The Great Bank Consolidation
four largest banks in the U.S.: Bank of America, JP Morgan Chase, Wells Fargo, and Citibank
Popularity: 6% [?]
If you enjoyed this post, make sure you subscribe to my RSS feed!
Posted by: admin Tags: Bank of America, banks, Citibank, consolidation, JP Morgan Chase, Wells Fargo
31 Comments to America’s Debt to Income Ratio as Compared with Other Countries
by Uncle B
On November 5, 2008 at 12:18 pm
When Obama gets America off of oil, and into the schools, studying science and technology, we will astound the world with progress in science and technologies all the world can share – even clean coal energy for China! The greatest country on earth, founded on the most modern principles ever, has elected an educated, intelligent and consulting man to help lead the way. He will set a path in his lifetime that will endure well into the next century and carry with it the American people. We will not need “World Government” we will develop “World Enlightenment” and live in co-operative and consultative fashion, save for the few through-backs among us, who will be promptly re-educated in the survival of the group over the individual will. China will gladly participate as will Russia and India in a world with a “common good” goal and the days of tiny warring empires for individual riches will be over, forever!
by Lab
On November 13, 2008 at 10:35 pm
Interesting article and good to highlight the downsides of euroeconomics. Uncle B – I can only assume your joking or high. Obama may be an excellent president, that remains to be seen, but he’s not the messiah.
by Ric
On November 14, 2008 at 10:16 am
UNcle B,
I’m afraid not all your colorful ballons will float. A lot will pop.
by jeflin
On November 15, 2008 at 2:28 am
US is fortunate to be in a position with the dollar acting as the world’s reserve currency and they can always print more money to service the interest payments of its high external debts.
Actually, UK is in a more dire situation compared to the US as its GDP is disproportionate to its debts.
by Jeff
On November 17, 2008 at 4:30 pm
Uncle B, your comment noticeably lacks the accompaniment of a big brass orchestra and the sound of thousands of marching feet…
by Silence Dogood
On November 17, 2008 at 8:54 pm
Planning for the worst yet hoping for the best is what the planet needs to be doing. The root of the global economy’s problem is that nobody knows the definition of accountability. Please discuss.
by bobniborg
On November 17, 2008 at 11:48 pm
and what about what is owed to the countries? doesnt Japan owe us a ton of money?
by AP
On November 18, 2008 at 1:05 am
What this article fails to mention is that a huge percent of our GDP is based in the retail sector. Our entire GDP is a house of cards, as we are now seeing. The biggest bubble of them all! As people stop spending money, retailers will go out of business, dragging our GDP down with them. Why do you think there is a big push to save the automotive industry? Automobiles a part of the largest retail sectors in this country!
by Enginerd
On November 24, 2008 at 2:45 pm
You’re comparing debt to GDP. This makes sense to ratio (i.e., the US government debt / GDP = 10.5 Bil / 13.8 Bil = 76%), but the subtraction is meaningless. The “per capita net worth” of a country would be total assets – total liabilities / # people. You’ve used GDP for assets. I don’t know what the total assets of the US are, I’ve looked but haven’t found a good source.
One could also look at debt servicing capabilities. In that case, it would be logical to take interest paid on all debt / GDP. That would tell you how much of GDP is required to service our debt. That number is more important I think, and more meaningful for an entity that doesn’t have any marketable assets but does have an income stream (like the US government).
by sveerhof
On November 24, 2008 at 3:34 pm
to bobniborg:
External debt is defined as money one country owes to other countries. So no, Japan does NOT owe us a ton of money.
by Cameron
On November 24, 2008 at 5:46 pm
I want to see our gdp vs internal and external debt.
by Dan
On November 24, 2008 at 6:08 pm
It’s misleading to distinguish between those European countries individually because economically they’re under the European Union. The UK might have a disproportionate amount of debt themselves; however, the UK is not really an autonomous economic zone and will, for it’s own good and the EU’s good, eventually adopt the Euro. I’m quite sure that, it’s largest economies notwithstanding, if the entire EU’s debt was related to it’s entire GDP (the largest in the world) I think the result would be about even.
