21/1/18: FT Warns on Credit Cards Delinquencies: High or Hype?

The FT are reporting a 20% rise in credit cards delinquencies across major U.S. banks in 2016, compared to 2017 (see here: https://www.ft.com/content/bafdd504-fd2c-11e7-a492-2c9be7f3120a). Which sounds bad. Although, of course, neither new nor completely up-to-date. That is because the NY Fed give us the same figures (for all U.S. households) through 3Q 2017.

So here is the analysis of the Fed figures:

• Credit Card delinquencies rose to 6.33% of total balances in 3Q 2017, up from 5.15% a year ago and from 5.45% in 3Q 2015. So, in fact, instead of a 20% jump, y./y for 3Q figures, there was a drop in 2016 compared to 2015, but a big jump in 2017 on 2016.
• One can expect a more significant jump in 2-3Q 2018, as new credit issuance glut of 4Q 2017 works its way into defaults (see link here: http://trueeconomics.blogspot.com/2018/01/19118-tears-over-qe-us-household-debt.html).
• Besides this, as noted here http://trueeconomics.blogspot.com/2018/01/19118-tears-over-qe-us-household-debt.html, credit card debt is rising and rising fast, with overall debt levels now 4.8% ahead of 2005-2007 average.

Despite these worrying dynamics, the levels of delinquencies are still low. In 2007-2008, credit card delinquencies rates were around 9.34% and 10.84%, respectively. In 2006, these were 8.54%. In fact, current running average for 1Q-03Q 2017 is 6.14% or lower than for any year between 2003 and 2012. 

As the chart below shows, the real crisis is currently unfolding not in the credit cards debt, but in Student Loans with 10.05% average delinquency rate for 2017 so far. Credit crds delinquencies are only fourth in terms of severity. 

In terms of total volumes of debt in delinquency, 3Q 2017 data shows credit cards with USD12.3 billion, against mortgages at USD88.56 billion, student loans at USD 30.16 billion and auto loans at USD 17.05 billion. 

Even in terms of transition from shorter-term delinquency (30 days-89 days) to longer-term delinquency (90days and over), credit cards are not as prominent of a problem as student loans:

In summary, thus, the real crisis in the U.S. household debt is not (yet) in credit cards or revolving loans, and not even (yet) in mortgages. It is in student debt, followed by auto loans.

10/6/17: Cart & Rails of the U.S. Monetary Policy

So, folks, what’s wrong with this picture, eh?

Let’s start thinking. The U.S. Treasury yields are underlying the global measure of inflation since the onset of the global ‘fake recovery’. Both have been and are still trending to the downside. Sounds plausible for a ‘hedge’ asset against global economic stagnation. And the U.S. Treasuries can be thought of as such, given the U.S. economy’s lead-timing for the global economy. Except for a couple of things:

1. U.S. Treasury is literally running out of money (by August, it will need to issue new paper to cover arising obligations and there is a pesky problem of debt ceiling looming again);
2. U.S. Fed is signalling two (or possibly three) hikes over the next 6 months and (even more importantly) no willingness to restart buying Treasuries again;
3. U.S. political risks are rising, not abating, and (equally important) these risks are now evolving faster than global geopolitical risks (the hedge’ is becoming less ‘safe’ than the risks it is supposed to hedge);
4. U.S. Fed is staring at the prospect of potential increase in decisions uncertainty as it is about to start welcoming new members ho will be replacing the tried-and-trusted QE-philes;
5. Meanwhile, the gap between the Fed policy’s long term objectives and the reality on the ground is growing: private debt is rising, financial assets valuations are spinning out of control and 

So as the U.S. 10-year paper is nearing yields of 2%, and as the premium on Treasuries relative to global inflation is widening once again, the U.S. Fed is facing a growing problem: tightening rates is necessary to restore U.S. dollar (and U.S. Treasuries) credibility as a global risk hedge (the key reason anyone wants to hold these assets), but raising rates is likely to take the wind out of the sails of the financial markets and the real economy. Absent that wind, the entire scheme of debt-fuelled growth and recovery is likely to collapse. 

Cart is flying one way. Rails are pointing the other. And no one is calling it a crash… yet…

22/5/17: U.S. Public Pensions System: Insolvent to the Core

A truly worrying view of the U.S. public sector pensions deficits has been revealed in a new study by Joshua D. Raugh for Hoover Institution. Titled “Hidden Debt, Hidden Deficits” (see http://www.hoover.org/sites/default/files/research/docs/rauh_debtdeficits_36pp_final_digital_v2revised4-11.pdf) the study opens up with a dire warning we all have been aware of for some years now (emphasis is mine):  “Most state and local governments in the United States offer retirement benefits to their employees in the form of guaranteed pensions. To fund these promises, the governments contribute taxpayer money to public systems. Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference.”

Some details: “most public pension systems across the United States still calculate both their pension costs and liabilities under the assumption that their contributed assets will achieve returns of 7.5–8 percent per year. This practice obscures the true extent of public sector liabilities.” In other words, public pension funds produce outright lies when it comes to the investment returns they promise to generate. This, in turn, generates delayed liabilities that are carried into the future, when realised returns come in at some 3-4 percent per annum, instead of promised 7.5-8 percent.

How big is the hole? “In aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97% of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion.

“What is in fact going on is that the governments are borrowing from workers and promising to repay that debt when they retire. The accounting standards allow the bulk of this debt to go unreported due to the assumption of high rates of return.”

Actually, what is really going on is that the governments create a binding contract with their employees to loot - at some point in the future - the general taxation funds to cover the shortfalls on these contracts. How much looting is on the pensions liabilities? Take the unfunded liability estimate of $4.738 trillion. And consider that in 2014, total revenues collected by state and local governments stood at $1.487 trillion. Pensions deficits alone amount to 3.2 times the underwriters’ income. In household comparative terms, this is like having a full 100% mortgage on a second home, while still running a full 100% mortgage on primary residence (day-to-day expenses).

