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💳 Global Debt Slavery
« on: March 11, 2019, 02:26:00 AM »
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State of the World’s Biggest Debt Slaves: Americans Wimp Out in 11th Place

by Wolf Richter • Mar 9, 2019 • 119 Comments • Email to a friend   
And where do Chinese consumers fit in?

Americans are infamous for their eagerness to spend money they don’t have. A whole industry has grown up around making that happen, from payday lenders to the government that guarantees or insures a large portion of the mortgages so that lenders and investors don’t have to carry the risk. Consumer debt is turned into asset-backed securities, from government-guaranteed mortgage-backed securities to subprime-auto-loan-backed securities whose top tranches carry an AA-rating or even a AAA-rating.

It all worked out. But then came the moment when Americans deleveraged, mostly by defaulting on their debts, particularly their mortgage debts, which triggered the US Financial Crisis and then the Global Financial Crisis. The world should have learned a lesson, but no. Who has learned a lesson? American consumers whose household debt in relationship to US GDP has continued to decline.

US household debt inched down to 76.4% of GDP in the third quarter 2018, according to the newest batch of global data from the Bank for International Settlements. This was the lowest level since 2002. It put Americans in the inexplicably wimpy, and for the finance sector, insufferable 11th place:

Even at the peak just before the Financial Crisis, American household debt never quite reached 100% of GDP. This is important as we move on to the winners on this list.

UK households also deleveraged after the Financial Crisis, with the UK banking system kept upright only by massive bailouts and the nationalization of some banks. But recently, household debt as percent of GDP has been ticking up, reaching 86.5%, which put the UK into 10th place:

This ratio is a function of two factors: Household debt measured in local currency and the size of the economy measured by nominal local-currency GDP. This ratio cancels out inflation. When household debt grows more slowly than nominal GDP, the ratio declines. When household debt grows faster than GDP, the ratio increases, and consumers are becoming an ever-riskier part of the financial system.

Then there is Sweden. Swedish households used to be notoriously debt-averse, like German households, and their household-debt-to-GDP ratio remained below 50% until 2001. But then someone figured out how to fix that, and suddenly, Swedes went on a phenomenal borrowing binge, and the household-debt-to-GDP ratio nearly doubled over those years to 88.5%, earning them the 9th place in the debt-slave competition:

On this list of winners, the charts are on the same scale, and that’s why there is so much white space above American, British, and Swedish consumers. Consumers that did not do their job in the early part of this century and did not borrow enough fell off the chart entirely, which is a fate that afflicted the Swedes until 2002.

Germans, with a household-debt-to-GDP ratio of merely 52.7%, still, after all these years, would barely register on the bottom of this chart. And Austrians with a ratio of 48.7% wouldn’t even be on the chart. On the other hand, the white space in the charts gets filled in by the winners on this list.

New Zealand, with a household-debt-to-GDP ratio of 93.3% and in eighth place, has been helped along by a property bubble that has been inflating mortgage debts:

Economists love debt slaves.

Household borrowing converts mostly into household spending, which is the biggest contributor to GDP. So economists adore growing household debt because it means growing GDP, and the economic system moves heaven and earth to get consumers to borrow more so that they buy more and add to GDP. And these households become enslaved to their debts and their financiers.

Korean households have made amazing progress becoming debt slaves, now closing in on the glorious 100% line, with household-debt-to-GDP at 96.9%. At the current pace, a couple more years, and they’ll have arrived!

When household borrowing outruns GDP growth for long enough and reaches certain levels, things can get iffy, as US household debt has shown with its starring role in the Financial Crisis though it never even exceeded 100% of GDP. So below are all the countries whose household-debt-to-GDP ratio now exceeds 100%.

Canadian households have long been making headlines with their top-notch borrowing binge to support their top-notch housing bubble. By other debt measures, such as debt-to-disposable income, Canadian and Australian households have been battling over first place for years. In the debt-to-GDP measure, Canadian households are in a still respectable 6th place: This debt will pose some issues as the majestic housing bubbles in top metros are now deflating:

Norwegian households have bravely taken their household-debt-to-GDP ratio from 81% in 2012 to 101% in 2016. But this has since hit a ceiling as even regulators began to fret about the steep ascent, and a down-tick has been observed in the third quarter:

Households in the Netherlands were track to be undisputed king of the hill, with a debt-to-GDP ratio nearing 120%, in part because GDP plunged during the Financial Crisis, which caused the spike in the debt-to-GDP ratio and the collapse of some banks. During the subsequent euro debt crisis, GDP declined again. But since then, the economy has grown, and households have curtailed their borrowing, edging away from the brink, and in the process getting demoted to 4th place:

Households in Denmark exploded their debt-to-GDP ratio from an already high 90% in 2003 to nearly 140% during the euro debt crisis as the country went through a blistering recession. GDP still hasn’t recovered to the level before the debt crisis, as households are maxed out and have been whittling down their debts, but at 116.7% of GDP, the household-debt-to-GDP ratio lands them on 3rd place on the list of the biggest debt slaves in the world:

Australian households have been caught up in one of the biggest housing bubbles in the world, financed by debt. The household-debt-to-GDP ratio more than doubled between 1997 and 2016. Now that the housing bubble is deflating at an astounding pace, the debt ratio has begun to tick down, but remains in second place:

And the #1 debt slaves in the world: Swiss households. This is one of the reasons interest-rate repression remains the rule in Switzerland. The Swiss National Bank has imposed its negative interest rate policy on the country for years, and there have been stories of mortgages with 0% and even negative interest rates. There is simply too much household debt, and no one wants to see it blow up. Hence the negative interest rate policy. But this policy encourages more household borrowing, and the cycle will continue until it can’t:

The most explosive household debt: China

China is in a category of its own. And so the chart has a different scale. The household-debt-to-GDP ratio is still in the German neighborhood of just above 50%, but it has quintupled in the 12 years since the BIS data began in 2006. The idea that Chinese households are paying cash to sustain their housing bubble or to buy cars has become a bad joke: Chinese consumers have discovered debt, and they are eagerly turning into debt slaves:

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  119 comments for “State of the World’s Biggest Debt Slaves: Americans Wimp Out in 11th Place”

    Mar 9, 2019 at 3:35 am

    Switzerland has one of the lowest home ownership rates in the developed world around 44% . The whole country is under rent-control for residential dwellings, meaning that the annual rent cannot exceed a certain percentage of total investment. They are debt slaves but not to their own houses. In contrast, Norway has about an 82% home ownership rate. Quite a difference in the housing markets but both household debt ratios are over 100%. Hard to understand what the Swiss are spending their debt on.
        Mar 9, 2019 at 12:49 pm

        @cesky Yet housing in Switzerland is very expensive. What’s the catch?
            Mar 9, 2019 at 4:36 pm

