Debts in Many Forms

I had the day off from work for some dental attention. I think work is more fun. The air up in the northeast today has the cool, fall smell to it and I think I am going to throw up if I go back outside.

Reader Catch
Loyal reader Kevin alerted me to Mr. Practicals latest missive. I would like to say that the new format over at Minyanville (where Mr. Practical usually posts) takes forever to load, is hard to find the new articles, and is just too busy for my tastes. Just my 2 cents.

In any case, Mr. Practical offers another informative take on our present state of affairs, and while you should read the whole thing, I will temp you with this snippet:

When the market realizes that the Fed can't create inflation (a full monetization of the majority of debt; something that would make even Ben blink), it'll see that the S&P 500 is really trading at 20 times earnings that are not growing.

Always a great read.

It is not Even Halloween Yet
It is well known that Economic Disconnect is of the bearish bent as it relates to stocks and government intervention. I am also not a believer that we need the big banks to be saved so that we can survive at more than a neolithic standard of subsistence using rocks and growing potatoes (until the Monolith arrives of course). Still, I would say I am more of a "gloomer" than a "doomer".

Today I read two articles, both my writers I respect at the highest level, that scared me. I would not say they were terrifying by their content, but through their logical explanation of how some scenarios may unfold.

First up was a Market Ticker offering by Karl Denninger today which highlighted the very real possibility of an outright deflationary collapse should the problems of bad debt not be addressed. There are charts galore and plenty of math to support his contentions. Read at your own risk!

The second item comes from Jesse's Cafe, and to me it is more scary because it follows my own line of thinking in many ways. Jesse argues that the dollar can and will break down. The author also covers a not so distant in history purposeful currency devaluation (Russia 1998) and how it may apply to the US should we have to go that route. An interesting read.

Debts in Many Forms
I came across yet another article today that focused on looking at external debt by the good old method of Debt/GDP ratio. The piece on Clusterstock was titled:
If We're Screwed By Our Debt, Then So Is The Rest Of The World
The author lets us know that:

The Economist's latest debt clock, highlighted by Lawrence earlier today, makes it clear that while the US debt is a huge problem, most of the industrialized world sits in a similar boat.
According to The Economist's 2010 forecast data, the USA's debt to GDP ratio will indeed be high, though it will be similar to that of Canada, Spain, the UK, and Germany. It will be lower than that of France, Italy, and Japan.

And this sure sounds great! Why all the tomfoolery about debt when it really is no big deal, and besides, every body's doing it.

So first stop is the external (total public and private debt) debt held by countries the world over, kindly provided by Wikipedia (and yes I have a job).
List of countries by external debt
The table is far too long to include here, but it offers both the total amount of debt as well as the debt/GDP ratio for every country in the world.

So just looking at Debt/GDP ratios, here are some that matter:
United States: 95%
Canada: 60%
Spain: 151%
UK: 375%
Germany: 160%

The UK print of 350% is astounding.

The champions:
Ireland: 961%
Monaco: 1844%

So judged on this basis alone, then yes, the USA does not look like it has debt problems.

Lets take a look at absolute debt number now (all amounts in dollars, and I rounded).
The World: as of 2008, $54 Trillion dollars of external debt
United States: $14 trillion
United Kingdom: $13 Trillion
So here we see that $27 Trillion of the worlds $54 Trillion of debt is held by just two countries. That is 50% of it all belongs to us and the Brits.

Compare with a country like China, with a debt/GDP ratio of 5%, and more importantly they hold only $363 Billion in debt. That's nothing! That is a small stimulus bill here, or the Quantitative Easing cash burn. No sweat!

What I am trying to point out is that the debt/GDP ratio is fine, but the absolute debt needs to be considered as well.

Moving away from these set numbers, one must consider the quality of debt as well. If all outstanding consumer debts (mortgage, credit cards, car loans) are going to be paid back in full, I can agree that we are not great shape, but not terrible shape to be sure.

Too bad that is not the case.

We were just witness to the biggest credit driven bubble in recorded history. Many countries participated in the real estate bonanza of debt fueled growth. You already know all the other ways credit was leveraged form home price extraction and plowed into unproductive uses. Now that home prices have fallen and will continue to do so, the quality of the debt still on the books tumbles downhill fast.

Add to this all the notional instruments (derivatives, CDO's) written against this debt and I think a far more troubling picture emerges about all things finance. Nobody really knows what number to assign to such things.

Putting it all together, we must understand that the US economy is a service based economy. We make very little by way of manufacturing, and our export income cannot support the economy in any way. We must make exotic financial instruments and sell them to the world at huge premiums to bring the money in. We need banks to lend money aggressively to any and all to allow purchases of big ticket items like cars and homes. In turn, these items fuel the service economy, by, well, servicing them. The US must eat out frequently, go to the movies, and buy video games to make the show go on. This is our service economy.

With unemployment at almost 10%, consumer spending trending down for the first time in over 20 years, the savings rate going up, and foreign players with money repudiating US financial engineering products, it is not as easy to feel comforted by a lower than our peers debt/GDP ratio.

Have a good night.