Or, put more cogently, the entire system is insolvent. And is getting more insolvent, the longer the local and state governments refuse to use more honest accounting models.

Couple of charts to illustrate

CHART 2: State Contributions: Actual vs Required to Prevent Rise in Unfunded Liability

Now, observe in the above: the distance between the green triangle (required contributions) and the blue dot (actual contributions) is the gap in public pensions funding that has to be extracted to make the contracts whole. This will either have to come from tax hikes or from increased contributions from the public sector workers or from cut in future benefits to these workers. Or from all three.

In a range of the states, e.g. California, New Jersey, Illinois, etc we are already facing draconian levels of taxation, and falling real incomes of private sector workers. In a range of other states, municipal and local taxes are high, while the cost of living increases are swallowing income growth. In other words, there is not a snowball’s chance in hell these gaps can be funded from general taxation in the future.

When all ameliorating assumptions are made (to the upside for public pensions schemes), Raugh concludes that “despite markets that performed well during 2009–2014, state and local government pension systems are still underwater by $3.4 trillion. With relatively poor performance in fiscal years 2015 and the first part of 2016, this figure is likely to be even larger today. Finally, the report reveals the extent to which state and local governments are in fact not running balanced budgets. While they contribute 7.3 percent of their own-generated revenue to pensions, the true annual ex ante, accrual-basis cost of keeping pension liabilities from rising is 17.5 percent of state and local budgets. Even contributions of this magnitude would not begin to pay down the trillions of dollars of unfunded legacy liabilities.”

Yes, the entire system of public pensions is insolvent. No surprise there. And there is not enough fiscal space to recover from that insolvency without cutting benefits, raising taxes and hiking employee contributions. No surprise there either. Finally, although Raugh does not say so himself, it is pretty clear that there is zero will on either side of the Washington’s political divide to do anything tangible to address the problem.


Note: you can read a series of previous posts covering various sides of household debt in the following threads: Total Household Debt http://trueeconomics.blogspot.com/2017/05/19517-us-household-debt-things-are-much.html; U.S. Social Security Insolvency  http://trueeconomics.blogspot.com/2017/05/19517-reminder-social-security-is-only.html, and Student Loans Explosion http://trueeconomics.blogspot.com/2017/05/21517-student-loans-debt-bubble-is.html).

19/5/17: A Reminder: Social Security is Only Getting More Insolvent...

On foot of my earlier post on U.S. household debt, it is worth mentioning another, much-overlooked in the media, fact concerning U.S. real economic debt crisis. This fact is a staggering one, even though it has been published a year ago, back in April 2016.

Based on the 2016 OASDI Trustees Report, officially called "The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds" (see link here: https://www.ssa.gov/oact/TR/2016/index.html).

• U.S. Social Security's total income will exceed total cost of Social Security payouts through 2019. However, beyond 2019, interest income and money taken out of reserves will have to cover the funds required to offset Social Security's annual deficits until 2034.
• Assuming the U.S. Presidential Administrations and the Congress continue business as usual approach to Social Security, the federal government payroll taxes will only be able to cover roughly 75% of scheduled retirement benefits until 2090
• As the result, the Social Security Administration now projects that unfunded obligations will reach USD 11.4 trillion by 2090 or some $700 billion higher than the USD 10.7 trillion shortfall projected a year ago
• Worse:  on an "infinite horizon" basis (netting Social Security expected future liabilities from forecast revenues) Social Security will face a USD 32.1 trillion in unfunded liabilities by 2090, or staggering USD 6.3 trillion more than 2015 projection

Chart below plots forecast Social Security unfunded liabilities corresponding to each forecast year:

The above clearly shows that the Social Security 'stabilisation' achieved in 2014-2015 is now not only erased, but is set back to what appears to be a rapid acceleration in liabilities back to 2008-2014 trend.

Yes, Social Security is a system in which people pay in taxes for an 'allegedly' ringfenced program that is supposed to supplement retirement. No, Social Security is not a program that is actually contractually ringfenced to provide anything whatsoever to those who pay into it. Which, really, means that the default on Social Security is looming large for the millennials and subsequent generations. And this raises the issue of what will happen to pensions provision across the entire U.S. Currently, even public sector pensions (across states and municipalities) are facing severe uncertainty and, in an increasing number of cases, actual cuts. Which raises public reliance on Social Security just at the time that the Social Security system is facing higher threats of insolvency. 

Meanwhile, household debt situation is getting from bad to awful (see this post: http://trueeconomics.blogspot.com/2017/05/19517-us-household-debt-things-are-much.html). 

The status quo is a prescription for a social, economic and political disaster. No medals for guessing what the Congress is doing about it all.

19/5/17: U.S. Household Debt: Things are Much Worse Than Headlines Suggest

Those of you who follow this blog know that I am a severe/extreme contrarian when it comes to median investor perceptions of the severity of leverage risks. That is to say, mildly, that I do not like extremely high levels of debt exposures at the macroeconomic level (aggregate real economic debt, which includes non-financial corporations debt, household debt and government debt), at the financial system levels (banking debt), at the microeconomic (firm) level, and at the level of individual investors own exposure to leverage.

With this in mind, let me bring to you the latest fact about debt, the fact that rings multiple bells for me. According to the data from the U.S. Federal Reserve, household debt in the U.S. has, as of the end of 1Q 2017, exceeded pre-2008 peak levels and hit an all-time high by the end of March.

Let's crunch some numbers.