by Jerome
On November 24, 2008 at 7:47 pm
Seconding Cameron
by todd
On November 25, 2008 at 12:34 am
Sorry uncle B, but obama wants to turn us into the UK, or pick your european country. Could it be that their huge socialist governments have spent them into these great fiscal holes they are in? It needs to be said that wheather obama or Mccain was elected, the change will still be the change out of your pocket, make no mistake. Don’t forget obama voted for the bailout and the leading senate democrats (frank, dodd) are perhaps the most responsible for its passing. We need serious reform, and believe it or not, that is not what obama will bring us.
by dcortesi
On November 25, 2008 at 12:49 am
Why does China drop off your charts after the first? Has it no external debt? If so, its per-capita “worth” should be considerable on chart 3.
by George
On November 25, 2008 at 1:56 am
The problem is much of the US GDP is in financial services rather than manufacturing.
Since the financial services industry was completely inflated our GDP is not really the number you give.
by Hans
On November 25, 2008 at 4:44 am
The UK national debt is actually £637.4 billion. The figure you quote includes future pension contributions and PFI’s… money they don’t have to pay now and won’t necessarily have to spend.
by Serafin
On November 25, 2008 at 5:10 am
Interesting.
Not true not false. Just creative.
Please review for some answers:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html
Ups, USA is at the bottom!!!
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2003rank.html
Again, not better.
More
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2078rank.html
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2087rank.html
by M
On November 25, 2008 at 6:13 am
Once you understand that all money is created out of thin air, through the borrowers will/need to borrow from commercial banks. Then you understand that money is created solely from debt. End of story.
When the money’s up and there’s a nation that can spend, the nation is seeing the effect of the borrowing out stretching the amount being paid back. That’s why Inflation only goes up.
What the OP doesn’t seem to realise is that if all the debt was paid back there would be no money what so ever, none, not because it seems that there would be no money but because for the last 400 years money has been made from debt. And don’t of course take my word for it, LOOKUP the famous STAMP quote, that say’s the same thing, or the chap who ran the World Bank, or the chap who ran the federal bank of America. They know, and they were open when they said.
With each cycle the debt must be expanded to create enough money to pay the initial plus interest. The only money available is the difference.
That’s why in business some companies have to fold, because someone has to pay the interest. If four car makers borrow a grand they must grasp for enough money out of the system to pay the initial then the interest, if three grab enough they live and the fourth goes bankrupt, if all four grab enough another part of someone else’s business must fold. There is never enough for all to be paid.
The European countries mentioned pay the debt back with every cycle, but the debt must grow each year or there would literally be no money.
Incidentally if one looks at ‘these socialist countries’ in Europe, one would note that all are in debt to the World Bank and therefore America and America’s hyper free market policies.
The UK has seen its utility bills prices rise by 120% in one year, these socialist pig dogs have privatised their entire infrastructure, and so even though gas and fuel are at lower prices than previously, utility bills are higher than ever, and the owners of these companies, Americans, are making record profits.
To fully understand money one needs to watch the 45 minute animation ‘Money As Debt’ by the Canadian PAUL GRIGNON, …
“Two gentlemen from the American Monetary Institute in the USA also saw the animation. One described my cartoon as “far and away the best explanation of fractional reserve banking” he had ever seen.”
Watch it then comment here… It’s a real eye opener.
by Enginerd is right
On November 25, 2008 at 9:17 pm
Enginerd is right – you cannot meaningfully take the difference of two quantities that are dimensionally dis-similar. GDP is dollars per year, whereas debt (external, internal, or otherwise) is dollars. As Enginerd notes, a RATIO is appropriate, not a difference.
by SpaceLister
On November 27, 2008 at 10:43 am
Good analysis. The media would never lead Americans to learn this lest it reduce the panick they recycle, exacerbating the problem.
by Curious Canuck
On November 27, 2008 at 10:41 pm
Where are the Canadian figures ?
We don’t do deficits, tried them and didn’t like them.
by Hugh
On November 30, 2008 at 6:25 pm
wow, im from britain and if i would have known that we were so massivly in debt i would have sold my house and gone to live on a raft in the sea.
does this take into account anywhere the huge sums of money owed to britain by other countries? it seems not, if you take that into account i think you will find that its a lot closer.
there seem to be quite a few people posting here that think that europe is run by a load of gulag loving comunists. unfortunatly thats a load of nonsence, we just have regulations, our politicians are responsible for their action and our children dont die from illnesses that a 3rd world country could easily deal with.
by Chip Marks
On December 17, 2008 at 9:40 am
This blog prompted me to do some research about current and historical aggregate debt (C + I + G) to GDP levels and its implications for forecasting the depth and length of the present recession. Below are some random musings regarding the above.