            There is a 100% capital gains tax in the first years of ownership to stop buyers from quickly selling houses. Swiss law is very strict about the rules of buying and selling because it’s a very small realty market. The longer you live in your house the less capital gains taxes you have to pay on your profits.
                Mar 9, 2019 at 5:57 pm

                Foreigners are very limited in their ability to buy real estate in Switzerland, too. Both factors should act to dampen prices by discouraging speculation and money laundering in real estate.
                Mar 10, 2019 at 10:03 am

                Does foreigners include EU citizens?
                Mar 10, 2019 at 3:05 pm

                @char According to, which is an official site of the swiss government, EU/EFTA nationals are not concerned but you have to live in the country. That still excludes a lot of money.
        Mar 9, 2019 at 5:06 pm

        I am very dubious about the direction of Swiss monetary policy, and in fact fear it may be a trap for Swiss society – this is not the Switzerland I know. Leaving that aside, and it is a very big aside, maybe the experience of Switzerland is an example of some of the limits of being a wealthy and successful service economy, particularly as financial centre in a world of wider monetary expasion that has put the sf and hence the economy under different pressures.

        There are three articles I have been reading that give a better description from various sides, but you will have to piece the picture together for yourself. As only one link goes straight through in a post, the other two you will have to add three ws.

        Explains that stats (privacy remember) are lacking, and how socialistic moves are at work in terms of debt relief.

        Looks at how Swiss savings and real estate purchase interact.

        Focuses on consumer debt level.

        You will see an apparent contradiction in two sets of figures in those – Swiss save a high amount of disposable income, yet debt as % of disposable income is high, I leave anyone to figure out for themselves properly how that is.

        Low home ownership is primarily a question of prices in my opinion, it is an expensive market with higher lending standards, and as with Germany laws increase incentive to rent.
            Mar 10, 2019 at 4:26 am

            I’m Swiss, and here is my take on it: I have a mortgage at 1.15%, and I can invest in funds and other instruments with better returns than that. Moreover, my interest payments are tax-deductible.

            My savings therefore don’t go into paying back my house, resulting in having both high debt and high savings.
            Professor Plumb
            Mar 10, 2019 at 4:27 am

            With ultra low interest rates on mortgages since 2008, the home ownership rate has increased markedly, primarily the purchase of condominiums. In the 1990’s, the home ownership rate was around 36%. Now 44%! Lots of million dollar condos that could be interest only??? Individuals that I know personally have opted to take out interest only and at the same time save what they would have used to reduce the principal. So the interesting question is the rate at which new debt has been taken on and how much current interest the typical Swiss home/condo owner has to pay relative to their relatively high income( minimum wage is approaching $20 per hour). The high debt burden would become problematic if interest rates reverted back to the levels that prevailed in the 1990’s ( 3-4%).
                Mar 10, 2019 at 7:28 am

                I think you are along the right line . I don’t know the methodology used to calculate savings rate in those articles , but have seen principal repayment on assets counted in as savings at other times, in which case what you are saying adds up further. I would have to start looking up debt/disposable income ratio over time, and if possible mortgage vs consumer of that, but the impression overall, if principal payment counts as savings, would be higher debt for property purchase plus higher savings in its repayment, all coming out of a high disposable income. The Swiss property market and its mortgage structure is quite unique


                So the level of existing debt will be naturally high given the exceedingly long amortisation accepted and used.
                Mar 10, 2019 at 11:29 am

                I expect wage inflation before a rise in interest rates so it is not that problematic.
            Mar 10, 2019 at 11:23 am

            The question of why low/high home ownership has two big answers. Rural or urban and state policy. Price is not important
                Mar 10, 2019 at 12:20 pm

                Thanks, and to B – these are the kinds of small details that often even local people do not know of their own market, let alone of foreign ones. I know in Switzerland in some remoter areas there are state financial incentives to encourage repopulation.

                It is still possible to put it all down to price, it depends how you choose to look at it – eg. policy affects price which makes renting/ownership more or less attractive. That people choose not to buy vs. are unable to buy is quite a thin line that is hard to place when there are many variables, including state policy, at work. I won’t guess, but for sure some will think prices are too high while others will think it is soundly managed and that they should be at that level. I won’t argue either way, as that is for the participants to argue out themselves.
        Mar 10, 2019 at 11:48 am

        #1 Lets not confuse actual home ownership – no mortgage – with debt slave / mortgage obligation.

        When I get asked, “Do u own ur own home?”
        I reply, “well, I have an obligation…”

        And the obligation never ends with HOA fees and property taxes.
    Mar 9, 2019 at 4:54 am

    I guess it really depends on how you quantify national GDP, take Ireland for example debt to GDP of 43.8% in 2018 – you must be kidding.

    as per – the 2016 Irish GDP explosion farce.

    Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, Bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham.

    It’s large corporations transferring assets and IP patents into Ireland – with no real connection to employment – and then booking it as real investment, for tax purposes.

    They don’t call it “Leprechaun economics” for nothing
        Mar 10, 2019 at 11:33 am

        GDP is a reasonable number to use for almost every country except Ireland.
    Jos Oskam
    Mar 9, 2019 at 5:46 am

    I am a Dutchman currently living in France. Having spent the majority of my years in the Netherlands before emigrating, I guess that I can contribute something to this discussion without immediately feeling the need to defend myself or my country of birth.

    Statistics like “household debt to GDP” can be extremely misleading if they are not placed in context. In this case, it is not only the amount of debt in itself, but also the quality of the debt that must be taken into account. It makes quite a difference if a household goes in hock to pay for a new car, a boat and a nice holiday, or takes out a mortgage to finance the house they intend to get old in. In the former case the debt is not balanced by serious assets, in the latter case it is.

    While the naked debt figures for the Netherlands look awful in this article, in reality a significant part of that debt consists of mortgages taken out to finance houses to live in. While one can argue about the current price level of real estate in the Netherlands, fact is that only a small subset of these houses tend to be “under water”, in other words, worth less than the mortgage resting on it.

    To summarize, in the Netherlands household debt in the form of mortgages is largely canceled out by the value of the assets financed with them. Household debt purely for consumption purposes is not very popular among the Dutch, also because consumer credit interest is not tax deductible while mortgage interest is (with conditions).

    I do wonder what a list like the one in this article would look like if not simply the household debt figures, but rather something like “net household asset balance – assets minus debts” were to be factored against GDP. My guess is that such a list would look quit different.
        RD Blakeslee
        Mar 9, 2019 at 9:00 am

        I agree with this analysis.

        Our family went heavily into debt to buy a large piece of mountain land TO LIVE ON, forty-two years ago.

