Above is an interesting chart that has been making the rounds on the internet. Oddly I have yet to find the original article that was the source from Haver Analytics an independent research arm of Morgan Stanley (MS-NYSE).

Normally when articles talk about debt to GDP the reference is government debt to GDP. Overlooked is adding up all debt and seeing what that ratio is. The results were rather startling.

That the western economies are overburdened with debt is not news. Long before the financial crisis of 2008 there were numerous warnings of an impending debt collapse. The warnings were largely ignored.

Since then little has changed. The banks were bailed out and the financial institutions went back to business as usual fighting off all attempts to re-regulate the market and paying themselves huge bonuses.

Not included in this chart is the $700 trillion (some say it is as high as $1.2 quadrillion) of derivatives outstanding.

What is startling in looking at the chart is that government debt is not necessarily the largest component. The largest component for most of them is financial sector debt. And the one that has the largest exposure to the financial sector is Britain aka the United Kingdom. Altogether the UK’s total debt ratio to GDP is an astounding 950%. This dwarfs the Eurozone debt ratio of about 475%. The US by contrast is around 325%. Canada is almost at 300%. Not surprisingly Japan is number two over 600%. Japan also has the largest government debt to GDP ratio of nearly 230%.

Household debt which is constantly cited by heads of central banks including the BofC and the Federal Reserve is by comparison relatively low.

Missing from this chart is unfunded liabilities of government particularly the US. It is estimated that the US’s unfunded liabilities (Medicare, Medicaid and Social Security) are in the area of $60 trillion. Some say it is considerably more even double. 

The huge financial sector debt particularly in the UK is a potential big problem though. The UK’s financial debt to GDP ratio is in the area of 600%. The UK is the least regulated financial market of all of the G10. That probably helps explain why so much debt is domiciled in the UK. The UK financial centre in London is known for its financial innovation. Innovation in the financial world migrates to where the regulation is weakest.

Oddly enough Sweden has a total debt to GDP ratio of about 450% but one rarely hears about Sweden when it comes to the world’s high debt countries.

The question begs then what is Sweden doing that the others are not doing? At one time Sweden had a very tough banking regulatory environment. It has since been considerably weakened. Could this weakening of its regulatory environment eventually catch up to them as it has in Japan, Britain, the US and others?

Eventually in countries like Britain, the US and Japan and even Canada the government comes to the rescue if the financial sector gets into trouble. This was especially seen in 2008 when the government’s lavished taxpayer funds on the financial institutions in order to prevent a meltdown. When the crisis ebbed the financial institutions went back to business as usual.

Given the growing financial crisis in the Euro zone over Greece, Spain and others it is not surprising that the bailouts are not so much meant for those countries but instead the banks that have exposure to them. The banks are bailed out while the countries are told to accept severe austerity. Not surprisingly this has caused considerable resentment.

The trouble now is that the western economies are barely growing if at all. As growth falters the ability to service the debt becomes more and more unmanageable. And the fiscal policies are not working either. The fiscal policies of austerity and tax cuts only adds to the malaise as unemployment grows, tax revenue falls and in turn this brings another round of tax cuts and austerity. Fiscal stimulus to encourage growth was tried following the 2008 financial crisis; however, it only generated at best anaemic growth. The western economies appear to be caught in a liquidity trap where adding more money is having little in the way of impact. 

Corporations are flush with cash but they are not spending.

Households have high levels of debt but as long as they are employed they can service the debt. Losing one’s job often leads to severe financial stress as they are unable to service their debt.

No wonder the only monetary tool left for the central banks is quantitative easing (QE). All the other tools have already been used and in the US they can’t cut interest rates any further when they are already zero.  But QE is not the solution either as ultimately it leads to currency debasement and monetary inflation. In the extreme it brings hyperinflation. Some believe that is coming.

The western economies have too much debt. The chart above is testimony to that. Much of it is no doubt not repayable. They can roll it over and they can service it as long as the economy at least produces some small degree of growth. Failure to even get low growth leads to recession and an inability to pay the debt. That in turn leads to bankruptcy and collapse. 

General Disclosures

The information and opinions contained in this report were prepared by MGI Securities. MGI Securities is owned by Jovian Capital Corporation (‘Jovian’) and its employees. Jovian is a TSX Exchange listed company and as such, MGI Securities is an affiliate of Jovian. The opinions, estimates and projections contained in this report are those of MGI Securities as of the date of this report and are subject to change without notice. MGI Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, MGI Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to MGI Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company.

Definitions

“Technical Strategist” means any partner, director, officer, employee or agent of MGI Securities who is held out to the public as a strategist or whose responsibilities to MGI Securities include the preparation of any written technical market report for distribution to clients or prospective clients of MGI Securities which does not include a recommendation with respect to a security.

“Technical Market Report” means any written or electronic communication that MGI Securities has distributed or will distribute to its clients or the general public, which contains an strategist’s comments concerning current market technical indicators.

Conflicts of Interest

The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of MGI Securities, which may include the profitability of investment banking and related services. In the normal course of its business, MGI Securities may provide financial advisory services for issuers. MGI Securities will include any further issuer related disclosures as needed.

Technical Strategists Certification

Each MGI Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist’s personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist’s compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report.

Technical Strategists Trading

MGI Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein.

Dissemination of Reports

MGI Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm’s technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the MGI Securities website and davidchapman.com.

For Canadian Residents: This report has been approved by MGI Securities which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of MGI Securities in their particular jurisdiction where their IA is licensed.

For US Residents: This report is not intended for distribution in the United States. 

Intellectual Property Notice

The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by MGI Securities or the party credited as the provider of the information.

Regulatory

MGI SECURIITES is a member of the Canadian Investor Protection Fund (‘CIPF’) and the Investment Industry Regulatory Organization of Canada (‘IIROC’).

Copyright

All rights reserved. All material presented in this document may not be reproduced in whole or in part, or further published or distributed or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of MGI Securities Inc.

-- Posted Friday, 8 June 2012 | Digg This Article