Overview of Total U.S. Debt: It’s Massive
We all hear a lot of figures about rising debt from government to mortgage to investment leverage. No one seems to put together the whole picture – except for Steve Keen in Australia who has a great book called Debunking Economics.
We attempt to do that in this issue using a few of his charts as well. Chart 1
is the best overview of total debt in the U.S., not including unfunded liabilities for social security and health care benefits, which we will add in later. The U.S. is just over $52 trillion
in debt as of the end of 2008. The largest holder of that debt is not the government; it is first the financial institutions and then consumers – although the government will soon become the largest holder of debt. The present government debt totals about $8.6 trillion and is mostly federal at $6.4 trillion, but that does not include debt owned by government agencies like Social Security which would add about $4 trillion to bring the federal debt to 10.4 trillion (actually 11.2 trillion as of 4/30/09) and the total government (including state and local) to $12.6 trillion.
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Consumer debt in total is larger, at $13.7 trillion. $10.4 trillion is mortgage debt, $2.6 trillion is from credit cards and consumer credit (such as auto loans) and 0.7 trillion is other consumer. Financial debt is a whopping $17.2 trillion. That number includes all of the debt that banks, investment banks, and investment/brokerage firms borrow to leverage investments. Can you imagine that there is more debt used to leverage investments than all of the consumer debt in the entire economy? This is clearly a new variable that did not exist to the same degree in bubble booms like the 1920s. Also included is corporate debt, including commercial real estate, which amounts to $11 trillion. To put this debt into perspective, see Chart 2
, which shows these sectors and total debt as a percentage of GDP. For example, the $13.7 trillion consumer debt equals almost 100% of GDP, which was around $14 trillion in 2008. If we included the intragovernmental debt, the total debt to GDP ratio would be 400% instead of 371% and the federal debt alone would be close to 80% of GDP. You can see why the Fed and the Treasury were willing to go to any lengths to support the bank, investment bank, and insurance industries as they started to melt down. The greatest debt is in the financial sector. That is where the greatest leverage has been employed, often at rates as high as 30:1. No one wanted to see that deleveraging process continue and reveal how leveraged the system actually had become as a result of lack of regulation and realistic ratings systems. That is also why investment firms and hedge funds dumped commodities, emerging country stocks, and stocks so violently in late 2008. This was like diarrhea! They were so leveraged that they had to dump investments rapidly when values started to fall to avoid margin calls. The U.S. federal government came in and administered “monetary drugs” to suppress the process. However, we are still massively in debt. The deleveraging process will continue as the stimulus peaks and gets harder to administer without side effects such as a crashing dollar and/or rising long term interest rates. Ultimately, the economy will weaken again and stimulate the next round of debt defaults. Our best estimates are that the economy falls into the true “depression” stage between mid 2010 and mid 2011.
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If we look at mortgage loans, where default rates have been the highest until now, we see that the home mortgage sector is by far the largest (see Chart 3
). Consumer home mortgages are approximately $11 trillion by this chart, a little higher than the Federal Reserve figures. Multifamily mortgages to commercial owners are around $1 trillion, commercial real estate mortgages are around $2.5 trillion, and farm mortgages are negligible, at about $0.2 trillion. The prime loan crisis we discussed in the economic
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overview section ultimately will represent the greatest blow to the mortgage sector, which will force more “diarrhea” from unwinding leverage at investment/banking firms. Commercial real estate, including multifamily housing/apartments, is at $3.5 trillion. Thus, this sector is still substantial; it is now falling faster and harder than residential real estate, as Chart 4
shows. To decrease to year-2000 levels, as has residential real estate, commercial real estate would have to fall by nearly 50%. Thus, it is now about halfway down. This sector tends to follow unemployment, much like the prime loan mortgage sector, a coincident-to-lagging indicator. Even with the recovery in the making, commercial real estate is likely to continue to weaken into the summer – and then again in the second half of 2010 into mid-2011. The banks will continue to be hit by successive sectors of loan defaults. Each shock will trigger further deleveraging in the financial/investment sector, in which the greatest debt and leverage reside, and that in turn will trigger further crashes in various markets from stocks to real estate to commodities.