• Total Household Debt in the U.S. stood at USD 12.725 trillion at the end of 1Q 2017, up on USD 12.576 trillion in 4Q 2016. Previous record, reached in 3Q 2008 was USD 12.675, while the pre-Global Financial Crisis average was USD 10.112 trillion.
• During pre-crisis period, Mortgage Debt peaked at USD 9.294 trillion in 3Q 2008. In 1Q 2017 this figure remained below this peak levels at USD 8.627 trillion. As flimsy as house price valuations can be, this means that there is no 'hard' asset underlying the new debt peak. If anything, the new overall household debt mountain is written against something far less tangible than real estate.
• Student loans are up on previous peak (4Q 2016 at USD 1.310 trillion) at USD 1.344 trillion, as consistent with continued growth in the student loans crisis in the U.S.

Chart below illustrates the trends for total household debt:

Another key trend in household debt relates to debt defaults and risks. Here too 1Q 2017 data is far from encouraging. Pre-Global Financial Crisis average delinquencies (120 days or more overdue loans and Severely Derogatory delinquencies) average 2.07 percent of total debt outstanding. In 1Q 2017, some 29 quarters of deleveraging later, the comparable percentage is 3.0 percent. This is bad. Worse, take together, all household debt that was in delinquency in 1Q 2017 was 4.8 percent, which is still above 4.56 percent average for pre-2008 period. 

While overall delinquencies are not quite at problematic levels, yet, we must keep in mind the underlying conditions in which these delinquencies are taking place. Prior to the onset of the Global Financial Crisis, interest rates environment was much less benign than it is today toward higher levels of debt exposures: debt origination costs (direct cash costs) and debt servicing costs (income charge from debt) were both higher back in the days of the pre-2008 boom. Today, both of these costs are lower. Which should have led to lower delinquencies. The fact that delinquencies still run above pre-2008 levels implies that we are witnessing poorer underlying household fundamentals against which the debt is written.

Sadly, you won;t read this view of the current debt and debt burden issues from the mainstream media and analysts.

11/5/16: U.S. Economy: Three Charts Debt, One Chart Growth

In his recent presentation, aptly titled "The Endgame",  Stan Druckenmiller put some very interesting charts summarising the state of the global economy.

One chart jumps out: the U.S. credit outstanding as % of GDP

In basic terms, U.S. debt deleveraging post-GFC currently puts U.S. economy's leverage ratio to GDP at the levels comparable with 2006-2007. Which simply means there is not a hell of a lot room for growing the debt pile. And, absent credit creation by households and corporates, this means there is not a hell of a lot of room for economic growth, excluding organic (trend) growth.

As Druckernmiller notes in another slide, the leveraging of the U.S. economy is being sustained by monetary policy that created unprecedented in modern history supports for debt:

And as evidence elsewhere suggests, the U.S. credit creation cycle is now running on credit cards:

Source: Bloomberg

And the problem with this is that current growth rates are approximately close to the average rate of the bubble years 1995-2007. Which suggests that in addition to being close to exhaustion, household credit cycle is also less effective in supporting actual growth.

Which is why (despite a cheerful headline given to it by Bloomberg), the next chart actually clearly shows that the U.S. growth momentum is structurally very similar to pre-recession dynamics of the 1990 and 2000:

Source: Bloomberg

Back to Druckenmiller's presentation title... the end game...

30/12/15: US Junk Bonds: Heading into a New Defaults Wave?..

U.S. Junk Bonds markets have been a canary in the proverbial mine of the global economy since 2014, when we first felt some tremors in the markets. But so far, default rates for the junk bonds remained relatively subdued, albeit rising.

 
However, as recent Fitch forecasts suggest, things are about to get 1999-2000 styled. Fitch latest projection (mid-December) for U.S. Junk Bonds default rate for 2016 is at 4.5%, with energy sector at 11%. Now, for sectoral comparatives, here are the historical average default rates for the periods outside official recessions:

 The average in the historical series ex-recessions is close to 2.2%, which would make 2016 forecast for 4.5%... err... touchy, to say the least. It is also worth noting that in three pre-Global Financial Crisis recessions, build up in default rates was gradual, over two-four years. We are now two years into such a build up.

Obviously, this does not look like a good time to go into heavily leveraged assets... unless you've never been through a credit cycle meat grinder before...

23/12/15: Corporate Leverage: "I miss you since the place got wrecked"

Remember all the deleveraging the U.S. economy has gone through during the crisis? Why, sure, we've learned a lesson about too much debt, did we not?

Except when you look at the Deutsche Bank data in the following chart:

Source: @SoberLook 

By which the investment grade corporates' net leverage is at all time high 3 quarters running and rising; and gross leverage is at all time high 4 quarters running and rising. Or as Leonard Cohen's lyrics go:

"Ah we're drinking and we're dancing 

and the band is really happening 

and the Johnny Walker wisdom running high..."

10/12/15: U.S. Corporate Debt: It's Getting Boomier

U.S. Non-financial Corporations debt - the other 'third' of the real economic debt equation - is on the rise, again. Deleveraging is not only over, but has been pushed aside. The new cycle of debt boom is well under way, and with it, the next cycle of a bust is getting closer...

31/3/15: The Most Effective QE of all QEs

In the previous post I shared my view of the QE. Here is the best, most succinct summary of the effectiveness of the 'most effective' of all recent QEs: the US example via @Convertbond:

Nails it.

29/9/2013: It used to be Taper, now it's a Shutdown...

As the US moves into another pre-shutdown stage of its fiscal debacle, here are few charts to illustrate the partisan nature of the problem: http://uk.reuters.com/article/2013/09/29/uk-usa-fiscal-idUKBRE98Q0T820130929

Via http://ow.ly/i/3gZ8b/original:

So basically and roughly-speaking the US 'won' the Cold War on some USD3 trillion, then did something with the War on Terror for ca USD5 trillion more and failed the Great Recession War at USD5 trillion and counting... hmmm...

