Debt | timiacono.com - Part 4

$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.”

The Shrinking Deficit

It’s been a rough stretch for the GOP lately and news like this isn’t making it any easier to sell the American public on the idea that, somehow, they have a better plan for the U.S. economy moving forward (if that’s what they call what has been happening in recent years).

That first paragraph is like a dagger to the heart for folks like Rand Paul, Marco Rubio, and others who have aspirations to succeed President Obama in just a couple years: “… the federal budget deficit fell more sharply than in any year since the end of World War II”

Of course, the Federal Reserve has been doing most of the heavy lifting in their multi-year low interest rate/money printing extravaganza that has succeeded in re-inflating asset prices and, for the moment at least, making everyone forget about what happened the last time the central bank artificially inflated the price of stocks and real estate.

That’ll only be a problem when it’s a problem.

Consumer Debt Increase Fastest Since 2007

This New York Fed report(.pdf) showing aggregate consumer debt jumped $241 billion to $11.5 trillion in the fourth quarter, the biggest increase since the third quarter of 2007, has received a lot of attention today and was welcomed news by those who think that buying things you don’t need with money you don’t have is how the U.S. economy should operate.

Now, one could argue about whether you need a college degree these days, but there’s little question that few have the money to pay for it as evidenced by the bulging red bar segment in the lead graphic from the report below. According to this item by Wolf Richter, that red bar is enslaving an entire generation and, if so, that can’t be good.

The New York Fed’s Liberty Street Economics blog noted the dramatic rise in outstanding debt by said enslaved generation in this story earlier today.

I suppose when student loan debt  really becomes a problem, someone will let us know.

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