        We have long since been debt – free, but using debt to acquire the personally used capital (the land) to get that way has been a sound practice, IMO.
            RD Blakeslee
            Mar 9, 2019 at 9:04 am

            Aside: No way I could attack your country of birth and survive, Jos. My wife was born in Tilburg…
                Jos Oskam
                Mar 9, 2019 at 11:33 am

                [BIG smile]
                To your wife: Hartelijke groeten uit Soesterberg…

                Love your contributions on Len Penzo’s, by the way.
        Mar 9, 2019 at 9:25 am

        Though this table has a limited amount of countries, if you read the introduction you will see a maybe more accurate methodology – net assets ppp as % of disposable income (I think !)

        but we must also remember that national debt is ultimately a private liability, and that national debt is often used to substitute private expenditure, so changing say disposable income as well as expenses. I don’t know if the above OECD figures result in an accurate portrayal of that effect. We could add to that that the level of wealth/debt could change drastically if asset values, currency values, gdp values etc change by much. So any comparison is really just a rough guide to work with, a starting point from which to begin understanding a reality, not an answer to what that reality is.
            RD Blakeslee
            Mar 9, 2019 at 10:44 am

            “the level of wealth/debt could change drastically if asset values … change by much”

            Right on. As to disclosing my net worth, I say “That depends on the going price of real estate hereabouts, on the day you ask”.
            Wolf Richter
            Mar 9, 2019 at 10:55 am


            Any multi-country comparisons of GDP, debt, or whatever based on PPP is a very iffy assumption that produces very misleading results: These Purchasing Power Parity numbers convert local data into US dollars and adjust those US dollars for some hypothetical “purchasing power” differences in the local currency to the USD. This formula is in the eye of the beholder and regularly leads to some astounding results. For halfway accurate results you want to stay in local-currency-only ratios.

            For example, China’s GDP expressed in PPP dollars is $27 trillion. That’s about 35% higher than US nominal GDP. This result is totally nuts. PPP is very misleading and should never be used for anything.
                phillip sawicki
                Mar 9, 2019 at 11:21 am

                The US trade deficit for last year was more than $900 billion if I remember correctly, but Wolf hasn’t commented on that. I’m not an economist, but somehow that doesn’t seem to me to be a good thing.
                Wolf Richter
                Mar 9, 2019 at 12:46 pm

                Here you go, my article on the US trade deficit, including my own blistering charts and all, published the day the data was released (March 6):

                Mar 9, 2019 at 11:28 am

                I sort of agree, at least I don’t attach too much faith to any particular metric, if I could be more vague I would. However China headline gdp is for triple the population, and if you try to convert that into meaningful activity and equivalent values (vaguely) then I would not be surprised if China gdp was higher than US. In reality, what are we to include in gdp – one is able to monetise (ask or impose payment for) well beyond what would seem reasonable or productive, not forgetting the broken window fallacy and endless variations on that. Where does that leave us ? That is why real life commentary like is found here often is very valuable indeed. Thanks.
                Mar 9, 2019 at 11:36 am

                Wolf, if PPP should never be used for anything. What was its original purpose ?
                Wolf Richter
                Mar 9, 2019 at 12:50 pm

                It’s very difficult to accurately compare economies denominated in different currencies because currencies fluctuate (exchange rates) and lose purchasing power (inflation) at different rates. So one such effort to make economies comparable was PPP.
                Javert Chip
                Mar 9, 2019 at 9:12 pm


                2018 China population = 1,415,000,000 (1,415M)
                2018 USA population = 327,000,000 (327M)

                Ratio of china to USA population = 1,415 / 327 = 4.24

                ie: China population 4.24 times larger than USA (not 3)
                Mar 10, 2019 at 7:41 am

                China PPP is mostly based on currency yuan) peg of US$1=6.9 Yuan. ( it was US$1= 4.0 Yuan in 1990).

                If the peg is US$1= 4.0 Yuan as in 1990, the whole PPP will be greatly distorted and China can sell to US anymore.
                Mar 10, 2019 at 4:17 pm

                I would consider that PPP is a valid way of estimating relative standards of living — but those aren’t quantifiable economic data, they’re more useful for higher-level comparisons.
            Maximus Minimus
            Mar 9, 2019 at 3:22 pm

            Hopefully it’s not against the posting policy to link some other site. You can read an alternative view on PPP with lots of real life (non-academic) experiences in the following post:
                Mar 9, 2019 at 3:57 pm

                I feel a big mac attack coming on.
                Mar 10, 2019 at 8:20 am

                Javert – thanks, I just threw in a rough guess as notion…I was wondering afterwards if it was actually less than three.

                MM – even within one country the variability of circumstances is vast. In that article the author focuses on “hedonic comparisons” that set western standards as minimum bar, but I guarantee you you can go and live acceptably and comfortably in these countries at much much lesser cost, this – you would have to leave behind a world of choices and services to do so. You can do the same within a western country, I can find acceptable property in most countries at a fraction of the average cost, where food prices are minimal from local produce. You won’t have a large income like this though, future choices will be more limited, and the social scene would be of a very different nature to that of city, but you would be as well, or better off, in own wellbeing as long as you were able to adapt positively to the change of environment – e.g. some people look for this kind of reality and feel uncomfortable in faster big city life, while others would perish without city constant attentions.

                So where anyone places the values, even within national economy, is very personal and subjective. As an extreme take someone who is self sufficient. He/she has no income, he is in utter poverty…he has no debt so is wise to be so….he has no savings worth measuring and yet he seems happy, is active, well fed and dressed and enjoys a level of wealth and security ( to his or her personal view) that cannot be beaten.

                So PPP is, and isn’t, a valid comparison. It all depends on where anyone sets their own values and expectations, and it all revolves around the metric of activity having been monetised , in some societies everything has a money price attached and the resulting market is viewed as allowing and achieving progress, in others they just don’t bother so much as it is all more informal as per say within a family is in the west. Neither is nescessarily the better.
        Mar 9, 2019 at 10:23 am

        Thx for sharing. This makes more sense given that I know conspicuous car consumption is not a big thing there. And their college is paid for by the public.
        Wolf Richter
        Mar 9, 2019 at 10:40 am

        “…. but also the quality of the debt that must be taken into account. It makes quite a difference if a household goes in hock to pay for a new car, a boat and a nice holiday, or takes out a mortgage to finance the house they intend to get old in. In the former case the debt is not balanced by serious assets, in the latter case it is.”

        Yes, sure, but no, the Netherlands is not special; it’s typical.

        What blew up in the US during the Financial Crisis were MORTGAGES that then caused the mortgage crisis that then helped take down the banks. The vast majority of US household debt still is and was housing debt (mortgages). The Netherlands is not an exception, but typical in that respect.

