17/5/15: Public Debt, Private Debt… Someone Thinks There Might Be Consequences

Remember last year vigorous debate about whether debt (in particular real economic debt - as I call it, or non-financial debt - as officialdom calls it) matters when it comes to growth? Well, the debate hasn't die out… at least not yet. And some heavy hitters are getting into the fight. Òscar Jordà, Moritz HP. Schularick and Alan M. Taylor paper, "Sovereigns versus Banks: Credit, Crises and Consequences", Working Paper No. 3: http://ssrn.com/abstract=2585696

Ok, so some key preliminaries: "Two separate narratives have emerged in the wake of the Global Financial Crisis. One interpretation speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies." The problem is that the two 'narratives' "…may interact in important and understudied ways", most notably via debt and debt overhangs.

The authors examine "the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies significant financial stability risks have mostly come from private sector credit booms rather than from the expansion of public debt."

Time for Krugmanites to pop some champagne? Err, not too fast: "However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression."

Wait, what? A state indebted to the point of losing its shirt (or rather default on pay awards to trade unionised workers and retirees) imposes cost on private sector that can be detrimental during private sector own deleveraging? Yeah, you betcha. It is called power of taxation. Just as during the current crisis the Governments world wide gave no damn as to whether you and I can pay kids schools fees, health insurance and mortgages, so it was thus before.

"We uncover three key facts based on our analysis of around 150 recessions and recoveries since 1870:

1. in a normal recession and recovery real GDP per capita falls by 1.5 percent and takes only 2 years to regain its previous peak, but in a financial crisis recession the drop is typically 5 percent and it takes over 5 years to regain the previous peak; 
2. the output drop is even worse and recovery even slower when the crisis is preceded by a credit boom; and 
3. the path of recovery is worse still when a credit-fuelled crisis coincides with elevated public debt levels. Recent experience in the advanced economies provides a useful out-of-sample comparison, and meshes closely with these historical patterns. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now."

Now, take a more in-depth tour of the changes in fiscal and private non-financial debt across 17 advanced economies since 1870s:

Oh, yeah… 1950s and 1960s public deleveraging was done by leveraging up the real economy. And it didn't stop there. It got much much worse… instead of deleveraging one side of the economy, both public and private sides continued to binge on debt. Through the present crisis.

So "what does the long-run historical evidence say about the prevalence and effects of private and public debt booms and overhangs? Do high levels of public debt affect business cycle dynamics, as the public debt overhang literature argues? Are the effects of either variety of debt overhang more pronounced after financial crisis recessions?"

So here are the results:

So the results provide "…a first look at over 100 years of the inter-relationships of private credit and sovereign debt. We end with five main conclusions":

1. "…while public debt has grown in most countries in recent decades, the extraordinary growth of private sector debt (bank loans) is chiefly responsible for the strong increase of total liabilities in Western economies. About two thirds of the increase in total economy debt originated in the private sector. ...Sovereign and bank debts have generally been inversely correlated over the long run, but have increased jointly since the 1970s. In modern times, the Bretton-Woods period stands out as the only period of sustained public debt reduction, both in expansions and recessions."
2. "…in advanced economies financial stability risks originate primarily in the private sector rather than in the public sector. To understand the driving forces of financial crises one has to study private borrowing and its problems. In the very long run, if we run a horse race between the impact of changes or run-ups in private credit (bank loans) and sovereign debt as a predictor of financial crisis and its associated distress, private credit is the more significant predictor; sovereign debt adds little predictive information. This fits with the events of 2008 well: with the exception of fiscal malfeasance in Greece most other advanced countries did not have obvious public debt problems ex ante. Of course, ex post, the fierce financial crisis recession would wreak havoc on public finances via crashing revenues and rising cyclical expenditures."
3. "…with a broader and longer sample we confirm that private debt overhangs are a regular feature of the modern business cycle. We find that once a country does enter a recession, whether it is an ordinary type or a financial-crisis type of recession, if it carries the legacy of a large private credit boom then the post-recession output path of the economy is typically adversely affected with slower growth."
4. "…our new data also allow us to see the distinct contribution of public debt overhangs. We find evidence that high levels of public debt matter for the path of economies out of recessions, confirming the results of Reinhart et al. (2012). But the negative effects of high public debt on the performance of the economy arise specifically after financial crises and in particular when private borrowing also ran high. While high levels of public debt make little difference in normal times, entering a financial crisis recession with an elevated level of public debt exacerbates the effects of private sector deleveraging and typically leads to a prolonged period of sub-par economic performance." In other words, not too fast on that champagne, Krugmanites… 
5. "…from a macroeconomic policy standpoint these findings could inform ongoing efforts to devise better guides to monetary, fiscal, and financial policies going forward…" blah… blah… blah… we can stop here.

Funny how no one can get the right idea, though - the reason public debt matters is because the state always has a first call on all resources. As the result, the state faces a choice at any point of deleveraging cycle:

• (A) leverage up the State to allow deleveraging of the real economy; or
• (B) tax there real economy to deleverage the State.

In the US, the choice has been (A) in 2008-2014. In Europe, it has been (B). The thing is: both Europe and US are soon going to face another set of fine choices:

• (Y) reduce profligacy in the long run to deleverage the State; or
• (Z) get the feeding trough of pork barrel politics rocking again.

No prizes for guessing which one they both will make… after all, they did so from 1970s on, and there are elections to win and seats to occupy...

8/5/15: BIS on Build Up of Financial Imbalances

There is a scary, fully frightening presentation out there. Titled "The international monetary and financial system: Its Achilles heel and what to do about it" and authored by Claudio Borio of the Bank for International Settlements, it was delivered at the Institute for New Economic Thinking (INET) “2015 Annual Conference: Liberté, Égalité, Fragilité” Paris, on 8-11 April 2015.

Per Borio, the Achilles heel of the global economy is the fact that international monetary and financial system (IMFS) "amplifies weakness of domestic monetary and financial regimes" via:

• "Excess (financial) elasticity”: inability to prevent the build-up of financial imbalances (FIs)
• FIs= unsustainable credit and asset price booms that overstretch balance sheets leading to serious financial crises and macroeconomic dislocations
• Failure to tame the procyclicality of the financial system
• Failure to tame the financial cycle (FC)

The manifestations of this are:

• Simultaneous build-up of FIs across countries, often financed across borders... watch out below - this is still happening... and
• Overly accommodative aggregate monetary conditions for global economy. Easing bias: expansionary in short term, contractionary longer-term. Now, what can possibly suggest that this might be the case today... other than all the massive QE programmes and unconventional 'lending' supports deployed everywhere with abandon...