During the Great Depression we hit our previous peak in Total Debt to GDP at 2.6 to 1. My gut feeling is that this ratio probably was exacerbated because GDP contracted by 20% or so during the Great Depression, which made the ratio look much worse than it might have on a stabilized basis; so, let’s say the number should have peaked at only 2.1 to 1 had the economy not derailed.
Today the Total US Debt is about 53 Trillion and GDP is about 14.3T; therefore, the ratio is now something like 3.7 to 1 (before accounting for the slow down in the current US economy).
So there you have it: 2.1 to 1 (pre-Great Depression) versus 3.7 to 1 (Today). This is really terrible, no doubt.
The good news is that our economy in 2009 is so much more robust, diverse and stable and therefore able to handle vastly higher leverage ratios than in 1935. Ergo, this analysis probably defies an apples to apples to comparison. (Btw, it is nearly impossible to obtain similar numbers on other countries’ current and historical total debt burdens relative to their GDP numbers…so, the US may win an award for transparency…although, unfortunately, it’s likely to be a boobie prize.)
Notwithstanding, this disturbing revelation about the absolute level of US Total Debt to GDP begs a slew of pertinent questions such as (1) what does this ratio really mean?, (2) why is it relevant? and (3) is there some other metric that is more relevant? And, perhaps most importantly, (4) in the calculation of national levels of debt, what is the level of net EXTERNAL debt, i.e., the amount of debt owed to other sovereigns and non-US creditors in general?
1: Debt to GDP
Basically, GDP is a measure of income. In fact, before it was called GNP it was sometimes referred to as Gross National Income. Therefore, in order to assess the measure of risk associated with a run up in debt it is rational to get a handle on a party’s ability to service it.
2: Relevance of Ratios
At the current level of US Public Debt (only a mere 10.5T) to GNP, there seems to be no particular reason to be very afraid…none at all. At 0.73 to 1 (or even at 0.86 to 1 given another $2T of Federal deficits and assuming we get NO fixed asset creation, e.g., bridges, tunnels, aircraft carriers, etc. and NO financial asset recoveries, e.g., TARP bank preferred stock redemptions), this amount of indebtedness appears absurdly manageable to our economy. If we turn this ratio into something more familiar to businessmen, we see that this degree of leverage is indeed low. For instance, if GDP were a proxy for a company’s EBITDA, for USA Inc., then USA Inc. is levered to the extent of 0.73x EBITDA in 2008 and 0.86x EBITDA in 2010. If we add to this number another 2.5T to account for all state and local government debt in 2008, which should rise to 3T by 2010, the ratios still seem manageable at 0.91x EBITDA and and 0.93x EBITDA, respectively.
From a commercial real estate lender’s perspective we might look at these leverage ratios in terms of debt service coverage. The Federal DSC ratio is currently 14.3T over 455B (2008) or 31.42 times…wow, no problem!!! Correct? With 2T of additional Federal deficits, by 2010 the number hardly budges to 27 times coverage (assuming similar interest rates). Adding the state and local debts, for 2008 the coverage is 25.77 times and by 2010 the number is 24.97 times. So, if you, as a potential US creditor, were evaluating USA Inc. as a LBO (or an office building), I would bet Goldman’s credit committee be pretty happy to lend to this customer for quite some time.
The leverage issue becomes much worse, however, once you heap all of the other debt owed by US consumers and businesses. Then the numbers change pretty dramatically. To the best I can determine, the aggregate of all indebtedness in the US (from the consumer to Uncle Sam) is about $53T…this changes the ratios as shown below:
2008 Total Debt to EBITDA is 3.7 times
2008 DSC Ratio is 3.8 times (assuming 8%+/- on 40T of all non-governmental debt)
Even this doesn’t seem fatal when viewed through the lens of a businessman. In fact, by 2010, the numbers actually get better in spite of the deficits because the amount of debt “destruction” that is highly likely in the consumer and corporate sectors, which will exceed the incremental deficits run up by all government sectors.