        Just wait till house prices decline 30% or 40% in the Netherlands — and see that does to the “serious assets,” as you said, that back the mortgages. This happened in the US, and it happened in Spain. In Spain, it toppled the Spanish financial system to where the state and the Troika ended up bailing out some banks and shutting down others.
            Mar 9, 2019 at 10:52 am

            From my observations, people who see that their ‘serious asset’ has, as happened here in the UK, gone from say 200k to £700k in 10 years, immediately rush get in an architect to design an extension, or even build a second house on the property.

            I have been deafened by the sound of drilling, hammering – and squeaky wheelbarrows – all last year.

            The words, ‘peak’, ‘asset bubble’ and ‘unsustainable’ seem not to be in their vocabulary.

            Feeling serenely happy and even astute about vast debt ‘secured’ merely by bubble asset valuations is a case for seeing a shrink, not a reason to book the architect.
                Maximus Minimus
                Mar 9, 2019 at 4:13 pm

                With a risk of repeating myself, those that rushed to buy housing are the dumbest, least financially literate people I have met. Of course, the central bankers made them look like geniuses, and created a moral hazard that will linger for a long time.
            Jos Oskam
            Mar 9, 2019 at 12:56 pm

            Thanks for your comment Wolf.

            Although I would never dare claim that the Netherlands are immune to a housing price crash, the Dutch real estate situation is markedly different from Spain or the USA. The Netherlands are a small country, space is at a premium, and there never seem to be enough houses built. There is an eternal shortage of housing and it doesn’t look like this is going to change anytime soon. Also, non-social rents are high, in some cases approaching mortgage servicing payments.

            So, as soon as prices seem to go down, there is a contingent of would-be buyers waiting in the wings to snap up the offers. Be it renters eager to buy, people who want to upgrade or youngsters wanting a place of their own, there never seems to be a shortage of buyers.

            Although this does certainly not preclude a downswing in the real estate market with the resulting price correction, a serious crash of 30 to 40 percent does not seem the most likely scenario. Especially if you take into account the latest announcements from the ECB who seem hell-bent on stuffing bags of interest-free money down the throat of everybody who can fog a mirror /sarc.
                Javert Chip
                Mar 9, 2019 at 9:28 pm

                Jos Oskam

                With all due respect, you are perilously close to saying “…this time really is different…”.
                Jos Oskam
                Mar 10, 2019 at 2:42 am

                @Javert Chip
                You’re correct and I noticed this while writing, so I have tried to avoid sounding like that…but obviously not tried hard enough :-)

                Although I *do* feel that the Dutch real estate market really *is* different from Spain, the USA or a host of other countries, and that this difference makes a crash less likely, there are of course no guarantees.
                Mar 10, 2019 at 7:51 pm

                The Netherlands are small but not that small and most land around the Randstad (Amsterdam,The Hague, Rotterdam area) is veen. (peat bog swamp) It is state policy to not build on it but use it as (really bad) farmland. Change that policy and there wont be a land shortage. Another issue is that most houses are build before 1990 and as such are not exactly energy efficient. With the new government policy of a gasless country in the near future all those houses need a very expensive refit which in my opinion leads to much lower house prices for those buildings.

                ps. Refit is 20% of an average house, land value is 30% so my expectation is that a lot of neighborhoods build in the 20th century will be demolished and rebuild denser. I don’t see how that would be advantages for old builds.
        Mar 9, 2019 at 11:07 am

        In Japan in the 1980’s an awful lot of the debt in their epic credit binge went towards real estate, where the value of Tokyo was supposedly worth more than all of Canada put together. Then the bubble burst in ’91, asset prices collapsed and at one point Tokyo real estate was down (IIRC) 80%. The banking system never recognized the losses and become zombies for a couple of decades.

        What happened in Japan 25 years ago should have been a canary in the coal mine for modern economies, but somehow the lessons were ignored and everyone started thinking this time was different. As Australia and Canada are starting to discover, it isn’t.
            Mar 9, 2019 at 1:59 pm

            I recall that in the 1990s US economists — and the financial sector in general — was openly contemptuous of Japan’s QE, zombie companies, over-reliance on debt, and general desire to eliminate economic cycles. But you won’t hear that today, except in alternative media: the US has become Japan.
                Javert Chip
                Mar 9, 2019 at 9:35 pm


                Absolutely untrue.

                USA may indeed mirror some of Japan’s bad behavior, but US banks are probably among the most aggressive in the western world (includes Japan & Australia) at recognizing & writing off bad debt.
                Mar 9, 2019 at 10:50 pm

                @ Javert Chip

                Absolutely untrue? I’ll take exception to ‘absolutely’.

                The US has its house in better order than the EU in general (not necessarily including some specific members), the UK, Japan, and (apparently) China. But certainly the US has adopted the Japanese-style QE and low interest rates. And as a result, we have higher debt and — inevitably — more zombie companies than previously. Corporate debt quality in general has deteriorated, even as household debt / income has approximately doubled since the early 1990s. And, of course, the Federal debt / income (tax revenues) has skyrocketed.

                So I’ll go with ‘relatively untrue’. The cleanest dirty shirt, right?
                Mar 10, 2019 at 5:22 am

                THE WORLD, at least where the main central banksters rule, is becoming Japan.
            safe as milk
            Mar 9, 2019 at 4:27 pm

            @illumined +1

            there is a belief by many in the u.s. that because the money printing hasn’t caused extreme inflation, it’s ok. this is now being packaged as “mmt.”

            my first thought is the best we can hope for in this scenario is japan: a slow deflation and gradually lowering future expectations. my second thought is that because we don’t have the social cohesion of homogeneous japan, the more likely outcome is societal collapse and/or war.
                Javert Chip
                Mar 9, 2019 at 10:11 pm

                safe as milk

                “…my first thought is the best we can hope for…slow deflation and gradually lowering future expectations. my second thought…is societal collapse and/or war….”.

                You definitely jumped into the deep end of the dystopian pool:

                o Japan has been homogeneous for the last thousand years, engaging in 25+ named wars during that time; “Homogeneous” definitely does not mean peaceful

                o Median ages (half above & half below) of USA males & females are about 10 years younger than Japanese males & females.

                o WWII Japanese war deaths – 4.34% of population, (mostly military male); USA – 0.32% (mostly military male).

                o Japan does not “encourage” immigration into Japan; USA has been one of the most welcoming & heterogeneous countries since its founding.

                o Without immigration & rapidly aging, Japan population peaked at 128M in 2010, declining 1% since then; USA 2010 population 305M, increasing 6% since then
                Mar 10, 2019 at 5:37 am

                People always talk about the dramatic scenarios like war and hyperinflation etc., but according to some of the best analysts I know about, the depressionary effects of deleveraging is what will be the reality of the next decades. The homelessness and opioid crisis and death of the middle class have led to snowflake AOC, not a Russia 1917 Revolution…
                safe as milk
                Mar 10, 2019 at 6:28 am

                @javert chip – my point is that japan sees itself as a “one blood” society with collective responsibility. the usa does not.

                when political elites are in danger of losing control, they often start wars to maintain power. ours have already restarted the cold war. neither party questions it. who knows what comes next.
        Mar 9, 2019 at 11:47 am

        I totaly agree with Jos and Rd.