So Borio's view (and I agree with him 100%) is that policymakers' "focus should be more on FIs than current account imbalances". Problem is, European policymakers and analysts have a strong penchant for ignoring the former and focusing exclusively on the latter.

Wonder why Borio is right? Because real imbalances (actual recessions) are much shallower than financial crises. And the latter are getting worse. Here's the US evidence:

Now, some think this is the proverbial Scary Chart because it shows how things got worse. But surely, the Real Scary Chart must reference the problem today and posit it into tomorrow, right? Well, hold on, for the imbalances responsible for the last blue line swing up in the chart above are not going away. In fact, the financial imbalance are getting stronger. Take a look at the following chart:

Note: Bank loans include cross-border and locally extended loans to non-banks outside the United States.

Get the point? Take 2008 crisis peak when USD swap lines were feeding all foreign banks operations in the U.S. and USD credit was around USD6 trillion. Since 'repairs' were completed across the European and other Western banking and financial systems, the pile of debt denominated in the USD has… increased. By mid-2014 it reached above USD9 trillion. That is 50% growth in under 6 years.

However, the above is USD stuff... the Really Really Scary Chart should up the ante on the one above and show the same happening broader, outside just the USD loans.

So behold the real Dracula popping his head from the darkness of the Monetary Stability graveyards:

Yep.  Now we have it: debt (already in an overhang) is rising, systemically, unhindered, as cost of debt falls. Like a drug addict faced with a flood of cheap crack on the market, the global economy continues to go back to the needle. Over and over and over again.

Anyone up for a reversal of the yields? Jump straight to the first chart… and hold onto your seats, for the next upswing in the blue line is already well underway. And this time it will be again different... to the upside...

29/4/15: China's Debt Pile is Frightening & Getting Worse

Just catching up on some interesting data on China, courtesy of @AmbroseEP, showing debt to GDP ratios for China's real economy:

Now, note that the comparatives are all advanced economies that can carry, normally, higher debt levels. Which makes China's 282% estimated total debt pile rather large.

The chart references as a source data presented in this (see scone chart) http://trueeconomics.blogspot.ie/2015/03/5315-troika-tale-of-irish-debt.html but adjusted to reflect RBS estimates. which pushes McKinsey point for China horizontally to the levels close to Greece.

As someone else pointed out, nominal GDP growth in China is apparently now lower than interest on debt.

Meanwhile number of stock market accounts has gone exponential in recent days - using borrowed money (Chinese residents borrowed over Yuan 1 trillion or Euro150 billion worth of cash to pump into stock markets):

Economy is clearly slowing down in China, with conflicting reports and estimates of 1Q 2015 growth suggesting possible contraction in the real economy and domestic demand. (See http://www.irishtimes.com/business/economy/china-equity-markets-boom-while-economic-growth-stutters-1.2182547).

At the top of debt chain are local authorities: latest official data shows borrowings by the local authorities were up by almost 50% since the start of H2 2013 to c. 16 trillion yuan. Local authorities debt growth accounts for a quarter of changes in overall domestic debt since 2008. Recently, the IMF warned China that the country overall economic debt is expanding at a faster pace than debt in Japan, South Korea and the U.S. grew before the onset of the Global Financial Crisis.

My view: when this pile of Chinese debt blows, things will get spectacularly ugly, globally.

19/4/15: Higher Firm Leverage = Lower Firm Employment (and Output)

In a recent briefing note on the Capital Markets Union (CMU) (here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2592918), I wrote that the core problem with private investment in the EU is not the lack of integrated or harmonised investment and debt markets, but the overhang of legacy (pre-crisis) debts.

Here is an interesting CEPR paper confirming the link between higher pre-crisis leverage of the firms and their greater propensity to cut back economic activity during the crisis. This one touches upon unemployment, but unemployment here is a proxy for production, which is, of course, a proxy for investment too.

Xavier Giroud, Holger M Mueller paper "Firm Leverage and Unemployment during the Great Recession" (CEPR  DP10539, April 2015, www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10539) argues that "firms’ balance sheets were instrumental in the propagation of shocks during the Great Recession. Using establishment-level data, we show that firms that tightened their debt capacity in the run-up (“high-leverage firms”) exhibit a significantly larger decline in employment in response to household demand shocks than firms that freed up debt capacity (“low-leverage firms”). In fact, all of the job losses associated with falling house prices during the Great Recession are concentrated among establishments of high-leverage firms. At the county level, we find that counties with a larger fraction of establishments belonging to high-leverage firms exhibit a significantly larger decline in employment in response to household demand shocks."

In short, more debt/leverage was accumulated in the run up to the crisis, deeper were the supply cuts during the crisis. Again, nothing that existence of a 'genuine' capital markets union or pumping more credit supply (debt/leverage supply) into the system can correct.

19/4/15: The costs of deflations: a historical perspective

An interesting article from the BIS on the impact of deflation risks on growth and post-crises recovery. Authored by Borio, Claudio E. V. and Erdem, Magdalena and Filardo, Andrew J. and Hofmann, Boris, and titled "The Costs of Deflations: A Historical Perspective" (BIS Quarterly Review March 2015: http://ssrn.com/abstract=2580289), the paper looks at the common concern amongst the policymakers that falling prices of goods and services are very costly in terms of economic growth.

The authors "test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt."

But there is much more than this to the paper. So some more colour on the above.

"Concerns about deflation [are] …shaped by the deep-seated view that deflation, regardless of context, is an economic pathology that stands in the way of any sustainable and strong expansion."

Do note that I have been challenging this thesis for some time now, precisely on the grounds of: 1) causality (deflation being caused by weak growth, not the other way around) and 2) link between corporate and household debt and deflation via monetary policy / interest rates channel.