And via http://www.pewresearch.org/fact-tank/2013/09/27/lessons-from-the-last-government-shutdown/ the 1995-1996 crisis dynamics.

More from Pew Research:

Potential impact estimates? Try this (albeit partisan): http://www.businessinsider.com/how-a-government-shutdown-will-hurt-the-economy-2013-9

6/1/2013: Houston, we've got a (US) problem?..

2013 biggest Grey Swan might be not China's slowdown or Euro area's continued debt crisis (although both are pretty much still on the books, although the former is less likely than the latter). It might not even be the Japanese economic implosion (albeit Japan is sick beyond any repair)... oh, no... the real Grey Swan of 2013 might be the markets starting to take a closer look at the US.

This might sound bizarre during the weekend following Friday, when the VIX index collapsed 39.1% - more than in any other trading day in its history, and when the US markets have ended the first week of the year with total gains almost equivalent to what some are projecting for the entire 2013... and yet... as some would say: "Houston, we've got a problem!"

The problem is best illustrated in the following three sets of chart, all comparing US fiscal performance to the peers.

Structural Deficits:

As two charts above highlight, the US Government structural deficits are massive. Since 2011, these are shallower than those of Japan (and Japan's figures in charts above are likely to become even worse following the latest Government appointment and their commitment to debase/in-debt the Japanese economy out of existence) but they are the worse in the entire G7 group save for Japan. More ominously:

• The IMF is predicting the structural deficit to worsen once again starting in 2015
• The above projections by the IMF do not reflect the disastrous consequences of the 'Fiscal Cliff' deal struck on December 31, 2012 (see here).
• In 2013, US structural deficit is projected to be around 5.49% of GDP against the G7 average of 3.04%
• In 2010-2017, according to the IMF projections, the US cumulated structural deficits will add up to 44.84% of GDP - against Japan's 58.53% and the G7 average of 24.97%. For 2013-2017, the same figures are: US 21.43%, Japan 33.31% and G7 average 10.48%. In other words, things are going to get worse in the US compared to G7 average in 2013-2017 than they were in 2010-2012. They will be worse still in Japan, but everyone expects Japan to remain the sickest member of G7, so there is little surprise or repricing that can be expected before the US risks are repriced.

Primary Deficits:

Ugly picture for the US vis G7 counterparts continues with primary deficits as well. Per above:

• The US is the second weakest link in G7 in terms of primary deficits
• In 2010-2017 period, the US is expected to generate cumulated primary deficits amounting to 37.65% of GDP and this is against Japan's 52.42%, but G7 average of 15.99%. In the period from 2013 though 2017, the US cumulated primary deficits are expected to come in at 14.21% of GDP against the G7 average of 3.54% of GDP and Japan's 25.73% of GDP. Once again, relative to G7 average, the US performance is expected to worsen in 2013-2017 compared to 2010-2012.

A table to summarise the above two sets of charts on a longer time horizon scale:

Government Debt:

The US is positioned as the third weakest G7 economy in terms of levels of Government debt it carries - after Japan and Italy. However, this analysis neglects the fact that according to the IMF projections, the US debt situation is expected to continue worsening through 2016 (when US debt is expected to peak at 114.19% of GDP), while Italian situation is expected to improve from 2013 peak of 127.85% of GDP into 2017. Similarly, compared to G7 average, the US debt dynamics post-2013 are unpleasantly convergent to the higher G7 average (driven by Japan's debt levels).

Stripping out Japan from debt analysis:

• In 2001, US debt to GDP ratio stood at 11.83 ppt below G7 (ex-Japan) average. By 2012 this number has reversed into US debt overshoot of G7 average by 10.06 ppt. By 2017 the same overshoot is expected to rise to 19.57 ppt.

Table below summarises the long-range view of the charts above:

To summarise the above evidence, the US debt levels are not sustainable in the long run, even though current growth (above debt financing costs) and funding costs (exceptionally low yields on Government bonds and the printing press effect on these yields) are delivering short-term sustainability. However, as shown above, the US primary deficit ius huge and not abating fast enough. This implies debt to GDP ratio will be rising into 2016, if not after. Which, in turn, implies rising susceptibility of the US to risk-repricing in the markets.

It is worth contrasting the US case with that of Italy and Japan. In Italy's case, there is significant surplus on the primary balance and overall deficit due to high cost of funding even higher debt, compounded by economic growth well below the cost of funding the state debt pile. In Japan - there are severe problems across all parameters: high primary deficits, growth well below the cost of debt funding, and debt pile so large that structural deficits are alarming.

All of which means that all three economies can be severely tested by the markets. As long as global economic environment remains that of subdued economic activity, so that risk aversion remains high and monetary policies remain extremely accommodative, the US is out of the investors' crosshairs and Italy is in. Should these environments change, all bets are off for the US - at least in the medium- to longer-term.

2/1/2013: The Bitter ATRA Fudge

Some say never shall one let a good crisis go to waste... US Fiscal Cliff 'deal' of December 31st is an exact illustration. Here is the list of pork carriages attached to the Disney-styled 'train' of policies the US Congress enacted.