        The Canadian number is admittedly awful and I have often argued on WS that it does not accurately reflect the Cdn psyche or our history. However, Canada has also become an urban country by % of population, and with that fact has morphed into a hamster wheel society focused on urban consumption priorities; expensive housing, commutes, dining out, ‘activities’ that cost money, etc. While we are one of the largest countries in the World, our population is less than California’s and the majority of Canadians live less than 100 miles from the US border. The stats reflect this situation.

        I have lived almost my entire life well outside of these urban centres. I used to know highly paid mill workers that lived like the golden goose would never quit laying, but by and large the more modest the income the more modest the lifestyle and the more likely people would have no debts. All of my friends had their homes fully paid for by the time they hit their forties. Most didn’t have car loans. etc. Nowadays, when I talk to the children of the highly paid miners and millworkers of my past they are often angry that they cannot live the freewheeling consumption their parents enjoyed and could afford. They often expect they should be able to; are entitled to do so. I had a co-worker 20 years my junior ask me to provide a budget analysis for him. He made good money but was sinking ever deeper in debt, by the year. I told him it was a dead snap, and I made a double entry list of needs and wants. And that is where it all fell apart. What I selected/implied to be wants he thought were needs; hockey rep for son, figure skating lessons for daughter, trailer, truck to haul trailer, type of food purchases. I asked him how he shopped and found out they often zipped to the store at 5:00 pm for supper stuff. When I explained the concept of store flyers, and building a week’s menu ahead of time by what was on sale, and buying ahead in bulk, he did not understand the power of saving after-tax-dollars, let alone the need to pay the mortgage off. I tried to make it into a fun game for him, to see how well he could live on less than they used to spend. He didn’t go for it.

        My son is 35. His outstanding mortgage is just 1.5 years of his salary. My daughter is 39. Her home will be paid for by age 45. They both are investing in pensions (that are fully funded). As I write this my daughter is just arriving on the Oregon coast for a 1 week vacation at a beautiful seaside ‘suite’. (I used to stay there myself). She is paying for it with ‘points’. My son lives on a river so he doesn’t need to vacation very often, his lifestyle is the vacation people pay for.

        That is the Canada rural folks know. Our hobbies used to be free and everyone shopped the flyers and paid off their mortgages. Everyone.
            RD Blakeslee
            Mar 9, 2019 at 1:00 pm

            Warms this old man’s heart to see these values survive here and there ..
            safe as milk
            Mar 9, 2019 at 6:54 pm


            i spent most of my life living the urban hamster wheel lifestyle that you describe, i have learned the error of my ways. i am still an urbanite but i take pleasure in my family and walking the dog down by the river and chatting with neighbors. we rarely go out for expensive meals, etc anymore.

            i have the advantage of an economics education so it was easy for me to understand where i went wrong and develop a strategy for getting my like back on track. most people – even educated people – are functionally illiterate when it comes to money.

            there is a great syndicated radio show by dave rasey who gives financial advice in a straight shooting folksy way to people who call in with their problems. it’s simply jaw-dropping when you hear people explain the tragedy of their financial lives. at first i had contempt but now mostly sympathy for the callers. dave’s advice centers around a system he developed (and sells) that’s solid if somewhat simplistic and christian for my taste. it’s based on a system of “baby steps.” i think we all need to take baby steps in the right direction.
                Mar 9, 2019 at 9:57 pm

                dave rasey = Dave Ramsey?
        Mar 10, 2019 at 7:06 pm

        Dutch housing is way overvalued if you compare it to historic housing values to income. This is mainly due to the tax-code but also because where in the house price cycle we are. Household assets is mainly overvalued home equity which could crash like the 80’s when house prices halved so i find net household assets not a particular useful number
    Mar 9, 2019 at 7:00 am

    Good traits begin at home. For us intermittent fasting and some good old fashioned deleveraging called savings really works. We look at debt and insulin resistance as the things to avoid. No debt and No Sugar works for us. We’re happy.
        Mar 9, 2019 at 10:03 pm

        I just finished reading “Pure,White and Deadly – How Sugar is Killing Us and What We Can Do to Stop It”. We’ve been fooled all these years into thinking it was the saturated fats!
    Lance Manly
    Mar 9, 2019 at 7:28 am

    I wonder if there is a good source of corporate debt to GDP? I think this time corporate debt is going to be more important since they went whole hog with ZIRP. Rumor is that they are looking to deleverage in order to deal with BBB problem, but that would be a drag on the economy wouldn’t it?
        Wolf Richter
        Mar 9, 2019 at 10:42 am

        Yes… coming. Maybe next weekend.
            Mar 9, 2019 at 2:23 pm

            Wolf, how about total net debt, personal, corporate and government against GDP (net of Government.
            i.e, the private, tax and interest paying part of the economy that has to carry Government).
        Mar 9, 2019 at 1:50 pm

        Thanks, Lance – I’ve been wondering about this very question! Hopefully Wolf regales us soon with his consummate ability to make very recondite things very clear. I keep hearing about the BBB problem vis-a-vis buyback leverage and on the face of it, the whole thing sounds pretty precipitous.
        safe as milk
        Mar 10, 2019 at 6:16 am

        sorry. yes, i ramsey.
    Mar 9, 2019 at 9:23 am

    Interesting, China and Germany both at 50% household debt/GDP. Both are export monsters, so in both, consumers might be borrowing to compete with the rest of the world to buy local products. Is that really what it would mean?
        Wolf Richter
        Mar 9, 2019 at 10:44 am

        Germany’s debt to GDP ratio has been essentially flat for two decades. China’s is shooting up exponentially. HUGE difference.
            Mar 9, 2019 at 1:41 pm

            So is India’s. People now take loans to go on vacations and buy furniture. It’s insane.
        Mar 10, 2019 at 8:42 pm

        Debt is so low in Germany because so many people rent (50%) . Higher home ownership would lead to more mortgages and higher debt.
        China was a third world country. Normal people in third world countries don’t bank so no debt.Normal first world people do bank so they get mortgages and car payments
    Mar 9, 2019 at 10:12 am

    This one he turns it round very simple (is good very simple) so it takes debt (new money) from GDP

    it’s also looking bit like household debt to gdp, why I don’t know.
    Mar 9, 2019 at 10:14 am

    Like any other balance sheet, households have assets as well as liabilities. It makes more sense to look at net debt rather than total debt. I suspect that households in the Netherlands and Switzerland have a lot of assets to offset their debt.
        Mar 9, 2019 at 11:37 am

        True. The problem with debt is that the creditor still needs to be paid, while the market value of assets can experience considerable variation.