Per authors, "The almost reflexive association of deflation with economic weakness is easily explained. It is rooted in the view that deflation signals an aggregate demand shortfall, which simultaneously pushes down prices, incomes and output. But deflation may also result from increased supply. Examples include improvements in productivity, greater competition in the goods market, or cheaper and more abundant inputs, such as labour or intermediate goods like oil. Supply-driven deflations depress prices while raising incomes and output."

Besides the supply side argument, there is more: "…even if deflation is seen as a cause, rather than a symptom, of economic conditions, its effects are not obvious. On the one hand, deflation can indeed reduce output. Rigid nominal wages may aggravate unemployment. Falling prices raise the real value of debt, undermining borrowers’ balance sheets, both public and private – a prominent concern at present given historically high debt levels. Consumers might delay spending, in anticipation of lower prices. And if interest rates hit the zero lower bound, monetary policy will struggle to encourage spending. On the other hand, deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive."

Note: the authors completely ignore the interest cost channel for debt.

Meanwhile, "…while the impact of goods and services price deflations is ambiguous a priori, that of asset price deflations is not. As is widely recognised, asset price deflations erode wealth and collateral values and so undercut demand and output. Yet the strength of that effect is an empirical matter. One problem in assessing the cost of goods and services price deflations is that they often coincide with asset price deflations. It is possible, therefore, to mistakenly attribute to the former the costs induced by the latter."

The BIS paper analysis is "based on a newly constructed data set that spans more than 140 years, from 1870 to 2013, and covers up to 38 economies. In particular, the data include information on both equity and property prices as well as on debt."

The study reaches three broad conclusions:

• "First, before accounting for the behaviour of asset prices, we find only a weak association between goods and services price deflations and growth; the Great Depression is the main exception."
• "Second, the link with asset price deflations is stronger and, once these are taken into account, it further weakens the association between goods and services price deflations and growth."
• "Finally, we find some evidence that high private debt levels have amplified the impact of property price deflations but we detect no similar link with goods and services price deflations." Note: this means that the ECB-targeted deflation (goods and services deflation) is a completely wrong target to aim for in the presence of private debt overhang. Just as I have been arguing for ages now.

Let's give some more focus to the paper findings on debt-deflation links: "Against the background of record high levels of both public and private debt (Graph 7 below), a key concern about the output costs of goods and services price deflation in the current debate is “debt deflation”, ie the interaction of deflation with debt."

"The idea is that, as prices fall, the real debt burden of borrowers increases, inducing spending cutbacks and possibly defaults. This harks back to Fisher (1933), who coined the term.16 Fisher’s concern was with businesses; today the focus is as strong, if not stronger, on households and the public sector. This type of debt deflation should be distinguished from the strains on balance sheets induced by asset price deflations. This interaction has an even longer intellectual tradition and has been prominent in the public debate ever since the re-emergence of financial instability in the 1980s."

Yep, you got it - the entire monetary policy today is based on the ideas tracing back to the 1930s and anchored in the experience that is only partially replicated today. In effect, we are fighting a new disease with false ancient prescriptions for an entirely different disease.

To assess the link between debt and deflation effects on growth, the authors take two measures into account:

• "One is simply its corresponding debt ratio to GDP." 
• "The other is a measure of “excess debt”, which should, in principle, be more relevant. We use the deviation of credit from its long-term trend, or the “credit gap” – a variable that in previous work has proved quite useful in signalling future financial distress."

Per authors, "The results point to little evidence in support of the debt deflation hypothesis, and suggest a more damaging interaction of debt with asset prices, especially property prices. Focusing on the cumulative growth performance over five year horizons for simplicity, there is no case where the interaction between the goods and services price peaks and debt is significantly negative. By contrast, we find signs that debt makes property price deflations more costly, at least when interacted with the credit gap measure."

So deflation in asset prices (property bust) is bad when household debt is high. Why?

Per study: "…these results suggest that high debt or a period of excessive debt growth has so far not increased in a visible way the costs of goods and services price deflations. Instead, it seems to have added to the strains that property price deflations in particular impose on balance sheets. …Why could the interaction of debt with asset prices matter and that with goods and services prices not matter, or at least less so? A possible explanation has to do with the size and nature of the corresponding wealth effects. For realistic scenarios, the size of the net wealth losses from asset price deflations can be much larger. Consider, for instance, the 2008 crisis in the United States,... the corresponding losses amounted to roughly $9.1 trillion and $11.3 trillion, respectively. By contrast, a hypothetical deflation of, say, 1% per year over three years would imply an increase in the real value of public and private debt of roughly $1.1 trillion (about $0.4 trillion for households and roughly $0.35 trillion each for the non-financial corporate and public sector). Moreover, the nature of the losses is quite different in the two cases. Asset price deflations represent declines in (at least perceived) aggregate net wealth; by contrast, declines in goods and services prices are mainly re-distributional. For instance, in the case of the public sector, the higher debt burden reflects the increase in the real purchasing power of debt holders."

And herein rests a major omission in the study: following asset (property) busts, accommodative monetary policy leads to a reduced cost of debt servicing for households that suffer simultaneous collapse in their nominal incomes and in their net wealth. This accommodation is deflating the cost of debt being carried. If it is accompanied by goods and services price deflation, such deflation is also boosting purchasing power of reduced nominal incomes. In simple terms, there is virtuous cycle emerging: debt servicing deflation reinforces real incomes support from goods and services deflation.

Now, reverse the two: raise rates and simultaneously hike consumer prices. what do you get?

1. Debt servicing costs rise, disposable income left for consumption and investment falls;
2. Inflation in goods and services reduces purchasing power of the already diminished income.

Any idea how this scenario (being pursued by the likes of the ECB) going to help the economy? I have none.

7/4/15: IMF WEO on Global Investment Slump: Part 2: It's Demand, Not Supply ..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment (http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf).

IMF findings focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

I covered chapter’s main findings for questions 1-2 in the earlier post here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-weo-on-global-investment-slump.html

Now, onto the remaining questions and the core conclusions:

Q3: "The overall weakness in economic activity since the crisis appears to be the primary restraint on business investment in the advanced economies. In surveys, businesses often cite low demand as the dominant factor. Historical precedent indicates that business investment has deviated little, if at all, from what could be expected given the weakness in economic activity in recent years. …Although the proximate cause of lower firm investment appears to be weak economic activity, this itself is due to many factors. And it is worth acknowledging that, as explained in Chapter 3 [of the WEO], a large share of the output loss compared with pre-crisis trends can now be seen as permanent."

