which, in part, probably helps explain how on Earth financially-stretched American households managed to buy up a year worth of toilet paper supplies in one week in April.

Thus, overall, real private economic debt in the U.S. has ballooned in 1Q 2020, rising to USD 33.092 trillion. This marked y/y growth rate of 5.80% in 1Q 2020, up on 4.03% growth in 4Q 2019 and on 4.73% average growth over two years through 4Q 2019:

 

And yes, leverage risks in the private sector have increased as the result of these figures. At the end of 1Q 2020:

• U.S. non-financial businesses debts stood at 78.07% of GDP, an all-time high since the post-WW2 data started;
• U.S. households and NPOs debts stood at 75.6% of GDP, marking an official end to the post-Global Financial Crisis 'deleveraging' period that saw debt/GDP ratio declining to the low of 74.2% in 4Q 2019.
• Total non-financial private real economic debt stood at 153.67%, the highest level since 1Q 2011.

13/7/2014: Deflating That Corporate Debt Deflation Myth

This week, the IMF sketched out priorities for getting Spanish economy back onto some sort of a growth path. These, as in previous documents addressed to Irish and Portuguese policymakers, included dealing with restructuring of the corporate debts. IMF, to their credit, have been at the forefront of recognising that the Government debt is not the only crisis we are facing and that household debt and corporate debt also matter. As a reminder, Irish Government did diddly-nothing on both of these until IMF waltzed into Dublin.

But just how severe is the crisis we face (alongside with Spanish and Portuguese economies) when it comes to the size of the pre-crisis non-financial corporate debt pile, and how much of this debt pile has been deflated since the bottom of the crisis?

A handy chart from the IMF:

The right hand side of the chart compares current crisis to previous historical crises: Japan 1989-97; UK 1990-96; Austria 1988-96; Finland 1993-96; Norway 1999-05; Sweden 1991-1994.

So:

• Irish corporate debt crisis is off-the-scale compared to other 'peripherals' in the current crisis and compared to all recent historical debt crises;
• Irish deflation of debt through Q3 2013 is far from remarkable (although more dramatic than in Spain and Portugal) despite Nama taking a lion's share of the development & property investment debts off the banks.

Now, remember the popular tosh about 'debt doesn't matter for growth' that floated around the media last year in the wake of the Reinhart-Rogoff errors controversy? Sure, it does not... yes... except... IMF shows growth experience in two of the above historical episodes:

First the 'bad' case of Japan:

 So no, Japan has not recovered...

And then the 'good' case of Sweden:

Err... ok, neither did Sweden fully recover... for a while... for over a decade.