        Certain assets, including equities, bonds, and real estate, are currently at elevated levels by most valuation techniques. If asset values revert to anything like historical norms, a very healthy net worth can quickly become very unhealthy.
            Mar 9, 2019 at 1:59 pm

            One thing that I haven’t seen in commentaries is the fact that, because of inflation, the creditors’ loans will suffer, not the borrower’s debt. Inflation allows borrowers to pay back debt with cheaper money. For long term debt, borrowing most of the property’s value, at what is currently a 4.25% interest rate (+ or -), makes sense to me. Unless we have deflation (which would cause the opposite effect) and if currency stays relatively stationary, at 2% inflation, it will be easier and easier to pay off that debt over time. This assumes that someone has a “fixed” rate, not adjustable. Other debt – credit card, car loans, any short term or adjustable loans – spells trouble if times get tough. Personally I’d want a mortgage at the currently low rates, use available cash for investing, and have the benefit of a “non-recourse loan” (if available) which means that one can walk if the property’s equity disappears.
                Mar 9, 2019 at 8:54 pm

                ” One thing that I haven’t seen in commentaries is the fact that, because of inflation, the creditors’ loans will suffer, not the borrower’s debt. Inflation allows borrowers to pay back debt with cheaper money ”

                Tst, the debt is the money and the money is always in the lender’s account so he lend again and again and get interest each time. He make inflation for profits. Borrower he must pay more for all else because inflation so he must be hoping he get some inflation in pay too or he is getting poor. But lender he must make sure his money is not worth nothing or he got no job, so he make sure you start in debt with need to pay tax, and he got interest that people like working with his money too so he always pushing it to people “have now pay later”, but not so much that it realised that he just inventing like he want.
        Javert Chip
        Mar 9, 2019 at 10:48 pm


        Very strongly disagree.

        Net debt results in someone with $1M house & $1M mortgage having zero “net debt”. No reasonable loan underwriter would use this technique.

        Some jurisdictions (Swiss) may have special legislation/circumstances insulating debt from volatility for a limited period of time, but I can’t think of a single major asset class that has “stable” valuations over the normal business cycle (say, 10-15 years).

        Total debt generally retains its amortization schedule regardless of asset value.
    Some Guy
    Mar 9, 2019 at 10:28 am

    We get that, ‘what about the assets’ argument all the time in Vancouver.

    As in, I make $75k/year, and I borrowed $1mn to buy a 50 year old house way out in the outer rim suburbs, but now I have an asset worth $1.1mn (and real estate prices only ever go up) so everything looks good on my balance sheet…

    Surely the problem is obvious though, if the asset values are inflated (and cap rates surely indicate they are in most of these places), then when the asset values fall, the debt remains and everything is frozen, barring some sort of reflation or a mass wave of foreclosure which would threaten the banking system (as in the U.S., U.K., Ireland, Spain, etc.) last time around – this is basically what a debt crisis is, after all.

    Alternatively, you keep asset prices high and you are just stuck with zero/negative rates forever and a zombie economy.
    Mar 9, 2019 at 10:50 am

    Last week I received another offer from a predator lender. Just sign here and deposit this $3500 check. Interest rate was 33.79% and term was about 12-18 months. This is a national disgrace and what is the party that “cares” doing about it, nothing.
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The Countries with the Most Monstrous Corporate Debt Pileups. US Wimps out in 25th Place!

The Countries with the Most Monstrous Corporate Debt Pileups. US Wimps out in 25th Place!

But China and the tax havens like Luxembourg, oh my!

US corporate debt, excluding debt by banks – so “nonfinancial” corporate debt – has surged in recent years by all measures and to such an extent that it was featured prominently in the Fed’s Financial Stability Report, in terms of what might trigger the next financial crisis. The Fed is counting total nonfinancial business debts, which include the debts of businesses that are not incorporated. It found about $17 trillion in debts.

A narrower measure is nonfinancial corporate debt, which amounts to $15 trillion. This is up a breath-taking 40% from the prior peak in 2008. The Bank for International Settlements (BIS) uses this measure to compare how corporate debt stacks up in different countries. One of its measures is corporate debt denominated in local currency; and in order to determine the relative size of this debt, the BIS expresses it as a percent of nominal local-currency GDP. So Chinese debt in yuan as a percent of Chinese GDP in yuan. By this measure, the US nonfinancial corporate debt-to-GDP ratio has ballooned to the highest ever: a stunning whopping 73.9% of GDP:

But the US is only in 25th Place

The BIS also converts local-currency debt to dollars, so that the total debts can be compared from one country to another. And the US corporate debt of $15 trillion pales compared to China’s corporate debt of $19.7 trillion.

But that is down from the $21.1 trillion in Q1 2018, at which point Chinese authorities got serious about deleveraging the corporate sector. The monstrous pileup of corporate debt in China happened in just 12 years:

China’s economy, while growing much faster than the US economy, is still quite a bit smaller than the US economy, when measured by GDP in US dollars. And so among the larger economies, China’s corporate-debt-to-GDP ratio is unrivaled (though there are some small economies with special tax laws that blow right past China for other reasons, and we’ll get to those in a moment). The data for China goes back only to 2006. Note the effects of China’s efforts to deleverage its corporate sector, with corporate debt-to-GDP ratio now down to 152.9%:

But China is only in 7th Place by debt-to-GDP

The tax-haven syndrome mucks up the numbers. Ahead of China in terms of the corporate debt-to-GDP ratio are a gaggle of small countries that are in effect tax havens for global corporations, including US companies whose debts start showing up in Ireland and elsewhere because that’s where they’re suddenly headquartered. Number one is tiny Luxembourg. There are five of those countries ahead of China, plus Sweden, which leaves China in 7th place.

So here we go with out debt countdown:

#24: Australia corporate debt-to-GDP ratio: 74.7%

Australia is a notch ahead of the US, with a corporate debt-to-GDP ratio of 74.7%. Because the differences between countries are so huge, it is impossible to put the charts on the same scale. To keep a sense of perspective, I added a red line for the US in each chart, and as we go down the line-up, and as the corporate debt-to-GDP ratio balloons country by country, we will see that red line getting pushed lower and lower until it is just an insignificant little thing at the base of the chart.