Have a laugh: http://www.nakedcapitalism.com/2013/01/eight-corporate-subsidies-in-the-fiscal-cliff-bill-from-goldman-sachs-to-disney-to-nascar.html

And to summarise the farcical output of the Congressional effort:

• The American Taxpayers Relief Act (ATRA) has raised taxes on pretty much everyone. Taxes up means growth down. Now, recall that the US economy is not exactly in a sporting form to start with (link here).
• The payroll taxes cuts are not extended into 2013 so every American is getting whacked with some 2% reduction in the disposable income, taking out $115 billion per annum (the largest revenue raising measure in the ATRA) out of households savings, investment and consumption, or under 1% of annual personal consumption.
• The super-rich (or just filthy-rich, take your pick, but defined as those on joint incomes at or above $450K pa) will see income tax rising to 39.6% and will have to pay an additional 0.9% in Medicare tax to cover that which they will not be buying - the Obamacare. They (alongside anyone earning above $250K pa) will also pay 3.8% additional tax on 'passive' income - income from capital gains and dividends for same Obamacare.
• Dividends and CGT are raised from 15% to 20% (again for joint earners above $450K pa).

Meanwhile, the US has already breached the debt ceiling and the ATRA has done virtually nothing to address the deficit overhang. So in a summary, the 'deal' is a flightless dodo flopping in the mud of politics. There are no real cuts on the expenditure side, there are loads of tax hikes that are likely to damage demand and investment and lift up the cost of capex funding for the real economy. And there is simply more - not less - uncertainty about the future direction of policy, as the White House and the Congress are going to be at loggerheads in months to come dealing with the following list of unaddressed topics:

1. Spending cuts
2. Budget deficit
3. Further tax hikes
4. Debt
5. Reforms of the entitlements system
6. Growth-retarding effects of ATRA and Obamacare.

Obamanomics have delivered fudged recovery, fudged solutions to structural crises and real, tangible increases in taxation. The latter is the 'first' since 1993.

20/10/2012: Is there a WW3 going on somewhere?

Is there a war of major proportions the US fighting somewhere?..

And may be Japan and Europe are all fighting for something pretty big too?

21/09/2011: Fed's QE3 and why it will fail

Markets catalysts for today (barring unexpected news from the euro area) will be the US Fed statement expected at 19.15. Following the FOMC two-day meeting consensus expectation is for the FED to announce new, but relatively modest - compared against QE1-2, easing measures labeled in the media Operation Twist.

These will attempt to boost consumer and corporate borrowing and spending, as well as ease longer-term debt constraint for the Feds and local authorities (states and municipalities). The Fed is likely to attempt flattening the longer-term yield curve in a hope that restarting borrowing will cut US elevated 9.1% unemployment rate.

To do this, the Fed will probably sell short-term debt (Treasuries) to buy out longer term debt - in effect the cost of borrowing will rise in the short run, while longer term financing costs will decline. Short-term consumer credit will take a hit, as will less liquid financial services providers. Operating capital for businesses is also likely to become more expensive. Just how exactly this is going to help US economy - anyone's guess, but it will provide some breathing space for the US Government, put pressure on the Republican opposition to debt ceiling hikes (pressing the argument forward that short-term financing is getting relatively more expensive) and will encourage banks to load up on maturity mismatch risk via incentivising shorter bonds loading).

Simultaneous selling of short term maturities and buying of longer term debt will in effect sterilize Fed intervention when it comes to its balance sheet, but it will also encourage cutting back the entire maturity profile of banks asset books.

The core problem, of course, is that these measures are likely to fail to deliver anything meaningful to the economy. The cause of stalled consumer and producer demand for credit is not the cost of financing - especially in the short run, since mortgage rates are currently at historically low levels. The real cause is the fact that the US is suffering from debt overhang.

Back in 1980, US Household, Corporate and Government debt as percentage of nominal GDP amounted to 151% - 3rd lowest in G7. By 1990 this rose to 200% - 4th lowest. With Bill Clinton's (or rather Republican Congress) heroic efforts to cut that, 2000 level of debt was 198% - the lowest in G7. In 2010, the US combined public and private non-financial debt was 268% - the second lowest in G7.

Meanwhile, household debt rose from 52% of GDP in 1980 to 95% of GDP in 2010. Thus US households have gone from being 4th most indebted in G7 back in 1980 to being second most indebted in 2010. In the mean time, corporate debt remained relatively low, compared to G7 states - rising from 53% in 1980 (3rd lowest) to 76% of GDP in 2010 (lowest in G7).

Public sector debt rose from 46% of GDP (3rd lowest in G7) in 1980 to 71% of GDP in 1990 (3rd highest in G7), declined to 58% of GDP in 2000 (second lowest) and rose to 97% of GDP in 2010 (3rd lowest in G7).

In a recent paper, presented at Jackson Hole, WY meeting this year, S. G. Cecchetti, M. S. Mohanty and F. Zampolli (paper titled "The real effects of debt") reported that thresholds for debt levels that are damaging to economic growth (under the baseline case that covers presence of the financial crisis) are:

• 96% for Government debt to GDP ratio (US was already at 97% in 2010)
• 73% for Corporate debt to GDP ratio (US was at 76% in 2010) and
• 84% for Household debt to GDP ratio (US was at 95% in 2010)

Spot the problem, folks, for Ben clearly can't see it. (Hint: of all three debt heads, household debt is further out of trigger range).

Thus, the only meaningful stimulus the US Government can put forward is the set of measures to deliver meaningful reductions in household debt. About the only tool for that is a broad-based middle and upper-middle classes income tax cut.

Everything else, including Ben's financial re-engineering of the yield curve, is not much different from what the EU is doing with Greece. Kicking the can down the road is not the proverbial elephant the Fed is ignoring. The can itself - household debt - is.

01/08/2011: Should President Obama play a harder ball with the Republicans?

In the wake of the US debt 'deal' pre-announcement, I have been seeing comments, including that from Paul Krugman in the NYT today (here) which appear to suggest that President Obama's agreement to accept parts of the Republican's proposals represents a surrender of the presidential authority and, more improtantly, such a limit on presidential authority is somehow a bad signla concerning consistency of macroeconomic policy in the US.

