Dear,
Some months ago, we saw the US economy confronting a real possibility of default as the US representatives disagreed on the terms of raising the nation's debt limit, with a number of economic consequences, like the US debt rating or rating perspective being downgraded by several rating agencies.
http://sapbank.blogspot.com/2013/10/i-wish-it-were-your-decision-mr.html
On October 16, the Senate passed the Continuing Appropriations Act, 2014, suspending the debt ceiling until February 7, 2014 which “apparently” solved the problem.
From this perspective, it seems we’re confronting a political issue, impacting the biggest world’s economy.
Unfortunately not, we’re going to see that politics have nothing to do with this and the problem is purely economic.
The below graph shows that US Federal debt has risen from 35% to nearly 75% of the US GDP in the last 10 years, and particularly since the starting of the Financial Crisis in 2008.
http://en.wikipedia.org/wiki/File:FederalDebt1940to2012.svg
And if we look at the evolution of the total debt of the US economy, we see how it has reached 350% of the US GDP with a very significant contribution of the Financial Sector, whose debt has speeded up since 1980’s deregulation.
http://upload.wikimedia.org/wikipedia/commons/e/e0/Components-of-total-US-debt.jpg
Today US economy presents an uncontrollable deficit and an unsustainable debt, growing independently of the government party, republican or democrat. Once again, this is not a political problem but an economic one.
This growing debt has fueled economic growth; this is logical as the current economic model requires wasting capital for generating economic growth.
As debt is a Financial Asset (Liability for the counterpart), growing debt means oversizing the Financial System. The U.S. finance industry comprised 10% of total non-farm business profits in 1947, but it grew to 50% by 2010. Over the same period, finance industry income as a proportion of GDP rose from 2.5% to 7.5%, and the finance industry's proportion of all corporate income rose from 10% to 20%.
This wouldn't be a problem if debt could grow indefinitely, but the question is; is that even possible?
Since the starting of the financial crisis, the FED has injected 2.3 Trillion Dollars in the economy. This month, as “Tapering” has reduced the liquidity injections from 85 to 75 billion dollars a month, a storm has been triggered in the Forex, Stock and Commodity markets.
http://www.telegraph.co.uk/finance/business-news-markets-live/10603717/Business-news-and-markets-as-it-happened-January-29-2014.html
What will be the impact in the Financial System when the Financial Markets decide to open their eyes and burst this huge debt bubble, raising the interest rates?
We saw it already in 2008, as the Financial Markets decided to not believe that real estate prices could grow indefinitely, interest rates of the CDO’s raise, and the world’s financial system was put on the edge of collapse.
The alternative at the time was bailing out the Financial System with public funds, collateralizing their debt and giving new and fresh guarantees to the debt holders.
At the time US Public debt was 5 trillion USD (36% of the GDP) and today it is more than 12 trillion USD (73% of the GDP). What’s the alternative now, who is going to rescue the Financial System if the interest rates start to rise?
When in the great movie “Too Big to Fail” http://www.imdb.com/title/tt1742683/ Hank Paulson asks Ben Bernanke for reducing the capital requirements of Bank of America so they can merge with Lehmann Brothers, Ben Bernanke replies.
“You want me to allow them to raise their leverage so they can buy a bank that's about to fail because it was overleveraged?”
Ok, now we have the US Central Bank overleveraged, what are we going to do about it?
Looking forward to read your opinions.
Kindest Regards,
Ferran.
Some months ago, we saw the US economy confronting a real possibility of default as the US representatives disagreed on the terms of raising the nation's debt limit, with a number of economic consequences, like the US debt rating or rating perspective being downgraded by several rating agencies.
http://sapbank.blogspot.com/2013/10/i-wish-it-were-your-decision-mr.html
On October 16, the Senate passed the Continuing Appropriations Act, 2014, suspending the debt ceiling until February 7, 2014 which “apparently” solved the problem.
From this perspective, it seems we’re confronting a political issue, impacting the biggest world’s economy.
Unfortunately not, we’re going to see that politics have nothing to do with this and the problem is purely economic.
The below graph shows that US Federal debt has risen from 35% to nearly 75% of the US GDP in the last 10 years, and particularly since the starting of the Financial Crisis in 2008.
http://en.wikipedia.org/wiki/File:FederalDebt1940to2012.svg
And if we look at the evolution of the total debt of the US economy, we see how it has reached 350% of the US GDP with a very significant contribution of the Financial Sector, whose debt has speeded up since 1980’s deregulation.
http://upload.wikimedia.org/wikipedia/commons/e/e0/Components-of-total-US-debt.jpg
Today US economy presents an uncontrollable deficit and an unsustainable debt, growing independently of the government party, republican or democrat. Once again, this is not a political problem but an economic one.
This growing debt has fueled economic growth; this is logical as the current economic model requires wasting capital for generating economic growth.
As debt is a Financial Asset (Liability for the counterpart), growing debt means oversizing the Financial System. The U.S. finance industry comprised 10% of total non-farm business profits in 1947, but it grew to 50% by 2010. Over the same period, finance industry income as a proportion of GDP rose from 2.5% to 7.5%, and the finance industry's proportion of all corporate income rose from 10% to 20%.
This wouldn't be a problem if debt could grow indefinitely, but the question is; is that even possible?
Since the starting of the financial crisis, the FED has injected 2.3 Trillion Dollars in the economy. This month, as “Tapering” has reduced the liquidity injections from 85 to 75 billion dollars a month, a storm has been triggered in the Forex, Stock and Commodity markets.
http://www.telegraph.co.uk/finance/business-news-markets-live/10603717/Business-news-and-markets-as-it-happened-January-29-2014.html
What will be the impact in the Financial System when the Financial Markets decide to open their eyes and burst this huge debt bubble, raising the interest rates?
We saw it already in 2008, as the Financial Markets decided to not believe that real estate prices could grow indefinitely, interest rates of the CDO’s raise, and the world’s financial system was put on the edge of collapse.
The alternative at the time was bailing out the Financial System with public funds, collateralizing their debt and giving new and fresh guarantees to the debt holders.
At the time US Public debt was 5 trillion USD (36% of the GDP) and today it is more than 12 trillion USD (73% of the GDP). What’s the alternative now, who is going to rescue the Financial System if the interest rates start to rise?
When in the great movie “Too Big to Fail” http://www.imdb.com/title/tt1742683/ Hank Paulson asks Ben Bernanke for reducing the capital requirements of Bank of America so they can merge with Lehmann Brothers, Ben Bernanke replies.
“You want me to allow them to raise their leverage so they can buy a bank that's about to fail because it was overleveraged?”
Ok, now we have the US Central Bank overleveraged, what are we going to do about it?
Looking forward to read your opinions.
Kindest Regards,
Ferran.
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