"US Total Credit Market Debt 700% of GDP?" !

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." - Cicero - 55 BC

"Overall Debt - Clearly excessive debt is one of the core issues at the heart of the current malaise so it is here that we must start. When looking at the question of deleveraging, one needs to consider a number of different dimensions, including the state of the banking and financial systems themselves, the state of the asset markets, the overall level of debt in the economy as well as the level of indebtedness of the various actors in the economy.

I think it worthwhile if we start at the macro level and work down from there. A key indicator of the status of deleveraging refers to the overall level of debt in the economy as measured by total credit market debt. A graph prepared by Ned Davis Research shows that Total Credit Market Debt for the US stood at $49 trillion as at February 2009, which was a record 350% of US GDP. And these figures don’t include the forthcoming budget deficits or the massive level of unfunded liabilities in the US, which some put as high as another $49 trillion. Adding unfunded liabilities to total credit market debt puts the debt to GDP ratio at a staggering 700% of GDP.

Not only is the current ratio of 350% the highest on record but it far surpasses the peak of 300% that was reached in 1929. In the aftermath of the Great Depression total credit market debt declined over the following two decades to reach a low of 130% in the mid-1950s. Some quick calculations show that based on a modest savings rate of 4% and real GDP growth of 3% pa, zero interest payments and the assumption that no more debt is created (which is unlikely given the Federal Government’s proclivity to spend), it would take until about the year 2026 to get back to a more sustainable debt to GDP ratio of say 150%. At a savings rate of 8% pa then you could get to the same level by about 2022.

When one includes unfunded liabilities, based on the above criteria it would take until 2030 just to get back to the current historically high rate of 350%.

Therefore based on the current trajectory of debt creation and without some rather radical changes in policy it appears that the US is not only looming as a basket case but will be unable to fund its way moving forward. As the saying goes: “Where GM goes so does the US”. Can anybody say Chapter 11? I think it is fair to say that any financially ill-prepared baby-boomers are going to have a somewhat difficult time of it and should practice their Wal-Mart and McDonald’s greetings.

Analysis by Morgan Stanley highlights that the composition of this debt has also changed since the 1930s, with the household’s proportion of total debt increasing from 18% to 27% whilst corporate debt has declined from 51% to 22%. Government and financial debt has also increased significantly over that time. This suggests that consumer deleveraging will be of paramount importance in any sustainable recovery in the US and elsewhere.

And the US is not the only nation up to its eye-balls in debt. Recent figures highlight that Ireland has $1.8 Tn in debt vis-à-vis GDP of $200 Bn (900% ratio), the UK has $10.5 Tn debt against GDP of $2.3 Tn (456%) whilst conservative Switzerland has a debt of $1.3 Tn versus GDP of $300 Bn (433%). Iceland is broke and on IMF life support. And in a recent newsletter John Mauldin stated that Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And with Eastern European home buyers entering their own form of carry trade by borrowing in Swiss francs, they are suffering as their own currencies decline by as much as 50% against the franc.

These are indeed scary figures and it raises the question: Can all of these debts ever be repaid? Based on current policy settings by governments and central banks alike, I think the answer is a definitive “No”, at least not without destroying the world’s fiat currencies, massive write-downs and / or repudiation of debt. What it will require is a shift back towards governments and central banks encouraging savings rather than debt, and more fiscal responsibility on the part of governments. Green shoots or Indian Summer? Which ever it is it will take more than a couple of years downturn to resolve."

- http://www.marketoracle.co.uk/Article11485.html