In particula, Prof Krugman states: "In fact, if I were an investor I would be reassured, not dismayed, by a demonstration that the president is willing and able to stand up to blackmail on the part of right-wing extremists. Instead, he has chosen to demonstrate the opposite."

Now, this argument would be fine, if Mr Obama had a record worth taking a stand on. He does not. Here are two charts on US debt based on IMF WEO database.

So both in terms of debt to GDP ratio and absolute current dollar denominated debt levels, Mr Obama might do well running away from his previously established record. Whether he did this via the latest debt deal or not is a separate issue altogether, but Mr Krugman's statement that President Obama should have exhibited more intransigence as the means for encouraging investors confidence in his administrative abilities is bizarre, to put it mildly. Mr Obama has no record worth defending. He has a record worth abandoning.

30/07/2011: US debt woes - some cool grpahics from NY Times

Several people asked about some of the assumptions I used in my post on US debt after the debt-ceiling increases.

While I outlined all of the assumptions in the original post, some of them are motivated by the following excellent infographic on US debt problems presented by the NY Times - link here. The subsequent post will show some comparatives for the US debt crisis.

These are reproduced here, with some commentary.

Note that in the entire debate about the US debt limits, I am of the view that the issue at hand is not the ceiling itself, by the level of the US overall indebtedness. In other words, if the US raises debt ceiling, in my opinion, it avoids immediate crisis, but loads the 'spring' of unsustainable debt levels even more.
Again, the above is irrelevant from my point of view. The US can simply print money or issue IOUs to cover its own debts in the short term. In reality, however, any more debt piled onto the US economy is going to be unsustainable and warrants a downgrade.

Clearly, the argument that the Republican presidencies are more fiscally conservative does not hold. Since Ronald Regan (who at the very least delivered on the stated objective of facing up to the USSR), US Republican presidents have accumulated $7.6 trillion worth of debt, or $633 billion worth of new debt per annum, on average, with George Bush, Sr at $375 billion annually, while his son - George W Bush, Jr at $625.5 billion per annum on average. Ronald Reagan accumulated new debt at ca $237.5 billion per annum on average.

In contrast, 2 Democratic administrations have managed to rake up $3.8 trillion worth of new debt, averaging $175 billion per annum on average for Bill Clinton and $800 billion per annum for Barak Obama.

Hence, Obama now holds an absolute record in fiscal profligacy, followed by George W. Bush (Jr), then by George Bush, Sr and Ronald Reagan. Bill Clinton is the least profligate of all US presidents since 1981.
Lastly, take a look at the source for my assumptions on the yields used in the post linked above:
So my assumptions of 3.5-4% post-debt deal are pretty close to what we can expect on the back of a 1 notch downgrade for the US debt.

Please see the following post on more comparatives for the US debt and economic dynamics.

30/07/2011: Some uncomfortable US debt arithmetic

In the light of the Senate vote yesterday, it is worth examining the extent of changes in the US debt and interest costs within the context of the Republican's-agreed plan (debt ceiling increase of $2,500-3,000 billion in exchange for 10-year deficit reductions of €917 billion).

There are a number of assumptions that we must make about the proposals, since it appears at this time that no clear picture is emerging as to what the specific details of spending and cuts might be.

Let us assume the following scenarios:

Scenario 1: Debt ceiling is increased by $2,500 billion to $16,800 billion
Scenario 2: Debt ceiling is increased by $3,000 billion to $17,300 billion

Assume that over the next 10 years there are no further increases in the debt ceiling.

Now, let us make some assumptions about the post-deal yields:

• Scenario A: assume that the current yields on US Treasuries - ca 3% - prevail over the next 10 years (this is extremely optimistic, since (1) it is likely that debt ceiling increase can lead to AAA downgrade one-two notches, (2) it is highly likely that US Fed is going to raise interest rates at least in some point in time between now and 2020. In this case, 10-year compounded interest charges on just the increase in the debt ceiling will be 34.39%.
  
• Scenario B: assume that average US Treasury yield rises to 3.5% post-deal. In this case, 10-year compounded interest charges on just the increase in the debt ceiling will be 41.06%.
• Scenario C: assume that average US Treasury yield rises to 4.0% post-deal. In this case, 10-year compounded interest charges on just the increase in the debt ceiling will be 48.02%.

Next, it is crucial to identify just how the 'savings' will be delivered and to what amounts cumulative to 2020. Let us make some assumptions on that:

• Republican plan of achieving savings of $917 billion by 2020, distributed:

1. Uniformly over 10 years in $91.7 billion increments
2. Front-loaded as follows: 175% of 91.7 billion in years 1 and 2, each, followed by 125% of that in years 3 and 4 each, followed by 100% in years 5 and 6 each and 50% in years 7-10 each, implying that through year 2 annual savings will be $91.7 billion plus $183.4 billion. By year 4 the savings will be running at $366.8 billion, by year 6 - at $550.5 billion and so on.
   

• Alternative plan (more like Democrats' plan) of achieving 1/2 of the Republican plan savings of ca $460 billion over 10 years, distributed:

1. Uniformly over 10 years in $46.0 billion increments
2. Front-loaded as follows: 175% of $46 billion in years 1 and 2, each, followed by 125% of that in years 3 and 4 each, followed by 100% in years 5 and 6 each and 50% in years 7-10 each, implying that through year 2 annual savings will be $161 billion. By year 4 the savings will be running at $276 billion, by year 6 - at $322 billion and so on.

Table below summarizes net savings (reductions - where positive) on the debt levels as the result of the proposed deal. These do not account for interest charges on the existent pre-debt deal debt level of $14,300 billion, nor for the costs of old debt financing that might rise in the wake of the debt ceiling hike.
In bold in the table above, I outline the more likely scenarios. Now, to arrive at the total debt ceiling hike impact we need to subtract from the above values the expected increase in the cost of Federal debt financing on the current $14,300 billion worth of debt. These are approximately $715 billion in the case of Scenario B and $1,430 billion in the case of Scenario C.

