Wednesday, November 14, 2007

Great debt graphs comparing developed countries

Household debt and wealth

The first graph shows debt levels are above Japan's in 1990. It is a shame the author then draws a way too optimiastic conclusion

Posted by sold 2 rent 1 @ 12:49 PM (1316 views)
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9 thoughts on “Great debt graphs comparing developed countries

  • It is quite clear why Japan can’t shake off deflation.
    Its household debt levels have remained at 130pc for 17 years.

    Unlike the US in the 1930s which saw consumer debt levels fall from 230pc to 70pc
    See graph
    http://www.thelongwaveanalyst.ca/downloads/NonPublicDeptPerGDP_multi.doc

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  • Planning4acrash says:

    Japan needs to bite the bullet and put up IR’s, have a short sharp shock and then be normal again. So do we in the UK!

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  • Quote.

    “Firstly, household debt has been rising since credit was invented and the surge since the 1980s partly reflects a rational adjustment to greater credit availability via competition and lower rates. It is unclear what a “safe” level of debt is.”

    He even spots the flaw in the banking system – expanding debt to infinity is unsustainable.

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  • S2R – This is interesting thanks for posting – (singularly and in response to my prior point that Japan can’t be compared – from House prices and extent of bubble with the UK) needs some “finking” on my part.

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  • talking of debt, who do we owe the money to??

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  • “expanding debt to infinity is unsustainable”

    I completely agree. But if you look at the measure Debt/Cash what happens as cash -> 0?
    This is happening now. I hardly ever see cash nowadays. Most people use cards in restaurants, bars and shops. Cash only seems to be used at the newsagents.

    Japan never really got into credit cards. Cash is king over there. It’s not here.

    I’ve not worked out the answer yet.

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  • justwatching: That’s a good question, who do we owe the money to?

    There are different types of debt: household, corporate, and government. All three are transformed into bonds: CDOs, corporate bonds, and treasury bonds respectively. A bond is a fixed-income investment i.e. it yields the same fixed sum every year. For example a $1m US Treasury bond with a 5% yield would pay out $50,000 every year until maturity, at which point the issuer is obliged to pay back the $1m. Maturities vary from one month to thirty years.

    All bonds have a rating issued by a ratings agency such as Standard & Poors, Fitch, or Moodys. The ratings range from AAA to C, with anything below BBB considered “junk”. The rating indicates the risk of default (non-payment). For example US Treasuries have AAA ratings, whereas Zimbabwean treasuries are junk. In the corporate sector, large safe companies like Tesco have bonds rated AA; smaller companies have lower ratings. The rating affects the yield: in the US a top-rated bond will yield only 4-6% whereas a poor-rated bond could yield up to 10%.

    So who buys these bonds? Anybody with cash to invest: pension funds, banks, companies, hedge funds, foreign governments, and foreign central banks. These are the groups who need steady, safe returns on their cash. For example a German bank might use its savers’ deposits to buy some US mortgage-related bonds (oops!). A Japanese pension fund might decide to buy some US corporate bonds, because they provide a better yield than Japanese corporate bonds. The Chinese government owns a lot of US Treasury bonds, partly for political reasons. The oil-producing states, flush with cash recently, also hold US Treasury bonds for political reasons.

    In short, any country with high savings rates (mainly Asia) lends money to countries with low savings rates (mainly the west). The bonds are normally issued in the currency of the issuing country, i.e. US treasuries are in dollars, UK gilts are in pounds. Fortunately for the western countries this means they can devalue their debts by printing more currency. That’s what we’re seeing in the USA now, because as more dollars are printed it devalues the entire currency.

    Given all that, it would make sense for Japan to print its way out of debt. However the Japanese know that this would only encourage more debt and would be a moral hazard. The USA and probably the UK aren’t quite so bothered about moral hazard, or so it seems.

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  • drewster, thanks
    So when Crash G used to talk about borrowing X billions of pounds in his past budgets, is he borrowing it from himself, by printing more money? foreign governments? pension funds?
    How does he get away with mortgaging the country’s future?
    Prudent, bah

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  • He’s borrowing it from the bond markets. The government issues more bonds and sells them on the bond market. Buyers could be UK pension funds or Japanese banks or the Chinese central bank, it doesn’t really matter. The good news is that the debt is denominated in pounds, so he can just print his way out of debt (not that they’d ever admit to such a tactic, of course).

    He gets away with it partly because all governments do it, partly because our debt isn’t all that bad compared with some countries, and partly because as a nation we’re very relaxed about debt anyway. The UK’s debt-to-GDP ratio is 42% (not counting hidden liabilities such as PFI schemes and public-sector pensions), in the the USA it’s 64%, and in Japan it’s a whopping 172%.

    * 2003 figures. Source: http://suddendebt.blogspot.com/2007/03/gasoline-disposable-income-and-economy.html

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