Here's a handy chart showing as much:

Figure 4.6. Real Business Investment and Output Relative to Forecasts: Historical Recessions versus Global Financial Crisis (Percent deviation from forecasts in the year of recession, unless noted otherwise; years on x-axis, unless noted otherwise)

Q4: "Beyond weak economic activity, there is some evidence that financial constraints and policy uncertainty play an independent role in retarding investment in some economies, including euro area economies with high borrowing spreads during the 2010–11 sovereign debt crisis. …In particular, firms in sectors that rely more on external funds, such as pharmaceuticals, have seen a larger fall in investment than other firms since the crisis. This finding is consistent with the view that a weak financial system and weak firm balance sheets have constrained investment. Regarding the effect of uncertainty, firms whose stock prices typically respond more to measures of aggregate uncertainty have cut back more on investment in recent years, even after the role of weak sales is accounted for."

Here is an interesting set of charts documenting that financial and policy factors played more significant role in depressing investment in the euro area 'peripheral' states:

Figure 4.10. Selected Euro Area Economies: Accelerator Model—Role of Financial Constraints and Policy Uncertainty (Log index).

Note: in Ireland's case, financial constraints (quality of firms' balance sheets) is the only explanatory factor beyond demand side of the economy for investment collapse in 2013-present, as uncertainty (blue line) strongly diverged from the actual investment dynamics.


Q5: "Finally, regarding the apparent disconnect between buoyant stock market performance and relatively restrained investment growth in some economies, the chapter finds that this too is not unusual. In line with much existing research, it finds that the relationship between market valuations and business investment is positive but weak. Nevertheless, there is some evidence that stock market performance is a leading indicator of future investment, implying that if stock markets remain buoyant, business investment could pick up."

Conclusions

• So IMF finds no need for any systemic the supply-side adjustments on capital/credit side.
• It finds no imbalances in the capital markets and finds that demand is the main driver for collapse in investment. 

Where is the need for more 'integration' of the capital markets that the EU is pushing forward as the main tool for addressing low investment levels? Where is the need for more bank credit to support investment? Ah, right, nowhere to be seen…

Meanwhile, the IMF does note the role of debt overhang (legacy debts) in corporate sector as one of the drivers for the current investment slump. "Although this chapter does not further investigate the separate roles of weak firm balance sheets and impaired credit supply, a growing number of studies do so and suggest that both channels have been relevant." In particular, "For example, Kalemli-Ozcan, Laeven, and Moreno (forthcoming) investigate the separate roles of weak corporate balance sheets, corporate debt overhang, and weak bank balance sheets in hindering investment in Europe in recent years using a firm-level data set on small and medium-sized enterprises in which each firm is matched to its bank. They find that all three of these factors have inhibited investment in small firms but that corporate debt overhang (defined by the long-term debt-to-earnings ratio) has been the most
important."

Thus, once again, how likely is it that low cost and abundant credit supply unleashed onto SMEs - as our policymakers in Ireland and the EU are dreaming day after day - will be able to repair investment collapse? Err… not likely.

7/4/15: IMF WEO on Global Investment Slump: Part 1: It's Private Sector Issue..

IMF released Chapter 4 of the April 2015 World Economic Outlook update. The chapter covers the issue of lagging growth in private investment.

Titled "PRIVATE INVESTMENT: WHAT’S THE HOLDUP?", IMF paper starts with a simple, yet revealing summary:
"Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since. Investment has generally slowed more gradually in the rest of the world. Although housing investment fell especially sharply during the crisis, business investment accounts for the bulk of the slump, and the overriding factor holding it back has been the overall weakness of economic activity. In some countries, other contributing factors include financial constraints and policy uncertainty. These findings suggest that addressing the general weakness in economic activity is crucial for restoring growth in private investment."

So the key message is simple: investment contraction is not driven primarily by the failures of the financial system, but rather by the weak growth - a structural, systemic slowdown in growth. Full text available here: http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c4.pdf

Let's take a closer look at IMF findings that focus on 5 questions:

1. "Is there a global slump in private investment?"
2. "Is the sharp slump in advanced economy private investment due just to weakness in housing, or is it broader?"
3. "How much of the slump in business investment reflects weakness in economic activity?"
4. "Which businesses have cut back more on investment? What does this imply about which channels—beyond output—have been relevant in explaining weak investment?"
5. "Is there a disconnect between financial markets and firms’ investment decisions?"

The chapter’s main findings are as follows (in this post, I will cover questions 1-2 with remaining questions addressed in the follow up post):


Q1: "The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies." Across advanced economies, "private investment has declined by an average of 25 percent since the crisis compared with pre-crisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s."

Figure 4.1. Real Private Investment (Log index, 1990 = 0)

Q2: "The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward pre-crisis investment trends in either sector."

Figure 4.2. Real Private Investment, 2008–14 (Average percent deviation from pre-crisis forecasts)

Spot Ireland in this…

And per broad spread of contraction, see next:

Figure 4.3. Categories of Real Fixed Investment (Log index, 1990 = 0)

But here's an interesting chart breaking down investment contraction by public v private investment sources:

Figure 4.4. Decomposition of the Investment Slump, 2008–14 (Average percent deviation from spring 2007 forecasts)

This, sort of, flies in the face of those arguing that Government investment should be the driver for growth, as it shows that public investment contraction had at most a mild negative impact on some euro area states (Ireland is included in the above under "Selected euro area").


Next post will cover Questions 3-5 and provide top-level conclusions.

13/3/15: Emerging Markets Corporate Debt Maturity Squeeze

H/T to @RobinWigg for the following chart summing up Emerging Markets exposure to the USD-denominated corporate debt redemptions calls over 2015-2025. The peak at 2017 and 2018 and relatively high levels for exemptions coming up in 2016, 2019-2020 signal sizeable pressure on the EM corporates that coincides with expected tightening in the US interest rates cycle - a twin shock that is likely to have adverse impact on EMs' capex in years to come. With rolling over 2017-on debt becoming a more expensive proposition, given the USD FX rates and interest rates outlook, the EMs-based corporate sector will come under severe pressure to use organic revenue generation to redeem maturing debt. Which means less investment, less hiring and less growth.