Thus, overall, in the most likely scenarios,

• The Republicans-proposed plan will achieve a reduction in the overall 2020 debt levels of just $802-1,994 billion in the most benign scenario or a reduction of $365 billion to an increase in debt of $827 billion in the more adverse case
• The Alternative plan will achieve increases in total debt burden for the US of between $573 and $1,171 billion in the more benign case and increases in total debt of $2,273 billion to $3,341 billion in the more adverse case.

In summary - neither potential outcome represents a significant departure for the US from the current massive debt levels. To achieve meaningful savings on the current debt, the US will require severe front loading of Republicans-proposed cuts and convincing the markets that its AAA rating must remain intact. However, even in this case, more likely effect will be to reduce debt levels by some €1,990 billion, or just 14%...

Daily Economics 20/04/09 - US debt problem

For those impatient - there is an estimate of Ireland Inc debt at the bottom... that can be compared with the US debt...

What is going on with the US economy? I expected the figures coming out on economic front (and earnings front outside the Federally financed banks) to be bad, but today's numbers are poor by all measures. According to the Fed's Conference Board, the index of leading economic indicators fell 0.3% in March, after a dip of 0.2% in February (revised up). But decomposition is telling:

• Building permits were the largest negative contributor in March, as builder have finally started to cut production in honest - much of this backed by the decreases in new starts, as finance committed to projects in 2008, signed for in 2007, has dried up. This is a welcome sign, as outstanding stock of unsold houses has to be pared back before any real recovery (as opposed to cliff-and-bottom bouncing) takes place.
• Stock prices, and the index of supplier deliveries also registered large negative contributions to the index in March, showing that real activity is continuing to deteriorate at, seasonally significantly faster rate. There is no spring bounce for now, and these are leading indicators, suggesting that any recovery upwards will require some new alchemy from the White House and the Fed.
  
• The real money supply was the largest positive contributor as the Feds printing presses were working overnight amidst deflation. And another sizeable positive push came from the yield spread - a sign that some of the future support might be waning - yield spreads narrowing is underpinned by lower Fed rates (not by healthier financial system, for banks are continuing to drop dead at an accelerating rate - 25 as of today in 2009 alone, and counting). So as the Fed has run out of options (short of setting negative nominal rates - e.g issuing loans with a principal repayment at a discount to the face value of the issued loan) and spreads are likely to start widening into the future as: (a) Uncle Sam's borrowing will remain buyoant, (b) debt refinancing will run rampant, and (c) Fed's helicopter drops of money thin out.
  

"There have been some intermittent signs of improvement in the economy in April," per Ken Goldstein, economist at the Conference Board. Overall, six of the 10 indicators were negative contributors, three were positive, and one was steady. Say what, Ken? Picture below is a telling one:
What Ken-omist from the Fed is referring to is the renewed momentum in the deterioration of the Leading Econ Indicators index that started in December (after a short 1-month flat) and has been going steady through March. The index has failed to bounce up in consecutive 9 months. Current Economic Conditions index is now converging downward to LEI, suggesting that unless things improve significantly in the next couple of months, simple psychology of the markets will lead to a renewed push down on LEI (the vicious cycle of self-fulfilling prophecies might commence).

Overall, in the six months to April 1, the index fell 2.5%, it declined 1.4% in the previous six months before that.

So about the only thing positive I can report has nothing to do with the Fed's own indicators, but with the decline in the new unemployment claims reported last week. If the decline persists for the next 6 weeks or so, then using comparisons with the last 6 recessions, we are at the point of inflection in economic recovery sometime now. But it is a big if, since the series can be reasonably volatile and their deviations from the monthly moving average can be significant (see here).

And here is a good chart on inflation expectations for the US (from the Fed: here) - care to argue this? or shall we start taking pressure on commodities-linked stuff in preparation for the new 2% inflation bout?


Paul Krugman on Ireland today: a good one from Krugman here. But an even better one from a comment to his article by PMD: "...Krugman and most of our own home-grown economists appear to regard cuts in public spending as being the same as tax increases. They have a model in their head with credit and debit on two sides and they are studiously agnostic about how the government should go about balancing the books. Those of us who work in the real economy know that increasing taxes on the productive part the economy - and that's 'productive' as in 'productivity' as in the only way to generate real wealth as in the only way to escape recession / depression - will dampen its productivity and, therefore, harm its capacity to generate wealth in the future - i.e. escape recession. All this 'sharing the pain' talk is just code for: we'll confiscate private sector wealth in order to avoid reform in the public sector. You can imagine a rich Titanic passenger on a half empty lifeboat blowing his nail and calling out to a dying pleb in the sea 'Chilly for this time of year. Isn't it?' I profoundly disagree with the reversion to the cargo cult school of economic management: let rich foreigners turn up and employ us. What on earth do we pay these mandarins for if the best they can come up with is 'something will turn up'? There are core domestic issues of productivity that are not being addressed." I couldn't have put it any better than this myself!

Lorenzo 'the Not-so-Magnificent' Smaghi... (or should it be Maghi?) is ECB's latest loose cannon... In an interview with FT Deutschland, Lorenzo Bini Smaghi of the ECB predicted that the Euro-zone recovery will follow the mirror image of a J-curve – a shallow recovery after the fall. Ok, I agree with this. In fact, I have warned for some months now that any recovery in the Euro-zone and Ireland in particular will be shallow and slow and will leave the continent at the trend growth rate of below 0.75% GDP, with Ireland at below 1% GDP pa. ECB's latest would-be-forecaster also 'predicted' a persistent and significant fall in potential growth rates going forward. Another thing Smaghi went into is inflation expectations: "'Inflation expectations are moving upwards (in euro area, U.S. and U.K.); no expectations of deflation," said the text of his presentation. Again, another theme I've been hammering about for some time now.

