Hi Rakesh,
A large part of the fall in the burden comes from the lower interest rates
which prevail now, but there is no denying that the level of debt financing
has risen dramatically over the past 6 years. Pardon me for burdening
everyone's in-tray with a couple of files, but I think the following are
instructive.
The data is taken from the Federal Reserve's web pages; I don't know how
they define debt, but I'm prepared to accept their definition here. Notice
that the debt to M1 ratio has risen from 11:1 tp 16:1 during the internet
boom--a substantial rise in the extent to which economic activity is
debt-financed, rather than cash-flow financed.
Also, the WSJ article you mention quotes interest costs to sales ratios;
like a lot of "new economy" math, the numbers look persuasive until you ask
what they mean. You don't repay interest costs out of sales--you repay them
out of earnings. I expect that the interest/earnings ratios don't look so
hot, and of course they will be the ones to collapse should a depression
strike. The following link is instructive on this:
http://www.msnbc.com/news/560432.asp
One key point not covered in these official stats, though, is the level of
financial corporations debt, and off-balance sheet trades. The former may
well be three times the debt/GDP ratio of private/non-financial debt; the
latter is simply unknown, but a rough estimate is that US$30 trillion worth
of interest rate swaps are extant. While the impact of that is slight when
liquidity prevails--only the servicing costs, which are comparatively
trivial, impact on the economy--things can get nasty if any of the parties
to these swaps go bankrupt. Then you can have events of the magnitude of
Long Term Capital Management, and a true liquidity crisis can eventuate.
>Hi
>Steve, according to today's WSJ:
>after the debt binge of the 80s, corporate interest rate costs stood at
>about 5% of total sales. By 99, after a period of falling interest rates
>and rising equity sales, companies had pared back their debt burden to
>2.8% So the situtation may not be as dire as you suggest. To be sure,
>profitability can't really improve from continued interest rate
>reductions. one expert in WSJ estimates interest costs may rise to 3/1% of
>sales by the end of the year.
On your point below, you may find the following interesting:
http://www.dismal.com/todays_econ/te_041601_2.asp
It also supports the arguments Jerry put when opening this thread, that the
working class may suffer the most during a downturn.
Cheers,
Steve
>>This implies that when the asset bubbles finally burst (I say plural
>>because there is an important bubble in real estate, which is arguably
>>feeding the stock market bubble), many people will find themselves with
>>unsustainable debt levels--especially if they are thrown out of work as a
>>result of the crisis, and completely lose their cash flow. But even those
>>who stay employed may well find themselves unable to finance debt
>>commitments, or managing to pay the mortgage but watching their equity
>>fall as their houses lose value faster than they repay their debts.
>
>I think this is an excellent point. Since people were borrowing against
>their homes, it's not clear that higher margin requirements would have in
>any way prevented the inflation of the balloon.
>
>
>
>
>
>>
>>I think the working class will be very badly affected by the crash. Those
>>who have trusted the system and bought the spiel that they should invest
>>for the long term are the ones who are most likely to hang onto their
>>shares till the bitter end. In 1929, those people saw their shares slump
>>over 90% in 3 years. I don't think the fall in the general market will be
>>quite that big this time around--more like a 50% fall from its peak
>>(though the Nasduck could well fall over 90%, from above 5000 to below 500).
>
>Highly unlikely. Maybe 1200 to 1300, at least that's what I heard from a
>few software CEO's.
>
>
>Yours, Rakesh
>
Dr. Steve Keen
Senior Lecturer
Economics & Finance
Campbelltown, Building 11 Room 30,
School of Economics and Finance
UNIVERSITY WESTERN SYDNEY
LOCKED BAG 1797
PENRITH SOUTH DC NSW 1797
Australia
s.keen@uws.edu.au 61 2 4620-3016 Fax 61 2 4626-6683
Home 02 9558-8018 Mobile 0409 716 088
Home Page: http://bus.uws.edu.au/steve-keen/
http://www.debunking-economics.com
http://www.stevekeen.net
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