2010 Total Debt to EBITDA is 3.5 times (assuming no growth in GDP, 3T in Federal, state and local government deficits, and 6T in debt cancellation in the consumer and business sectors).
2010 DSC Ratio is 4.1 times
3: Is there a better metric?
Perhaps a National Debt to Equity Ratio based on an annual determination of National Net Wealth would be a better gauge. Before the current financial crisis, I estimate the US possessed about 110T of tangible assets (commercial real estate, infrastructure (but not valued at replacement cost), trains, aircraft, homes, etc.) and financial assets. Of these assets, as stated above, 53T represents the aggregate debt encumbrance from C + I + G, which leaves a pre-crisis Debt to Equity Ratio of 0.93 to 1 based on a National Wealth of 57T.
Here is where it gets a little scary…assuming that by 2010 there was an decrease in Total Debt of 3T (the sum of old debt cancellations plus new government deficits), but National Assets declined by 20%, then our National Wealth plummets from 57T to 35T…a stunning 39% decline. Were this to occur our National Debt to Equity Ratio increases to 1.42 to 1, which is a hugely material drop in our national credit capacity and worthiness…probably the equivalent to a drop from AAA to Baa from a Moody’s or S&P perspective.
4. Is there a better way to look at this?
Probably, yes. One of the big differences between our Government debt and the debt of other countries is that [I suspect] a much smaller percentage of our debt is owned by foreigners. This is debt is referred to by economists as External Debt. Currently, only 30% (tops!) of our 10.5T of Federal Government debt, or 3.2T, is owned by other nations or foreigners. Add to this, say, 20% of the remaining 42.5T of our non-government debt being owned by foreigners (i.e., 8.5 T, then the total US Debt in foreign hands is only about 11.7T. Now, here comes the leap of faith. If one assumes that debt America owns to Americans cancels itself out [just like bilateral Credit Default Swap liabilities between financial institutions are canceled out in bankruptcy (an under-appreciated fact that reduces aggregate CDS exposure to the financial markets by nearly 85%)], then our “External” Debt to Equity ratio post-crisis is only 11.7T to 35T or 0.33 to 1, which is represents a solid AAA credit.
What does this mean? This means there might be a wealth transfer from the US investor class to the US non-investor class to the extent massive debt cancellation is required to solve our country’s financial dilemma. In other words, if the wealthiest 5% of Americans are willing to take a huge financial hickey, we are still in good shape.
5. Then where’s the rub?
There are still another 50T of social security, pension, medicare and veteran’s benefits to be paid out over the next 30 years? At PV this is probably only 20T in 2008 dollars. Still, it’s a big, big number that must be whittled down. Although a possible silver lining here — if one can call it a silver lining with everyone’s savings being recently wiped out — is that most US workers will now have to remain in the work place much longer, sadly, to a point in time much closer to their actual life span, thereby requiring them to pay into social security and medicare longer, and stay healthier in order to work so as to support themselves, which will serve to reduce the amount of their public sector draw downs, thus reducing the looming “twin towers” of entitlement deficits…perhaps massively.
Anyway, this is all b.s. to some extent but it’s also good food for thought. The big problem is “C” in the master economic equation. The Consumer is 71% of GDP and its indebtedness throws all the ratios deep into the red zone. Consequently, this is different than past recessions. This is the lens one needs to continually use to watch this monster because, as Yogi Berra said (or should have said), “the future sure ain’t what it used to be!”
by Ken T
On December 22, 2008 at 7:29 pm
Great blog. I’ve been looking at some of this stuff for quite a while now, from a US point of view. I’m actually quite concerned that our world economy has become so dependent on governmental deficit spending that some day in the future it is going to collapse like the Ponzi scheme it is starting to resemble.
