Archive for Debt Articles
Every quarter, U.S. government data crunchers release information on the financial condition of our households, corporations, and the economy as a whole. The following are what I consider to be the most important indicators.
If you listen to or read from the business media, you probably know that household net worth has recovered all that was lost during the Great Recession. Commentators are using this fact to infer that consumers are now in great financial shape and are expected to start spending a lot of this wealth.
What you don’t hear about is how net worth has recovered. The improvement in net worth over the past few years has been mostly due to the increase in financial assets. Those who own financial assets have had the benefit of new all-time highs in the stock market and rising bond prices, thanks largely to the Federal Reserve Board’s low interest rate
Today, the Federal Reserve Board issued its economy-wide financial data for the 2013 2nd quarter. Below are many of the charts I monitor regarding federal government, corporate, and household financial condition. The following are a few key takeaways from this data:
- It appears that, as a whole, debt reduction is over in the U.S.
- The federal government and corporations have been especially active in adding debt.
- Although corporations have a lot of cash, they also have a lot of debt. Overall, corporate balance sheets are not as strong as is portrayed in the financial press.
- Mortgage debt has declined significantly. However, this trend seems to be over.
- Household net worth as a percentage of total liabilities is very low.
- The rise in home equity has resulted in a commensurate decline in the personal savings rate. Therefore, consumers have once again started using their homes as a source of savings, rather
The Federal Reserve Board (FRB) recently released 2012 year-end flow of funds data. Included in this release is information on the progress (or lack thereof) of reducing the huge debt load in the U.S. The following charts I found to be most interesting and telling about our country’s current financial condition. I have broken these charts into three categories: Total U.S., Households, and Corporations.
U.S. Debt Trends
Overall debt in the U.S. continues to rise, primarily because of huge increases in federal government and non-financial corporate debt. Financial companies continue to lower their debt leverage. Households had been reducing debt, but debt in this sector might once again be on the upswing.
Total debt to Gross Domestic Product (GDP) rose in the 2012 4th quarter. Prior to this uptick, total credit market debt to GDP had fallen in 12 of the previous 13 quarters. U.S. Treasury and Agency debt is
The May 28 issue of The Economist carried an article about the development of new drugs in America. Evidently, the business model for big drug companies is shifting. In the past, research has focus primarily on creating blockbuster drugs, those that are applicable to diseases that affect large numbers of people. Now, companies are increasingly investing in drugs that are more specialized, applicable to diseases that threat relatively small groups of people. My guess is that drug companies are finding it increasingly difficult to find new blockbuster drugs and development costs do not provide adequate profit margins. So, more and more, drugs coming to the FDA for approval are those developed by Biotech firms targeting small numbers of people.
Of course, to make this work financially, the price of these new drugs must be very high. Much of the new research is oriented toward treatment of advanced-stage cancer. As examples,
To get our country back on sound financial footing, our federal government must attack two important issues over the next few years: The annual fiscal deficit and the coming financial nuclear blast of the Baby Boom generation entering the age of Social Security and Medicare benefits. In a recently released study from the Urban Institute, “Social Security and Medicare Taxes and Benefits Over a Lifetime,” authors C. Eugene Steuerle and Stephanie Rennane attempt to quantify the amount of money a “typical” American individual or married couple will pay into and, ultimately, receive in benefits from Social Security and Medicare.
Below are charts showing, for the “average” wage earner and based upon the year a person or couple reaches the age of 65, the amount of estimated Social Security and Medicare benefits received during the years in retirement, total taxes paid into these programs while working, and
A friend and investment professional sent in a comment in response to my 2011 Outlook report that discussed the huge amount of cash on corporate balance sheets. Here is a chart showing that non-financial corporations currently hold about $2 trillion in liquid assets. That’s a lot of money.
As my friend pointed out, this cash could find its way into making acquisitions, which would help stock prices, or capital expenditures, which would help the economy. In addition, companies could decide to increase dividends or buy back their outstanding stock, both of which would have a favorable impact on stock prices.
One of the interesting things about this cash, however, is how it came to be. As the above chart clearly shows, there has been (and always will be) an upward bias to corporate liquid assets. As the economy grows over time, so will total cash on companies’ books. That does
“It takes a lot of borrowing to live within your means.” Author unknown
Before I get into discussing how we get out of the economic mess we’re in, here is a summary of how we got in the mess and where we are now. For more detail, you can reread the prequels to this post (The Mess We’re In, Part 1 and Part 2):
The early 1980s began with a long-term peak in interest rates.
As rates declined, borrowing became cheaper and various sectors of our economy started taking on more debt.
Although borrowing rose dramatically, much faster than the economy as a whole…
The lower interest rates resulted in a much slower increase in consumers’ debt payment burden.
For years and years, economists cried “wolf” about the rising debt load and an ultimate calamity. As time passed and the wolf did not knock on the door, borrowers and
The worst of the recession seems to be over. Weekly reports tend to have a positive bias to them, but not enough to erase the fear that our economy succumbs to the dreaded “double-dip” recession. Unfortunately, Gross Domestic Product (GDP) growth is slow with few signs that it will accelerate anytime soon.
The combination of the high jobless rate and the fact that homeowners have experienced a dramatic destruction in their wealth has worn down consumer confidence. Over the past few months, confidence has improved, but only to levels that reflect being out of the depths of despair.
The housing bubble brought with it more people buying homes. In addition to increasing debt in our economy, lenders became magnanimous and allowed buyers to put less money into the down payments. When home prices dropped, the result was a vast decline in home equity.
Americans had been using their homes
History teaches us that men and nations behave wisely once they have exhausted all other alternatives. – Abba Eban
The Thursday, July 8, 2010 Wall Street Journal (WSJ) carried a story about commercial real estate. My hat is off to the Journal for bringing back into view a difficult problem we knew the banking industry was facing, but that had slipped out of the collective consciousness of investors’ minds. In rough terms, the banking industry will have somewhere between $500 billion to $1 trillion in commercial loans coming due over the next few years (estimates vary).
By coincidence, I had lunch on July 7th with a fellow church member who is in the commercial real estate business. We had time to chat before our meeting began and I asked him about the banks and their commercial loans. He indicated that the banking system has not yet felt the
“It is difficult to get a man to understand something when his salary depends upon his not understanding it.” – Upton Sinclair
In the post Nightmare on Elm Street, I wrote about the financial pressures facing state and local municipal budgets. Last week, a front-page article in the Sun Sentinel, a widely read south Florida newspaper, summarized Broward County’s financial situation. As is the case with many, maybe most, municipalities throughout the country, Broward County is bringing in less revenue. In Florida’s case, without a state personal income tax, property taxes are an especially important contributor to budgets, which left the state as one of those most impacted by the rise and fall of real estate prices. In the face of shrinking tax revenues, Broward County has been looking for ways to cut spending. Some of their choices will echo through our nation over the next few years.