But... (S)maghi appeared to suggest that non-conventional monetary policy action would be likely soon, without giving any details. What this might be? Negative nominal interest rates? Unlikely. A policy of accepting all and any bonds issued by the member states? Brian Lenihan can wish... It is all but inevitable that the ECB will have to rescue Ireland and some of the other APIIGS. Such a rescue will have to be unconventional and not only because there is no existent convention within the Euro framework for doing so, but because as Smaghi stated in his presentation, households across Europe have lost faith in sustainability of public finances and have started to hoard cash. Nowhere more apparent than in Ireland. After surviving through a decade of anaemic (embarrassingly low, by some standards) economic growth, this is the second greatest threat point for the Euro.

A pat on the back: A stoodgy, but occasionally interesting quasi-official Euro economics website/blog: EuroIntelligence.com has the following 'news' item today. A long recession, a shallow recovery: The IMF has prereleased chapters 3 and 4 of its WEO. This is from the introduction of chapter 3 “…recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized recessions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. By contrast, expansionary fiscal policy seems particularly effective in shortening recessions associated with financial crises and boosting recoveries. However, its effectiveness is a decreasing function of the level of public debt. These findings suggest the current recession is likely to be unusually long and severe and the recovery sluggish.”

Imagine this! See here for March 3 post that uses the exact precursor to Chapter 3 release... Oh dear, sometimes it is worth checking if a 'new' release is actually 'news'...

ESB's disgraceful entry into 'stimulus' economics has moved on to the next stage. As I noted in two earlier notes, the ESB plan for 'jobs creation' is an affront to the idea of competition and consumer interests (here), as well as an insensitive move at the time of economic hardship for many (here). Now, as today's IT reports (here) we are also looking at more Georgian Dublin demolitions... Is this predatory and arrogant monopoly ever going to brought under normal market controls? And is Irish Times ever going to become a paper where journalism stops being platitudinous to state monopolies and all-and-any 'Green' / 'sustainable' labels and starts seeing the likes of ESB for what they really are? And per wages and earnings in ESB... well, indeed in the entire public sector, see this excellent blog post from Ronan Lyons here. A must read.


A late Sunday thought - with Obamamama economics, how much debt is the US economy carrying?

Well, there are many sources of debt:

• National debt = currently at $11.2 trillion (per US National Debt Clock calculator here);
• Federal bailout commitments = so far set at $12.8 trillion (up from $4 trillion left by the previous Administration, per March 30 report by Bloomberg here);
• Federal entitlements commitments under Medicare and Social Security obligations = $52 trillion in current debt from the Federal Government to the system or $117 trillion in the present value of unfunded obligations (per National Center for Policy Analysis, as of December 2009, here);
• Private sector corporate and financial liabilities = $17 trillion (per US Federal Reserve numbers of December 2008, here)
• Private households liabilities $13.8 trillion (ditto), mortgages $10.5 trillion (here and a breakdown here) = $24.8 trillion.
  

Total = $117.8 - 172.8 trillion or 829.6-1,217% of 2008 GDP!
Financed at the current 30-year US Treasury rate of 3.79%, the interest payment on this debt alone will be $4,465-6,549 bln per annum - up to 46.1% of the country annual GDP.

We are not considering the pesky issue of the derivative instruments issued within the US system. These are notional debts, but they can come back and bite you as well. Per the Office of the Comptroller of the Currency (here), as of the end of Q4 2008 US held:

• interest rate derivatives to the tune of $164 trillion;
• CDS at $15.9 trillion,
• other stuff: FX, equities, commodities -based derivatives, to the total of $20.5 trillion

So Derivatives grand total of $200.4 trillion.

Which brings US total debt obligations to $318.2-373.2 trillion = upwards of 2,628% of US GDP!

Considering that the US current population is 306,251,267, the total US debt per capita is between $1.31mln and $1.22mln, with a servicing cost of up to $46,185 per annum per person!

And amidst this, Obama is talking traditional Democratic drivel of 'spending the economy out of a recession'? While Paul Krugman is wailing that not enough is being spent?

Can anyone really doubt that inflation is around the corner? If so, consider the above figures and do tell me how can the US get out of this corner without a massive debt write-off via inflation and sustained devaluation? Dollar at 1.75 to the Euro in two years time and interest rates in double digits?

Now on to Ireland Inc's debt:

• National debt = currently at €54.245bn (per NTMA here);
• Government bailout commitments = so far set at €400bn (here) under Banks Guarantee Scheme, €70bn (my estimate in the forthcoming B&F article) under NAMA, €87bn (here); Sub-total = €557bn;
  
• Public entitlements commitments under Pensions, Social Welfare and Health obligations = €75bn (Pensions: here), €66.3bn (€38bn per annum spending on health, wages & social welfare taken over 30 years horizon with deficit of 10% per annum over term) in the present value of unfunded obligations; Sub-total = €141.6bn;
  
• Private sector corporate and financial liabilities = Monetary Financial Institutions: €810bn, inc of IFSC, corporate sectors: €551bn; Direct Investment: €183.6bn (here); Sub-total = €1,544.6bn
  
• Private households liabilities (per my earlier estimates here) = €150bn.
  

Total = €2.45 trillion or 1,440% of 2009 GDP!
Financed at the current 5-year rate over 30 year horizon (roll-over) of 4.5%, the interest payment on this debt alone will be €110.25bn per annum - up to 64.9% of the country annual GDP. Put differently - the debt/liabilities of this economy are currently amounting to ca €555,048 per every person living in Ireland...