I knot the US is not the worst offender here in terms of percent of GDP, but in terms of dollars we are way out in the lead. We may not be the first economy to buckle under the weight of debt, but once they start buckling, we’re going to have a problem too.
by John
On January 21, 2009 at 1:41 pm
You are using data incorrectly. The “external” debt, as compiled by the BIS, OECD and World Bank is only that debt which is denominated in foreign currencies. The U.S.A. debt is denominated in dollars. Thus, only a very small percent of the total American debt appears in the statistics you have quoted. If dollar denominated debt were included, the figures would really be horrendous. The U.S. is, by far, the most indebted nation on earth when total debt is considered and taken down to the per capita basis.
by Fact Checker
On January 26, 2009 at 6:09 pm
Since the US dollar is effectively the world reserve currency calculating external debt is rather a strange process – external dollar denominated debt becomes internal debt, which is rather a different matter when it comes to sustainability which is really the important factor.
The 53T number quite is quite specious. It is generated by addition of Social Security and Medicare imputed obligations; this money has not actually been spent by the government and it is very likely that there will be substantial changes in these programs in the next few years which significant ameliorate the issue.
by Chip Marks
On February 2, 2009 at 5:23 pm
Guys
You can call it “external” or “owned by non-US entities” but the number is the number and and all denominated in USD. The 53T figure is also a solid number for aggregate indebtedness. It does NOT include any allowances for discounted unfunded SS or Medicare liabilities. Indeed, the total US debt figure, whether in the aggregate or per capita, is stupidly huge. As I noted in the fourth para of my piece, we are now 3.7x GDP…and that’s totally uncharted territory. Also, with respect to external vs. internal debt…and this is small change, but it’s marginally better to have our debt be internally owned/owed, which it is, despite the talking heads claim to contrary…their claims lack context. What is most pressing now is: (1) finding a floor to asset prices — housing and non-government securities, especially highly rated ABS, (2) stabilizing the banking system, and (3) learning how our economy — and the global economy too — will cope with 1T less annual spending (or, conversely, 1T more annual savings) emanating from the American Consumer as “C” increases it’s annual savings rate from -3% (2007) to +7% (2010). Note: we are now at about +4%, up 7% in about 14 months. My last point, point number 3, is a real paradigm shifter for huge swaths of the global economy. Seems like a little thing but it has gargantuan consequences for everyone….from to American software manufacturers to Chinese toy makers to Japanese electronics companies. The American Consumer is the swizzle stick that stirs the world’s economic cocktail…and it ain’t buying anymore! Be scared of this ahead of all other things because it’s the one, true game changer. C’s increased savings will cure most of the other ills plaguing us in due time, as will a massive amount of debt destruction that has already occurred or is in the process of disappearing under the spate of write offs, foreclosures and bankruptcies to come. However, the change in the behavior of the American Consumer is altering the fundamental complexion global businesses.
All for now,
Chip Marks
by Frank Dean
On March 24, 2009 at 7:31 pm
As others have noted, there is some conceptual confusion here. Unfortunately, some of your commenters have only added to the confusion.
If you look at the CIA data, you will note that the external debt for the entire world is:
World $ 54,610,000,000,000 31 December 2008 est.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2079rank.html
Now, since the world doesn’t get loans from Mars, obviously external debt reported by the CIA is GROSS debt. Net external debt for the planet as a whole has to be zero.
To understand a country’s debt position, external assets also need to be counted. The CIA World Fact Book doesn’t provide this information.
They do include a portion of external assets, namely “Stock of direct foreign investment – abroad”. This leaves out portfolio investment abroad, among other items.
World 16,220,000,000,000.00 2008 est.
IMF data may help identify other components.
I hope this helps and leads to further analysis.
by K T Cat
On November 14, 2009 at 9:20 am
The information is incomplete. As others have noted, GDP is annual income for the nation and therefore a measurement of how able you are to service your debt. Interest rates play a role here, too. That is, if you make $50,000 a year, you can service $150,000 of debt at 4.5% much easier than $150,000 at 29.9%.
Of more interest to me is the return on investment for this debt. If I borrow money for my business, I want to see the ROI for the debt I’m servicing. As the ROI diminishes with more debt, I should borrow less, not more. It seems obvious to me that we’ve reached the point where huge new borrowing results in miniscule changes in GDP, much like the endless spending increases in education have resulted in no changes in test scores.
by K T Cat
On November 14, 2009 at 9:21 am
Addendum – right now, those Federal debts are really interest-only loans with no due date. That plays a role in the analogy as well. If all I have to do is service the interest on my debt, I can cover a much larger loan than I could if I had 5 years to pay the whole thing off.