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y and in moderation it clearly improves welfare but when it is used imprudently and in excess the result can be disaster for individual households and firms overborrowing leads to bankruptcy and financial ruin for a country too much debt impairs the government s ability to deliver essential services to its citizens high and rising debt is a source of justifiable concern we have seen this recently as first private and now public debt have been at the centre of the crisis that began four years ago data bear out these concerns and suggest a need to look comprehensively at all forms of non financial debt household and corporate as well as government over the past 30 years summing these three sectors together the ratio of debt to gdp in advanced economies has risen relentlessly from 167 in 1980 to 314 today or by an average of more than 5 percentage points of gdp per year over the last three decades when debt ratios rise beyond a certain level financial crises become both more likely and more severe reinhart and rogoff 2009 this strongly suggests that there is a sense in which debt can become excessive but when we take an empirical approach to this question using a new dataset on debt levels in 18 oecd countries from 1980 to 2010 based primarily on flow of funds data we examine the impact of debt on economic growth our data allow us to look at the impact of household non financial corporate and government debt separately in this section we briefly review trends in household non financial corporate and government debt in what follows we will refer to the total combined debt of these three sectors as the total non financial debt as shown in graph 1 from 1995 to the middle of the last decade public debt had been relatively stable as a percentage of gdp but this period of relative public sector restraint was accompanied by a rapid rise in household and non financial corporate debt the righthand panel of graph 1 makes the rather stark point that real household debt tripled between 1995 and 2010 dwarfing the accumulation of debt in other sectors of the economy the place that supply is deemed not to matter finance here s a older graph from a seeking alpha post of january 09 by contrahour source contrahour at seeking alpha the highest line there the pink one is the total of all the other lines that s the problem yeah total debt but just look at the components just look at one of them on the right side the second highest line highest among the components is financial debt domestic financial debt on the left side at the start financial debt is the lowest in other words financial debt was the fastest growing component of total debt not household debt or any of the others financial debt oh by the way they re all bankmen cecchetti is economic adviser at the bank for international settlements bis and head of its monetary and economic department mohanty is head of the macroeconomic analysis unit at the bis and zampolli is senior economist at the bis maybe they have a vested interest in failing to see financial debt as a problem that would be like me saying household debt does not matter something i do not say and yes it would be like the private sector pointing the finger at public debt posted by the arthurian at 4 00 am 0 comments monday june 11 2012 david brooks the debt indulgence from the opinion pages of the new york times by david brooks 4 june 2012 every generation has an incentive to borrow money from the future to spend on itself but until ours no generation of americans has done it to the same extent why why because policy does nothing to prevent it policy only encourages it still today federal reserve policy is to grow the economy by getting everyone to borrow more this must change a huge reason is that earlier generations were insecure they lived without modern medicine without modern technology and without modern welfare states they lived one illness one drought and one recession away from catastrophe they developed a moral abhorrence about things like excessive debt which would further magnify their vulnerability try to focus david brooks you are not doing economics here your stories are irrelevant in case you didn t notice in the 1990s and 2000s we had a growth industry dedicated to making money by helping people out of debt so even then we had a moral abhorrence about things like excessive debt some kind of abhorrence anyway our character is not the problem our policies are the problem recently life has become better and more secure but the aversion to debt has diminished amid the progress credit card companies seduced people into borrowing more politicians found that they could buy votes with borrowed money people became more comfortable with red ink it is policy david plain and simple there is no need to make up these stories today we are living in an era of indebtedness over the past several years society has oscillated ever more wildly though three debt fueled bubbles first there was the dot com bubble then in 2008 the mortgage finance bubble now we are living in the fiscal bubble wait a minute the fiscal bubble no you misuse the word bubble in this country the federal government has borrowed more than 6 trillion in the last four years alone trying to counteract the effects of the last two bubbles states struggle with pension promises that should never have been made europe is on the verge of collapse because governments there can t figure out how to deal with their debts nations around the globe have debt to g d p ratios at or approaching 90 percent the point at which growth slows and prosperity stalls it all goes back to the increase in the tolerance for debt no david as rex nutting says excessive private debt created the problem but what it all goes back to is policies that encourage credit use and the accumulation of debt private debt and public policy focus on these two things everything else follows democrats and republicans argue about how quickly deficits should be brought down but everybody knows debt has to be restrained at some point the problem is that nobody has been able to find a political way to do it no david the problem is that nobody considers the economic way to do it what about private debt brooks 1 excessive private debt leads to inadequate growth 2 inadequate growth leads to excessive public debt what about private debt the era of indebtedness began with a cultural shift it will require a gradual popular shift to reverse today s wisconsin vote might mark the moment when the nation s long debt indulgence finally began to turn around what about private debt fool posted by the arthurian at 4 00 am 9 comments labels debt and inflation sunday june 10 2012 rex nutting u s debt load falling at fastest pace since 1950s from marketwatch at the wall street journal by rex nutting if you want to know why economic growth has been so tepid here s your answer four years after the storm hit the economy is still deleveraging and it s very hard for any economy to grow when everyone is focused on increasing their savings the rapid rise in federal debt over the past four years has distracted us from the big picture the level of public debt is indeed worrisome but it s not as big a worry as the economy s total level of debt public and private as much as we hear politicians pundits tea party patriots and the congressional budget office obsessing about government debt it was excessive private debt not public debt that caused the 2008 financial meltdown and it