Friday, December 07, 2007

Flow of Funds Report Show Record Burden of Debt

The latest flow of funds report show a record level of debt burden. Private sector debt rose to a record 168.2% of GDP, up from an upwardly revised 166.4% the previous quarter, 135.5% in the fourth quarter of 2000 and 98% in 1980. Both household debt and business debt increased faster than GDP, but business debt is now increasing faster.

Even mortgage debt is actually increasing, and increasing faster than GDP (rising from 74.3% to 74.5%) as well as disposable income (rising from 101.3% to 101.4%) reaching new all time highs relative to both. Although housing values strangely increased slightly according to this, mortgage debt relative to housing value increased from 48,9% to 49,6%.

While household debt increased in both absolute and relative terms, business debt increased much faster, and rose from 69,0% of GDP to a record 70.2%. The reason for this surge in lending is a significant decline in the financial savings rate of companies, particularly nonfinancial companies. Undistributed profits -Net profits minus paid dividends- of nonfinancial companies fell from $259.1 billion to $232.1 billion, leaving it at less than half of its 2005 peak. At the same time, business investments increased to new highs in absolute terms. All of this have financed by sharp increases in debt.

All of this confirms what I've been saying all along: the so-called "credit crunch" is a hoax with regard to the overall financial system. The "credit crunch" is only applicable to a limited number of financial instruments, something which is more than compensated by the fact that bank lending is soaring, increasing by 5% between August 1 and November 21, which corresponds to an annual rate of 17%.

4 Comments:

Anonymous Anonymous said...

all this is verry bullish because it will create panic att the FED & Government, filling the markets with liquidity, more money in circulation = more money to the stock market!

Göran
Sweden

3:16 PM  
Blogger stefankarlsson said...

What part of the post are you refering to?

The part where I described how there is no credit crunch? That is hardly going to encourage more Fed rate cuts.

Or did you refer to the sharp decline in undistributed profits? That may make the Fed more disposed toward cutting rates, but at the same time it means that the fundamental value of stocks are going down. I don't see that as bullish for stocks.

4:20 PM  
Anonymous newson said...

re: absence of a credit crunch - i notice that the spread of 3mth libor/3mth t-bills continues to widen from its july, pre-crisis level. surely this is symptomatic of a growing problem. otherwise this re-pricing would have stabilized. thoughts?

2:37 PM  
Blogger stefankarlsson said...

I don't see any reason to worry about that, except to the extent that this reflects 3 month rates being absurdly low.

The banking sector keeps increasing lending at a far too high rate, making credit expansion and not any phantom credit crunch the problem.

5:02 PM  

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