The impossible monetary policy trilemma that I have been warning about for some years now is starting to play out, with delay on my expectations, but just as expected - in the weaker and more vulnerable markets first.

7/2/15: Euro Area's Debt Addiction

Europe's debt addiction in one chart: the following chart plots total domestic and cross-border credit to non-banks, at constant end-Q2 2014 exchange rates, in per cent of GDP:

Source: BIS: http://www.bis.org/statistics/gli/gli_feb15.pdf

In the above:

• The solid lines are actual outcomes, 
• The vertical lines indicate the 2007 beginning of the global financial crisis and the 2008 collapse of Lehman Brothers. 
• Figures include government. 
• The dashed lines reflect long term trend, calculated as for the countercyclical capital buffer in Basel III using a one-sided HP-filter.

Two obvious conclusions emerge from the above:

1. Since the start of the Global Financial Crisis, debt addiction expanded both in the US and the Euro area, with US addiction rising faster than the Euro area's.
2. The gap between Euro area and US dependency on debt at the end of 2014 stood at a similar level as at the start of the Global Financial Crisis and above the pre-crisis level. That is despite the fact that in the US, most recent manifestation of the debt addiction has been associated with much higher economic growth and jobs recovery than in Europe.

4/2/15: Debt Overhang and Sluggish Growth

Debt overhang and its impact on growth has been a rather controversial topic over the recent years. One of the key contributors to the debate is Kenneth Rogoff. Rogoff has a new paper out on the topic, together with Stephanie Lo, titled "Secular stagnation, debt overhang and other rationales for sluggish growth, six years on" published by the Bank for International Settlements (http://www.bis.org/publ/work482.pdf).

In the paper, Rogoff and Lo state that "there is considerable controversy over why sluggish economic growth persists across many advanced economies six years after the onset of the financial crisis. Theories include a secular deficiency in aggregate demand, slowing innovation, adverse demographics, lingering policy uncertainty, post-crisis political fractionalisation, debt overhang, insufficient fiscal stimulus, excessive financial regulation, and some mix of all of the above." Rogoff and Lo survey "the alternative viewpoints" on the causes of slow growth. The authors argue that "until significant pockets of private, external and public debt overhang further abate, the potential role of other headwinds to economic growth will be difficult to quantify."

Rogoff and Lo focus strongly on the effects of debt overhang on growth. "In our view, the leading candidate as an explanation for why growth has taken so long to normalise is that pockets of the global economy are still experiencing the typical sluggish aftermath of a financial crisis… The experience in advanced countries is certainly consistent with a great deal of evidence on leverage cycles, for example the empirical work of Schularick and Taylor (2012), who examine data for a cross-section of advanced countries going back to the late 1800s and find that the last half-century has brought an unprecedented era of financial vulnerability and potentially destabilising leverage cycles. Moreover, focusing on more recent events, Mian and Sufi’s (2014) estimates suggest that the effects of US household leverage might be large enough to explain the entire decline in both house prices and durable consumption."

Still, their conclusion is very cautious. Instead of assigning direct causality from debt to growth, they suggest increased indeterminacy of the relationship between other variables and growth in the presence of high debt overhangs. They do reinforce the point that the argument about debt overhang relates to the total real economic debt (governments, households and non-financial corporations), not solely to government debt alone.

14/1/2015: European Banks: Permanently in the International Isolation Ward

My blog post on the declining fortunes of European banking for Learn Signal blog is available here: http://blog.learnsignal.com/?p=143

26/12/2014: Household Leveraging and Deleveraging in the U.S.

Household debt deleveraging is one of the key forces currently still working through the Western economies, suppressing investment and spending, and supporting precautionary savings. The U.S., having entered the Great Recession ahead of many other economies, armed with stronger consumer-centric systems of insolvency and personal bankruptcy, and having exited the Great Recession with more robust rates of economic growth than other advanced economies, presents a good example or a case study for this process.

One recent paper, by Justiniano, Alejandro and Primiceri, Giorgio E. and Tambalotti, Andrea, titled "Household Leveraging and Deleveraging" (see FRB of New York Staff Report No. 602: http://ssrn.com/abstract=2229366) does exactly that.

Per authors, "U.S. households' debt skyrocketed between 2000 and 2007, but has since been falling. This leveraging and deleveraging cycle cannot be accounted for by the liberalization and subsequent tightening of mortgage credit standards that occurred during the period." Quite strikingly, the authors show that financial liberalisation does not fully explain the cycle.

Instead, "…the credit cycle is more likely due to factors that impacted house prices more directly, thus affecting the availability of credit through a collateral channel. In either case, the macroeconomic consequences of leveraging and deleveraging are relatively minor because the responses of borrowers and lenders roughly wash out in the aggregate."

Of course, the only reasons for this conclusion are the factors mentioned above: the U.S. personal insolvency and debt resolution regimes are far more benign, allowing for a more orderly and less disruptive 'washing out' of adverse effects of household debt overhang.

26/12/2014: Advanced Economies: Public Debt Explosion 2008-2014

Some interesting insight into the legacy of the Great Recession that we are carrying over into 2015. From the start of 2008 through 2014:

• Average increase in gross debt of all advanced economies was 27.2 percentage points of GDP, with a range from a decrease of 21 percentage points for Norway and an increase of 88.5 percentage points for Ireland. Thus, the average annualised rate of increase in government debt over the period was around 3.47 percentage points of GDP with a range of -2.76 percentage points annualised decline for Norway and a 9.48 percentage points annualised increase in Ireland.
• Average change in the gross government debt of the group of countries where debt declined over the crisis was -12.0 percentage points of GDP. There were only 3 countries in this group.
• Average increase in gross government debt of the group of countries with benign levels of increase (levels of increase consistent roughly with offsetting GDP contraction over the crisis period) was 4.8 percentage points of GDP. There were only 5 countries in this group and only two of these were in Europe, with none (at the time of the crisis onset) being members of the euro area.
• Average increase in gross government debt within the group of countries where debt rises were moderately in excess of contraction in the economy was 16.4 percentage points of GDP.
• Average increase in gross government debt within the group of countries with debt increases significantly in excess of economic contraction was 26.6 percent of GDP.
• Average increase in the government debt within the group of countries with severe debt overhang was 60.4 percentage points of GDP, with a range of increases in this group between 41.6% for the U.S. at the lower end and 88.5% of GDP for Ireland at a higher end.