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In the 1930s, the deleveraging of private debt was beyond comprehension. Farm mortgages and loans were the biggest sector back then. Chart 5
shows how total private debt went from 270% of GDP in the early 1930s to only 50% after World War II. Now it is 290% with a much larger portion of financial sector debt. In the 1930s, government debt rose only modestly while private sector debt fell dramatically, which killed the banking system but left the country with much lower debt in aggregate despite the massive debt from World War II.
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Back then, the government did not come so rapidly and fully to the banking system’s rescue – partially because Keynesian economics was not as accepted back then (thank God) and small farmers didn’t have the political clout that the major financial institutions have today. It remains to be seen how much private debt will be written off in the coming years. However, one thing is for sure: the writeoff level will be much higher than most anticipate at this time!
We hope that our government debt as a percentage of GDP will not mirror what occurred in Japan (Chart 6
). As we showed in the last issue, Japanese government debt as a percentage of GDP has more than tripled since 1991 (these figures show 170% of GDP vs. 190% in our past charts, we will try to resolve that). Japan provided a massive stimulus that ultimately did little good other than easing the pain of the private sector deleveraging. U.S. public debt doubled from $5 trillion to $10 trillion between 2000 and 2008. We think it will easily double again in 5 years. By 2013, public debt will reach $20 - $25 trillion, with massive deficits in 2009, 2010, 2011, 2012, and 2013 that likely reach $3 trillion or more in the worst years like 2011 and 2012. Japan started their longterm housing bubble and generational crisis with public debt just over 50% of GDP, similar to the U.S. in 2008. Ultimately, public debt is likely to be near 200% by the early 2020s, when the next extended global boom is predicted to begin. Japanese private sector debt peaked at 123% in 1992 and then fell to 91% in 2005, a write-off of 32% of GDP. That debt reduction was minor compared with what occurred in the 1930s in the U.S. Currently, a private sector debt reduction such as this in the U.S. would wipe out $4.5 trillion in debt. We think $12 - $20 trillion in private debt write-offs is more likely given our much higher private debt ratios at 290% and a much deeper downturn. The bigger point is that Japan’s public debt offset the write-offs in private debt such that the economy didn’t lighten its debt load but merely transferred it. That is where the U.S. is headed unless we get smarter or unless the world markets prevent the government from endlessly stimulating the economy at the direct expense of our debt and future generations.
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To add insult to injury, the U.S. government has pledged at least $43 trillion in estimated unfunded liabilities for its social security and health care benefits to an aging generation (Chart 7
). The Peterson Foundation estimates these unfunded liabilities to be around $54 trillion and they are likely to be more accurate. All estimates for federal and state/local deficits will rise in the decade ahead, largely as a result of health care and pension liabilities. Even without the massive deleveraging and Baby Boom spending decline, our government systems would be in trouble in the next decade. When we add unfunded benefit liabilities to total U.S. debt, we get a current total of $95 to $106 trillion, or 680% to 760% of GDP, and up to $110 trillion or 785% with the intragovernment debt! Add to this the massive fall in household net worth ($13 trillion thus far and $25+ trillion ultimately). Clearly, the U.S. government cannot simply stimulate its way out of this staggering debt and leverage, even if it applies tens of trillions of dollars in stimulus. The Japanese were not able to do so with their stimulus monies; likewise, we will not be able to do so. The next crisis, whether it be geopolitical and/or another round of debt implosion, will lead to further shocks and deleveraging in the financial sector of debt. The “diarrhea” will continue, and the U.S. government will scramble again until the world and markets lose confidence in its ability to meet its exploding debt obligations. The recovery will gain momentum over the coming months, but make no mistake about it, it will not last past early to mid 2010!