was private debt some of it since transferred to the public that lies behind the current european debt crisis economists who have studied the impact of indebtedness have found that low levels of debt are essential to growth but that high levels of total outstanding debt can hurt an economy beyond a tipping point adding on more debt will reduce growth over the long run even if it inflates a bubble in the short run at low levels debt is good it is a source of economic growth and stability concluded stephen cecchetti m s mohanty and fabrizio zampolli economists for the bank of international settlements in a paper presented at the federal reserve s jackson hole conference last august beyond a certain point debt becomes dangerous and excessive and can lead to increased volatility financial fragility and slower growth it can even bring down the real economy with it as we have seen read the bis paper the real effects of debt according to a study by mckinsey published earlier this year u s households may have two more years of deleveraging left before their debts are sustainable again if mckinsey is right the u s economy may have to endure a couple more years of slow growth thank you rex the only thing i don t like in that is the waiting why wait fix the problem ht the dixie dove posted by the arthurian at 4 00 am 0 comments saturday june 9 2012 who cares what reagan was paul krugman from reagan was a keynesian as many economists have pointed out america is currently suffering from a classic case of debt deflation all across the economy people are trying to pay down debt by slashing spending but in so doing they are causing a depression that makes their debt problems even worse yes this is exactly the situation in which government spending should temporarily rise to offset the slump in private spending and give the private sector time to repair its finances no in this situation the government should admit it made policy mistakes that led to the creation of all this debt that people are trying to pay down today in this situation the government should repair those finances itself the federal reserve should take the responsibility and pay down private debt this way people wouldn t have to be slashing spending and causing a depression there is no link between decisions to increase government spending and decisions to reduce personal indebtedness having the government spend more does nothing for people s debt we need direct policy action to reduce the problem reduce private sector debt do it now posted by the arthurian at 4 00 am 8 comments friday june 8 2012 creative destruction romney s jobs record from char weise at creative destruction here s total private sector jobs in massachusetts and the us from 1990 to 2012 from the bls the shaded area is romney s term as governor 2003 06 clearly massachusetts economy underperformed in the romney years private sector employment rose by 1 5 in massachusetts versus 5 7 in the us overall posted by the arthurian at 4 00 am 0 comments thursday june 7 2012 likewise if you mow the lawn often enough it looks good but put the mowing off a day and clippings will clump up like a hayfield in need of baling so then you have to go and mow sooner the next time and higher than you want and you have to be inventive with the mowing pattern so the clumps get smaller instead of bigger and then you have to mow it again sooner and again and then maybe you can cut it a little shorter if you wait until it looks like you need to mow the lawn you waited too long if you wait until it looks like debt is creating problems you waited too long posted by the arthurian at 4 00 am 2 comments wednesday june 6 2012 one for you three for me it is true to follow up on yesterday s post that for nonfinancial corporations the share of real assets has been falling while the share of financial assets has been rising graph 1 financial red and nonfinancial blue shares of total nonfarm nonfinancial corporate assets it is also true as we observed some time ago that the profit to nonfinancial corporations has been falling as a share of total corporate profits while that of financial corporations has been on the rise graph 2 financial red and nonfinancial blue shares of total corporate profits this gets me wondering about what is left as the profit from real assets to nonfinancial corporations if we take their profit from financial assets and count it with the profit of financial corporations i suspect the profit from real assets has been falling and is rather low why do i think this because economic growth is not good and because profit is the engine that drives enterprise i m gonna assume that the split between financial and nonfinancial profit of nncb nonfarm nonfinancial corporate business follows the same pattern as the split between assets shown on graph 1 above starting with graph 1 and factoring in fred s nonfinancial corporate business profits after tax shows us the profit to nonfinancial corporations arising from financial and nonfinancial sources in billions graph 3 financial red and nonfinancial blue profits arising from nonfarm nonfinancial corporate assets profits from the two sources have become nearly equal but i remind you that graph 3 shows the profit of nonfinancial corporations only now we shall add the profit of financial corporations i add it to the red line to the financial profit of nonfinancial corporations graph 4 total corporate profits from financial sources red and productive sources blue it may clarify the picture to see this profit breakdown expressed as percent of total corporate profits graph 5 percent of corporate profits from financial sources red and productive sources blue in the 1950s about 60 of corporate profits came from real production and the rest from finance during most of the great inflation the ratio was 50 50 today about 25 of corporate profits come from real production three quarters comes from finance from other people s debt posted by the arthurian at 4 00 am 5 comments tuesday june 5 2012 fred at random 3ao the random eyes sidebar link turned up a comparison of two items from nonfarm nonfinancial corporate business balance sheets totals assets and total financial assets graph 1 fred s 3ao two lines going up the higher line the blue line is total assets the lower line the red one is financial assets everything below the red line down to the zero line is financial assets everything above it up to the blue line is productive assets if i divide the red line values by the blue line values and multiply by 100 to convert to percent i get to look at the history of financial assets as a percent of total assets for nonfarm nonfinancial corporate business graph 2 financial assets as a percent of total assets after the 1982 recession a straight line increase of financial assets up to 50 of total corporate assets as much as half the assets are financial assets half the assets of non financial corporations are now financial assets tax law made that happen i m sure of it posted by the arthurian at 4 00 am 2 comments monday june 4 2012 a beautiful mind the reasoning is from marcus nunes one of the effects of the ongoing crisis characterized by an abrupt and steep fall in ad aggregate demand was to bring back the discussion of what should be the target of mp monetary policy to the proponents of the view that the central bank should have as its objective the stability of ad this is the key to macroeconomic stability national or global marcu...
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