Chart above summarises these facts and also highlights the extent to which Ireland's government debt increases were out of line with experience in all other countries, including Greece and all other 'peripheral' economies.

The average rise in gross government debt across all peripheral economies 2008-2014 was 56.5 percentage points of GDP (excluding Ireland), which is more than 1/3 lower than that for Ireland. Our closest competitor to the dubious title of worst performing sovereign in terms of debt accumulation is Greece, which experienced a debt/GDP ratio increase almost 1/4 lower than Ireland.

And in case you wonder, our Government's net debt position is not much better:

20/12/2014: Remembering that Debt Pile on Our Shoulders

Three charts to illustrate the extent of Ireland's debt problem... that's right, the one that has not gone away with all the recovery talk.

Let's start in the happy days of 2007, when Irish Government's sustainable debt per capita was running at EUR10,775 and we ranked 11th most indebted nation (on per capita basis) in the today's EA18.

And fast-forward to 2014, when, based on the IMF projections, our Government debt per capita will amount to an eye-watering 'sustainable' EUR42,469 ranking us a run-away 1st in the debt load:

Needless to say, this record should have propelled us to the top of the league of EA18 nations in terms of debt increases during the crisis. And it did:

In Census 2011 (see here:  http://www.cso.ie/en/media/csoie/census/documents/census2011profile5/Profile,5,Households,and,Families,full,doc,sig,amended.pdf) the average household size in Ireland was 2.7 persons, implying that Government debt alone amounts today to EUR114,666, before the mortgage and other debts kick in. And when I say before, I mean it : the Government has priority over all other claims on income, including food and shelter.

So how do you feel now when you think of the Budget 2015 measure to ease the burden of DIRT on families saving for the downpayment on house purchase? Lavished by the warmth of a caring Government, undoubtedly...

29/11/2014: Living in a Ponzi Land of Debt Overhang

An excellent interview with Daniel Stelter on the problem of debt overhang:
http://janelanaweb.com/trends/we-all-are-in-a-ponzi-world-right-now-hoping-to-be-bailed-out-by-the-next-person-interview-with-daniel-stelter/

Worth a read.

One point I disagree with is the idea that debt mutualisation across EU states will solve the problem. It will not: the quantum of debt will not be reduced by mutualisation. We need a QE-like targeted debt deleveraging facilitated by the ECB. Not a 'warehouse for debt' but a debt furnace. 

1/10/2014: IMF's out of Ideas, but still full of Analysis: WEO Chapter 4

IMF WEO October update is steadily creeping toward its main denouement, the release of the database update at the very end of the process that normally starts with releases of analytical chapters of the WEO - bigger thematic pieces dealing with the core topics relating to the global economy.

This week, IMF released its Chapter 4, covering the issue of current accounts imbalances across the world.

Per IMF, "Global current account (“flow”) imbalances have narrowed significantly since their peak in 2006, and their configuration has changed markedly in the process. The imbalances that used to be the main concern—the large deficit in the United States and surpluses in China and Japan—have more than halved. But some surpluses, especially those in some European economies and oil exporters, remain large, and those in some advanced commodity exporters and major emerging market economies have since moved to deficit."

You don't need to say. Just see this post from earlier today: http://trueeconomics.blogspot.ie/2014/10/1102014-that-exports-led-recovery-in.html

But IMF shows some pretty interesting data on composition and levels of imbalances across the globe. Chart below details these:

The IMF argues that "the reduction of large flow imbalances has diminished systemic risks to the global economy." Sounds happy-all-around.

But as usual, there is a kicker, or rather two:
"First, the nature of the flow adjustment—mostly driven by demand compression in deficit economies or growth differentials related to the faster recovery of emerging market economies and commodity exporters after the Great Recession—has meant that in many economies, narrower external imbalances have come at the cost of increased internal imbalances (high unemployment and large output gaps).

This straight into the teeth of the EU, where 'internal devaluations' (beggar thy own consumers and households) policies are all the rage. But it is also a warning to the emerging markets, where the latest stage of economic growth is translating into falling commodities prices, threatening to unravel their own economic 'recoveries' based on beggar-thy-trading-partners economic environment of elevated commodities prices in the past.

"The contraction in these external imbalances is expected to last as the decrease in output due to lowered demand has likely been matched by a decrease in potential output." Which means a Big Boom! Potential output is the stuff economies supposed to produce once the effects of the business cycle (recession-to-expansion) is netted out. In other words, the stuff that is somewhat long-term 'sustainable'. And the above statement says it is down.

"However, there is some uncertainty about the latter, and there is the risk that flow imbalances will
widen again." Which means 'choose your poison' - either risks are materialising in structural growth slowdown or risk will be materialising in current account imbalances returning once again. Rock. Hard place. The world stuck in-between.

"Second, since flow imbalances have shrunk but not reversed, net creditor and debtor positions (“stock imbalances”) have widened further. In addition, weak growth has contributed to increases in the ratio of net external liabilities to GDP in some debtor economies.These two factors make some of these economies more vulnerable to changes in market sentiment. To mitigate these risks, debtor economies
will ultimately need to improve their current account balances and strengthen growth performance."

And here we have the usual bangers-n-mash dish from the IMF. What it says is that debt overhang is not getting better, but might be getting worse. And with that, the IMF runs out of any solutions other than go back to 'internal devaluations'. Which, of course, gets us back to the first kick in teeth. Bigger rock. And an even harder place. And Euro area is now wedged in-between.

"Stronger external demand and more expenditure switching (from foreign to domestic goods and services) would help on both accounts," says IMF. And this is the statement of surrender. Basically IMF says that if more people were to buy stuff from the countries with weak external balances and loads of debt, things will improve. No sh*t Sherlocks. And if money was growing on trees in Sahara Desert, things would improve even more.

IMF's out of idea. But IMF is still full of analysis. QED.

23/8/2014: That Pesky Problem of Real Debt...

Again, revisiting IMF's Article 4 consultation paper for Euro Area, published in July 2014, here is a summary of the Euro area 'peripheral' countries debt overhang.