#23 Turkey corporate debt-to-GDP ratio: 80.3%

Turkey is already in the middle of a crisis that is composed of a currency crisis, an inflation crisis (20%), and a debt crisis. Much of the debt in Turkey is denominated in foreign currency, mostly euros and dollars, and so inflation in Turkey just makes the debt-service burden worse. After a blistering surge of corporate debt over the past few years, the corporate debt-to-GDP ratio of Turkey finally beat that of the US in 2018, at 80.3%:

#22 United Kingdom corporate debt-to-GDP ratio: 83.3%

The UK debt-to-GDP ratio has been high for years, and is in part related to the City of London as a tax haven for global corporations. But 83.3%, it’s down from 101% at the beginning of the Global Financial Crisis:

#21 New Zealand corporate debt-to-GDP ratio: 83.8%

#20 Austria corporate debt-to-GDP ratio: 89.9%

#19: Spain corporate debt-to-GDP ratio: 93.7%

Note the deleveraging that has taken place since Spain’s brutal financial crisis during the euro debt crisis. This is an exemplary chart of what leads to a financial crisis and how it gets resolved:

#18 Chile corporate debt-to-GDP ratio: 96.3%

The data goes back to only 2003.

#17 South Korea corporate debt-to-GDP ratio: 101.2%

And the effects of the Asian Financial Crisis that kicked off in 1997 are perfectly visible:

#16 Japan corporate debt-to-GDP ratio: 101.2%

Japan’s corporate sector deleveraged for over 15 years from its world-class debt bubble that imploded in 1989:

#15 Portugal corporate debt-to-GDP ratio: 101.4%

A financial crisis, such as Portugal’s or Spain’s, always ends the same: pain and forced deleveraging (defaults or otherwise). And there is still some deleveraging left to do.

#14 Denmark corporate debt-to-GDP ratio: 111.8%

#13 Canada corporate debt-to-GDP ratio: 113.2%

Canada is of course noted for its household debt that ranks among the highest in the world. But it’s also doing a good job in the corporate sector.

#12 Singapore corporate debt-to-GDP ratio 114.9%:

#11 Finland corporate debt-to-GDP ratio 115.1%:

#10 Switzerland corporate debt-to-GDP ratio 118%:

The data for Switzerland only goes back to 2000.

#9 Norway corporate debt-to-GDP ratio 135.4:

#8 France corporate debt-to-GDP ratio 143.6%:

As is the case in some other countries, the French corporate sector is dominated by enterprises that are either wholly or partially owned by the state and that used to be entirely owned by the state before being partially privatized. They have enormous amounts of debt, which is assumed to be backed by the French state.

#7 China corporate debt-to-GDP ratio 152.9%:

#6 Sweden corporate debt-to-GDP ratio 158.2%:

#5 Belgium corporate debt-to-GDP ratio: 161.1%

Belgium is the location of Euroclear that holds about $32 trillion in assets in fiduciary accounts and it has come other advantages for global corporations.

#4 Netherlands corporate debt-to-GDP ratio: 170.8%

Now we’re getting into the smorgasbord of corporate tax avoidance techniques — delicious sounding menus items like “double Irish with a Dutch sandwich” — for large corporations that might impact where and how their debts are registered.

#3 Ireland corporate debt-to-GDP ratio: 195.3%

The hottest thing for US corporations was to engineer a move to Ireland on paper, to dodge US taxes. One of these maneuvers is a corporate tax inversion. For example, Allergan, a pharmaceutical giant that generates most of its sales in the US, was formed in 2015 when Irish–registered Actavis acquired the much larger US company and assumed Allergan’s name. Note the fabulous spike in Ireland’s corporate debt-to-GDP ratio at that time.  Actavis, formerly a US company as well, had performed the same feat in 2013. These companies didn’t actually move to Ireland, but now at least some of their corporate debt shows up in Irish data — instead of in the US data:

#2 Hong Kong corporate debt-to-GDP ratio: 222.9%

This is where China’s corporate debts like to hang out. And much of it should be added to China’s tally.

#1 Luxembourg corporate debt-to-GDP ratio: 222.9%

“Many companies, regardless of their industry or origin, have already made the choice to locate their headquarters in Luxembourg like ArcelorMittal, the world’s largest steelmaker, RTL Group, the European leading radio and TV broadcaster, satellite services leaders SES and Intelsat, intercontinental airfreight company Cargolux, or internet giants Amazon, Skype and Paypal,” brags the Luxembourg office of KPMG whose business it is to manage mailbox headquarters. Which explains this:

And this concludes another chapter in the amazing global debt saga.

And where do consumers fit in? Read…  State of the World’s Biggest Debt Slaves: Americans Wimp Out in 11th Place

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💳 A Mountain Of Debt Impairs Kraft Heinz - This Is The Damage
« Reply #2 on: March 30, 2019, 02:57:28 AM »
When KHZ goes BK, that spells Trouble with a Capital "T".

Where will I get the cheap bagged and shredded cheeses for my omelettes, quesadillas and quiches?  :o


A Mountain Of Debt Impairs Kraft Heinz - This Is The Damage
Mar. 29, 2019 6:45 PM ET|
About: The Kraft Heinz Company (KHC)
Ian Croci
Ian Croci
Growth at reasonable price, value, long-term horizon, long/short equity

KHC is currently sitting atop a mountain of debt and has recently cut the dividend, signaling intent to work on this issue.

Debt is cheaper than equity, but poses risks. Paying it down is expensive, but perhaps necessary.

By understanding how the company intends to combat its debt moving forward, it's possible to refine my original fair value estimate.

A few weeks ago, I wrote an article as a direct rebuttal to an argument Warren Buffett made, essentially contesting the idea that Kraft Heinz (KHC) is a wonderful business. Towards the end of the article, I issued a fair value estimate for the enterprise of $54.6 billion, even under what I considered to be a very optimistic assessment of future business performance. When reflecting on this price target, I realized that I had over-simplified the differences between debt and equity, and I would like take a deeper dive into the capital structure of the company, and refine my fair value estimate further.
Debt Is Cheap, But Risky

As of the end of 2018, Kraft Heinz carried almost $31 billion in long term debt, an increase of $2.5 billion from the prior year, and paid about $1.3 billion in interest on it, a rate of about 4%. As of writing, the company has a market cap of about $40 billion, meaning debt is now making up almost as large a piece of the pie as equity. In my article explaining my valuation methodology, I require a minimum return of 10% on any equity I'm interested in purchasing, which makes debt at 4% quite a lot cheaper. However, this also means that repaying the debt is an expensive affair, as any cash spent in this way carries only a 4% return on investment. In contrast with retained earnings being reinvested into the core business at 71%, or even in contrast with shareholder returns, at an earnings yield of 8.6%, paying down debt offers poor returns.

