Debt | timiacono.com - Part 3

Unsustainable?

Via this item at Mining.com where someone took the time to read through this report from the World Gold Council on the subject of risk management and capital preservation comes the chart below where, clearly, they’ve got the correct caption.

I’d read about gold’s share of financial assets then and now (i.e., back in 1980 as compared to today), but this is the first time I’ve seen it in chart form and it’s a real eye-opener.

Once again, this reinforces the little acknowledged fact that the financial world has changed rather dramatically in recent decades (and perhaps not for the better given that booms and busts seem to be a regular part of the landscape).

More Troubling Student Loan Data

This Econbrowser update by Economics Professor James Hamilton on the nation’s record rise in student loans over the last half-decade or so is chock-full of all sorts of disturbing data, such as, the first chart that depicts the near doubling in outstanding student loans as a share of GDP from below 4 percent to over 7 percent.

There’s also a good discussion about how the Education Department gets borrowed money from the Treasury Department in order to lend that money to students, many of whom either don’t graduate or make much less after they get their sheepskin than they thought, making it difficult (if not impossible) to pay that money back.

It seems Education has become one Treasury’s better customers as illustrated below.

The stat of the day is this gem:

The outstanding balance borrowed by the Treasury on behalf of the Department of Education’s student loan programs comprises 7% of the $12 trillion in debt owed by the Treasury to the public as of the end of last fiscal year, and by itself accounts for 20% of the growth in Treasury debt during that fiscal year.

Of course, this isn’t going to end well – for students or the government.

In fact, it’s already not ending well as default rates are soaring and an entire generation is souring on the American dream that has turned into being saddled with debt for the foreseeable future in yet another legacy of the present era of easy money in the U.S.

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$100 Trillion in Debt – A Big Round Number

The Bloomberg headline reads:

Global Debt Exceeds $100 Trillion as Governments Binge, BIS Says

and, along with the graphic below from the associated BIS report(.pdf), that should serve as the latest warning to financial markets around the world that things aren’t as rosy as the recent rise in virtually all asset prices might imply.

Writes the BIS:

Not surprisingly, given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers (Graph C, left-hand panel). They mostly issue debt in domestic markets, where amounts outstanding reached $43 trillion in June 2013, about 80% higher than in mid-2007 (as indicated by the yellow area in Graph C, left-hand panel).

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Rubin to QE3: “Me No Likey”

There’s a lot not to like about former Clinton Treasury Secretary and former Citigroup CEO Robert Rubin since, along with former Federal Reserve Chairman Alan Greenspan, these two probably did more than any other two people on the planet to create the mess that we find ourselves in today.

However, there is some small redemption for Rubin given the views he expressed on the Fed’s latest round of money printing last Friday in his address to a forum on monetary policy at the University of Chicago Booth School of Business as detailed in this WSJ story.

“The real issue is, what were the risks and rewards of QE3? There’s a widely held view that the benefits of QE3 have been relatively limited,” Mr. Rubin told an audience that included several Fed officials. At the same time, “these vast flows of capital have gone up the risk curve and created what may well have been excesses, that now as we know are tending to unravel — and that has a destabilizing effect.”

Mr. Rubin also said he is not as confident as top Fed officials who say they can absorb the high level of reserves in the banking system when the time comes to tighten monetary policy by simply raising the rate the central bank pays for holding excess reserves.

“I don’t think there are any magic wands,” Mr. Rubin said.

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy and a WSJ contributor, then asked Mr. Rubin what the Fed should do about monetary policy at the current juncture.

Mr. Rubin’s answer elicited laughter from the room of Wall Street and hedge fund economists: “I think I would do what the Fed seems to be doing, but I don’t know what the Fed is doing. I hope they know what they’re doing.”

A much better response to Mr. Wessel – and an answer that I probably won’t ever forget – came from GMO’s Jeremy Grantham who, when asked a similar question some time ago quipped, “Well, I wouldn’t start from here.”

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