First real economic debt (debt of non-financial companies, households and public sector):

 Points of note:

1. Ireland's debt overhang is severe. More severe than of any other 'peripheral' country. Bet you forgot that little bit with all the 'best-in-class' growth performance droning in the media. Ah, and worse, remember, not the level alone, but the rate of debt increases over time, also matters. And by this metric, we too are the worst in the group, both for debt increases on 2003 levels and debt increases on 2008 levels.
2. Ireland's households' debt has declined over 2008-2013, more so than in Portugal and Spain. But it remains second highest after the Netherlands' and this decline masks true extent of debt problem because 2013 figure no longer counts household debts issued by banks that left Ireland and books of loans sold to investment funds. This also excludes some securitised debt.
3. Ireland's corporate debt problem is potentially overstating true extent of real debt in the economy, as it includes a small share of MNCs debt - debt issued by Irish institutions. This is likely to be relatively minor, in my view, as MNCs largely do not do debt intermediation via Irish domestic institutions. 

Now on to our household debt deleveraging in more detail:

Good news is, when it comes to our households, we are aggressively deleveraging compared to pre-crisis debt peak. As aggressively (in rate terms) as the U.S. Caveats mentioned above apply.

But there is a problem with all the debt legacy:

In the above 'PS' stands for private sector, not public sector. So private sector debt legacy is associated with negative subsequent economic growth, in general. But as above shows, for the peripheral countries, including the basket case outside Troika capture, Slovenia, and the rarely mentioned case of Finland (see chart below) it is also compounding structurally weak fundamentals other than debt alone.

So a timely reminder: that debt problem - it has not gone away. Not by any measure and most certainly not for Ireland.

Note: to see the problem in Finland consider the following chart:

3/4/2014: Draghi's Put and Ireland's Woes

This is an unedited version of my Sunday Times article from March 16, 2014


To those who lived through the tropical storms annually ravaging the Southern Atlantic coast of the US, calm is not always the tranquility beyond the storm. Often, it is the tranquility in the eye of a hurricane.

The current state of economic affairs in Ireland, the sunshine washing across the markets, the warm-ish glow of a recovery, the steady diminishment of the crisis rhetoric - all are the sign of a fragile state of affairs brought about by the extraordinary monetary policies of the ECB since the beginning of 2012. As such, the change in economic weather we have experienced to-date can be a temporary respite rather than a permanent rebound.

In October 2012, three months after declaring that the ECB will do whatever it takes to save the euro, Mario Draghi noted another worrying regularity - the problem of differential pricing of debt across the euro area. At first, he was referencing government debt markets. Later, he started to show concern for the same trends emerging in all credit markets, including those for corporate debt.

Ever since then, the ECB has signalled that the Central Bank's core policy in dealing with the crisis will remain accommodative. Historically low policy rates, the promises of the Outright Monetary Transactions and the structuring of the Banking Union – together constituting what is known as the Draghi Put – were the Frankfurt's attempts to break down the fragmentation across various euro area economies. These measures were successful in reducing the differences in sovereign bonds yields between the euro area member states. First Ireland, Italy and Spain, then Portugal and Greece, all peripheral countries have seen their bond spreads over the German benchmark 10 year bunds come down dramatically in the course of the last 20 months.

Since mid-2012, therefore, the Draghi 'Put' underwrote historically low policy rates. It is this 'Put' that has been credited by the researchers at the ECB and the IMF, as well as by a number of academics, as the main driver behind the decline in euro area peripheral countries cost of borrowing, saving Irish taxpayers billions in interest on Government debt, helping hundreds of thousands of Irish borrowers to lower tracker mortgages costs and supporting our exit from the Troika programme.

But, in effect, the Draghi Put has also thrown a veil of ignorance over the core problems still working through the euro area economies: problems of excessive legacy debts, lack of structural drivers for the recovery and the transfer of public and banking debts onto the households' balance sheets through fiscal austerity. ‘Whatever it takes' monetary policies might have been effective in alleviating the immediate pressures on European governments, but they did not cure the underlying disease.


In effect, the Draghi Put is not a solution to the crisis, but a potential problem of its own. It is a cure that is risking making the disease stronger.

Draghi Put has forced ECB rates (and with them the rates charged in the inter-banks markets) down to their historical lows.

Current repo rate, the main rate set by the ECB, is at 0.25 percent - the lowest since the ECB records began in January 1999. Over the period prior to the crisis, the already low (by individual nations' standards) ECB rates averaged 3.1 percent. And the duration of the ECB rates deviation from their historical norm is unprecedented: 62 months and counting. Prior to the current crisis, the longest period over which ECB rates deviated by more than 0.5 percent from their norm was 38 months. That happened in the period that created a massive financial bubble across the euro area – January 2003 through June 2006.

In general, the longer the rates rest below their long-term trend, and the further they deviate from the trend, the faster they tend to rise back toward trend levels. Exception to this norm is Japan, but hardly anyone would argue that Japanese scenario is even remotely desirable.

In simple terms, the current environment of historically low interest rates is not going to last forever. Indeed, it is unlikely to last for as long as the rates have been depressed to-date.

Alongside the above facts, there two more notable observations worth making. Darghi Put has led to a significant decline in the inter-bank lending rates. For example, Euribor 12 months contract rate has declined from the crisis-period average of 2.1 percent for the period prior to the Draghi Put to the average of 0.6 percent since July 2012. Similarly, there was a massive decline in the margin charged in the interbank markets relative to the ECB repo rate. At the same time, retail interest rates charged on new loans for Irish households and non-financial corporations have shut straight up to historical highs, when compared against the ECB policy rates. Ditto for the rates charged on existent loans.


All of this leaves our economy vulnerable to any normalisation in the interest rates policy.

Should Signore Draghi start reversing the policy rate, while Irish banks remain dependent on high lending margins to rebuild their balance sheets, Irish SMEs will face significant increase on the cost of financing their legacy loans, including the very same troubled loans that relate to property investments. Beyond triggering potential arrears and cost saving measures by the SMEs (involving layoffs), this will put strain on any growth in the SMEs sector. Capital investment costs will go up. Credit risk ratings will go down. Investment in the economy will be under severe pressure relative to the already exceptionally low rates.