Of course, even though debt is currently very cheap, and thus offers poor returns, there's the aspect of risk that must be considered. Shareholder returns at 8.6% won't do the shareholder a dime of good if the business goes bankrupt, or earnings otherwise degrade, such that that 8.6% shrivels up over time, before the business has paid out enough to have made a worthwhile investment. With $1.3 billion in interest against about $6 billion in operating income, interest is eating a big chunk of the pie. Of course, 42% of the capital structure is tied up in debt, and it only consumes 22% of the pie, which is a win. The risk, however, is that a small decline in operating income will have a larger impact on shareholders' bottom line, due to the fixed interest expense.
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Re: 💳 Global Debt Slavery
« Reply #3 on: March 30, 2019, 07:35:48 AM »
I have not bought a Kraft product since they pulled their bottling plant out of Leamington Ontario royally screwing dozens of growers who they had sold on the benefits of producing tomatoes only for them. A highly profitable enterprise was pulled for a few dollars more; thank you Mr Buffett.  French's moved in bought produce and moved their production line in... And there is less sugar They have doubled their market share in Ketchup since. As for dairy... I would never put a multinational dairy product on my kids plate. Die an unloved death kraft you multinational Bastard...
Sorry, I take food very seriously
If its important then try something, fail, disect, learn from it, try again, and again and again until it kills you or you succeed.

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Re: 💳 Global Debt Slavery
« Reply #4 on: March 30, 2019, 07:58:37 AM »
Sorry, I take food very seriously

No apologies necessary, I take food seriously too.

When I cook this stuff strictly for myself and not a SNAP Card Gourmet video,  I buy the BEST craft cheeses at the Gourmet cheese counter, sometimes paying $36/lb for some of them.  FRESH Mozarella! Yum.

When I do a SNAP Card Gourmet episode, I go for the cheapest facsimile I can find.  In this case, ON SALE Kraft Shredded Mozarella.  Doesn't measure up, but it does in fact taste like Mozarella.

« Last Edit: March 30, 2019, 08:05:49 AM by RE »
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💳 Perhaps It’s Time to Start Worrying About Global Corporate Debt
« Reply #5 on: May 09, 2019, 03:14:26 PM »
A little late now.


Perhaps It’s Time to Start Worrying About Global Corporate Debt, Suggests Bank of England
by Don Quijones • May 8, 2019 • 15 Comments • Email to a friend   

Chinese corporate defaults this year through April are 3.4 times the amount last year.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Since the global financial crisis, the total value of outstanding corporate bonds has doubled, from around $37 trillion in 2008 to over $75 trillion today. But the growth has been far from even, with non-financial debt growing much more rapidly in certain jurisdictions. As the volume and price of this debt has grown, so too has its riskiness. And that could be a recipe for disaster, warns Sir John Cunliffe, deputy governor for financial stability at the Bank of England.

In the US, non-financial debt is up 40% on the last peak in 2008. Cunliffe expressed even greater caution concerning emerging markets, where corporate debt as a proportion of the global debt pile has grown the most over the past 10 years. “Emerging market debt now accounts for over a quarter of the global total compared to an eighth before the crisis,” Cunliffe said.

Before the financial crisis, emerging market companies were issuing a total of $70 billion per year in bonds, according to OECD data. That was before the world’s biggest central banks embarked on the world’s biggest monetary experiment, in which companies the world over were invited to participate.

By 2016, emerging market corporations were issuing ten times more money ($711 billion) than before, much of it in hard foreign currencies (mainly euros, dollars and yen) that will prove much harder to pay back if their local currency slides, as is happening in Turkey and Argentina right now. Although bond issuance by emerging market companies declined by 29% in 2017 and remained around the same level in 2018, it is still approximately 7.5 times higher than the pre-crisis level.

Much of the increase has been driven by China as it transitioned from a negligible level of issuance of corporate debt prior to the 2008 crisis to a record issuance amount of $590 billion in 2016. During that time the number of Chinese companies issuing bonds soared from just 68 to a peak of 1,451 and the total amount of corporate debt in China exploded from $4 trillion to almost $17 trillion, according to BIS data. By late 2018 it had reached $19.7 trillion.

“There has been a persistent buildup of private debt to record levels in China,” Cunliffe said. Much of this increase took place in the direct aftermath of the financial crisis. The largest increases have been in the corporate sector, mainly in state-owned enterprises. At last count, China’s corporate debt-to-GDP ratio was 153%, enough to earn it seventh place on WOLF STREET’s leaderboard of countries with the most monstrous corporate debt pileups (as a proportion of GDP), 18 places above the US. This chart compares the rise of non-financial corporate debt in China and the US:

The rate of growth and level of debt in China have passed the points where other economies, advanced and emerging, have experienced sharp corrections in the past, noted Cunliffe citing research carried out by the Bank of England.

Since early 2017 the Chinese authorities have been scrambling to deleverage its corporate sector and shrink its shadow banking system, with a certain degree of success (the hook in the chart above): corporate debt-to-GDP ratio has fallen in the last two years by almost 10%. However, in the face of slowing economic growth, the Chinese government has dialed back some of these reforms as concern rises that a sharp slowdown in growth would make China’s elevated debt levels even less sustainable.

And if things get seriously sticky in China’s debt markets, it won’t take long before they’re felt elsewhere, Cunliffe cautioned:

    The Chinese economy is now pivotal to regional growth and one of the main pillars of world growth and trade. As well as the economic effects and effects directly through banking exposures, it is likely that there would be a severe impact on financial market sentiment, [as happened] in 2015 when a period of sharp correction in domestic Chinese financial markets sparked a correction in US financial assets.

Problems once again appear to be on the rise in China. Chinese companies defaulted on 39.2 billion yuan ($5.78 billion) of domestic bonds in the first four months of 2019, 3.4 times the total for the same period of 2018, according to data compiled by Bloomberg. For the moment, there’s little sign of the problems spreading far beyond Chinese borders. In most advanced economies, as well as quite a few emerging markets (Turkey and Argentina excluded), bond spreads — the amount charged for risk, be that credit risk or liquidity risk — are still at or near historically low levels.

But conditions can change on a dime, as the short-lived drama at the end of 2018 amply demonstrated. Between mid-October and the end of the year spreads on investment grade bonds widened by around 50 bps, all on the back of “relatively modest amounts of news,” Cunliffe noted. “Since then, these moves have fully retraced – spreads at the start of May were the same as they were in mid-October last year. Bonds in other currencies and high yield bonds went on a similar round trip.”

When it comes to expectations about the value of debt, the market can be highly susceptible to changes in sentiment, meaning a “correction can come very quickly”. As Cunliffe warns, given the “current compression of risk pricing,” not to mention the sheer abundance of poor quality, mispriced bonds out there, “such a correction could be a sharp one.” By Don Quijones.
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