Households currently working their way through arrears resolution process are likely to face high risk of relapsing into arrears. To-date, some three quarters of all restructuring deals done by the banks involve either temporary arrangements or ‘permanent’ deals that involve increases in debt carried by the households. They will face increases in the cost of restructured mortgages, impacting not only those on variable rate (the segment of the mortgage holders already heavily hit by the banks), but also trackers. Depending on how fast and at what time in the recovery process rates increases occur, the effect can be devastating. Households that are not in trouble with their lenders today will face a major hit on their incomes, depressing once again their consumption and investment and triggering a renewed bout of precautionary savings.

Counting existent loans alone, reversion to historical averages in ECB rates can take some EUR5.7 billion annually out of the real economy in higher interest costs. This would be roughly equivalent to a loss of double the annual contribution to our GDP by the Agriculture, Forestry and Fishing sector.

The above factors can also pose a threat to the Exchequer in form of lower VAT, income tax, stamps and excise receipts, exacerbated by the potential increase in the cost of borrowing that goes hand-in-hand with higher policy rates.


The good news is that given Mr Draghi's current pronouncements, we are still months, or even years, away from higher interest rates. Better news, yet, Mr Draghi has communicated that he will provide 'forward guidance' on rates policy. This commits the ECB to supplying in advance clear signals as to its intentions. Even better news is that last week Mario Draghi clearly identified output gap (the shortfall in current economic growth relative to long-term potential rates of growth) as one of the parameters watched by the ECB. This strongly suggests that Frankfurt is likely to take into consideration structurally weak economic conditions prevailing across the euro area in setting its policy rates. Such a consideration further extends the period over which low rates are likely to remain in place.

The bad news is that the only way the rates can remain low is if the euro area core remains mired in a near-deflationary Japanese economic growth scenario.

In other words, we have a choice: either the economy remains in the doldrums, unemployment stays high and incomes growth remains subdued; or the rates will go up.

Mr. Draghi Put is not based on the smaller peripheral economies conditions, but on France, Italy, Spain, Belgium, Finland and Austria as drivers of credit demand and low interest rates, and Germany as a break on low interest rates. Meanwhile, German lending constraints for non-financial companies have been at record lows for months now. There is a glut of credit in the euro area's largest economy. Thus, Germany will be ripe for rates hikes, as soon as inflation pressure picks up even moderately. The countries with shortages of credit supply are seeing their economies gradually pulling out of a recession. One can relatively safely assume that, barring new shocks, by the end of 2015 the ECB will start contemplating the end of Mr Draghi's Put.

Put conservatively, anyone with business loans or mortgages of duration greater than 5 years should be concerned. By last Central Bank of Ireland count, these loans amounted to 65 percent of all loans outstanding in the economy.


There is little we, in Ireland, can do about the direction of the ECB interest rates or the timing and the speed at which the rates increases will happen. About the only two things in our power are to ensure that current process of restructuring of SMEs loans and household mortgages is robust enough to withstand the shock of higher interest rates in the future, and that our households incomes retain the necessary cushion to absorb such increases. The former requires much more through and independently verified restructuring of our legacy debts. The latter requires lower tax burden, deep reforms and faster economic growth anchored in our real economy, not in the tax optimising MNCs-led sectors.

Absent these measures, Irish economy is a weak athlete swimming into a storm surge. The eye of the hurricane might make us feel better about our perceived strengths, but the clouds on the ECB’s horizon, no matter how distant, warn of a possible storm to come.

Box-out:

ESRI’s latest research paper on the impact of the banking sector competition on credit availability to the SMEs across the EU sheds some light on the urgency for Ireland to abandon the banking sector policy based on the Twin Pillars model.  “Does Bank Market Power Affect SME Financing Constraints?” published in an influential Journal of Banking & Finance argues that banking sector retrenchment across the Eurozone towards domestic markets and reduced competition between the banks “will lead to an increase in financing constraints for SMEs”. Such constraints “will inevitably lead to lower investment and potential output. “ According to authors, “the structure of the banking system has changed dramatically following crisis... This has substantially lessened competition for business credit in Ireland with only three main retail business banks remaining. This reduction in competition poses serious questions regarding the ability of the financial system to transmit credit to SME borrowers in a recovery scenario.” In short, given Irish SMEs’ heavy reliance on bank financing, we need more than a new pillar bank. We need a fully competitive financial system operating across the economy. This will be hard to deliver on. Irish Pillar banks continue to rely on state protection for even trivial market considerations, such as deposits rates setting by their competitors, e.g. An Post. And our regulators and policymakers are still clinging to the erroneous belief that competition in the banking sector in 2001-2007 has fuelled the boom and caused the crisis.

10/3/2014: NYSE Margin Accounts Busting Record Levels...

Two quick twitter posts on leverage accumulation in the markets.

First one via Holger Zschaepitz @Schuldensuehner:

Shows NYSE members debit balances in margin accounts - at historic highs (since 1960).

Second, via Ioan Smith @moved_average:

Shows the above as % of nominal GDP as third highest in history. As noted by @moved_average, currently margin accounts balances are at ca 26% of all commercial and household loans outstanding in the US banking system.

This is just NYSE... Do we need to add timing lines for QEs here?.. (Hint: see peaks...)

Monthly data on the above: http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=tables&key=50&category=8

Here's a good post on monthly series analysis: http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

And a telling chart from the above on growth rates in margin accounts:

Oh, and a comment from above post: margins accounts are at historic highs in real (inflation-adjusted) terms too...

Don't get too worked up if things get jittery next... cause this time (unlike in Q2 2000 and Q3 2007) things are going to be different...

Update:  via John Tracey @traceyjc84 the above expressed relative to Dow Industrials:

14/2/2014: Debt & Growth: New IMF Paper

An interesting working paper from the IMF, worth further digesting and blogging: "Debt and Growth: Is There a Magic Threshold?" by Andrea Pescatori, Damiano Sandri, and John Simon (IMF Working Paper WP/14/34, February 2014: http://www.imf.org/external/pubs/ft/wp/2014/wp1434.pdf)

Per abstract (emphasis is mine): "Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised."

"Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as 
countries with lower debt."

"Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility."

As I noted above: needs more reading and blogging. Generally, before dealing with the paper in details, this appears to contradict Reinhart & Rogoff (2010) paper and several subsequent papers (on slowdown in growth conclusions) and support a number of papers finding inconclusive evidence. Note another caveat: absence of evidence is not evidence of absence.