Zbigniew Piekarski on debt and the consumer
"Blessed are the young for they shall inherit the national debt,"
- U.S. President Herbert Hoover (1874-1964).
Since 1996 the United States has been responsible for 96 percent of the growth in world Gross Domestic Product (GDP). Over the last few years, the American consumer has kept the world economy afloat by amassing debt at record levels and spending like crazy, assisted by his cousins in the Anglo Saxon countries, and his friends in South East Asia.
A similar situation occurred in the 1920s when public euphoria and abandon meant that debt levels rose to more than 250 percent of GDP. Then during the 1940s, savings rates hit nearly 20 percent and by 1950 debt had dropped to less than 150 percent of GDP. It took nearly another half century before the public's mood returned to the exuberant levels of the late '20s. Today, total U.S. debt-to-GDP stands at over 300 percent and may actually be as high as 360 percent.
To place an actual figure on U.S. debt is difficult, but the federal government's gross debt - the accumulation of its annual deficits - was quoted as being about $24,000 per head of population last September. However, once the liability of the government's Social Security and Medicare commitments are factored in, the burden on each individual American rises to well above $100,000 according to the Comptroller General of the United States, Mr. David M Walker. He predicts that in order to balance the budget, either taxes will have to be doubled or benefits halved. Yet the debt is getting larger. In the first quarter of 2004, net U.S. government borrowings are expected to reach a record of $177 billion.
The present debt levels are unsustainable, both on a personal and national level, and the credit system is about to break down. If the debt cannot be repaid, individuals default, affecting the living; and governments devalue and default, affecting both the living - and those yet to be born.
The Bank of England raised base rates in November 2003 to 3.75 percent, largely on fears that consumers were taking on too much debt. Consumption fell for a month but soon revived. Habits are hard to break. Then on Thursday, February 5, it increased them to 4 percent and envisages further increases until the consumer spending boom 'subsides'. Yet advertisements for easy loans abound and the average mortgage is now seven times the average income (2.75 is the historical norm) and the consumer can still obtain a loan of up to 150 percent of the value of their home provided they have an income to sustain the re-payments.
Considering the fact that over 40 percent of mortgages in both the USA and the UK were in order to release equity and spend, rather than to move, it is no wonder that the consumer has kept the economy alive.
Yet at a time of a 45-year-low in interest rates and negligible unemployment in the UK, the Department of Trade and Industry said there were 10,271 individual insolvencies in England and Wales between October and December 2003. What is more, according to independent economic consultancy Capital Economics, personal bankruptcy levels could be at their highest since records began in 1960.
Over on the other side of the World in South East Asia, credit-fueled consumer spending helped to pull the economies out of the slump into which they were pushed by the currency meltdown of 1997. LG Card of South Korea - part of the massive LG Group, one of the conglomerates or 'chaebols' which survived 1997 relatively intact - ended up with one in three of the credit cards in existence. Now consumer spending is slowing in the face of the heavy debts demonstrated by the record 14.3 percent delinquency figures. In LG's case, the consequence is a near-collapse which called for a $4.5 billion bailout. This bailout began to come apart when the Korea Exchange Bank said it was backing out and another bank, Hana, also expressed doubts. LG's state-sponsored bailout is now at risk because foreign-owned banks are reluctant to give it more money.
Finally, while sentiment toward the residential property market is still wildly bullish, Alan Abelson in his column in Barron's two weeks ago revealed that the inventory of unsold single family houses in the USA has risen to 380,000, the highest level in at least 10 years. Yet new homes are being built at record rates. All these are leading indicators and they point to a nightmare scenario once the 'Social Mood' changes and the spending binge is replaced by a repayment hangover.
When the Finance Ministers of the world's seven most powerful nations (known as the G7) met in Florida they faced a particular conundrum. One of the reasons given for the dollar's fall against the euro is that the American budgetary deficit is now estimated at around 5 percent and that the U.S. economy will find it difficult to grow out of this problem.
This explanation ignores the budgetary deficits of both Germany and France which are approaching 4 percent of GDP, and that the chances of the eurozone economy growing out of this level of deficit, based on recent performance, are virtually nil and are less than nil should the euro appreciate further against the dollar.
My predictions are that, although the dollar has further to fall, it will bottom out in the first half of this year and then rally to a level that will surprise many a Jabberwocky, economist and finance minister. It's not that the dollar will strengthen, but that the other currencies will weaken. We are approaching the stage of competitive devaluations in currencies.
On the WSE: Profits of Polish companies will be doubly hit. There is the added cost of a new set of rules and regulations which this time must be implemented, and then there is the higher cost of a new layer of politicians. Since China is cheaper (fewer rules and political parties) Poland will soon be known as the country which demands, and then begs, but does not produce.
- U.S. President Herbert Hoover (1874-1964).
Since 1996 the United States has been responsible for 96 percent of the growth in world Gross Domestic Product (GDP). Over the last few years, the American consumer has kept the world economy afloat by amassing debt at record levels and spending like crazy, assisted by his cousins in the Anglo Saxon countries, and his friends in South East Asia.
A similar situation occurred in the 1920s when public euphoria and abandon meant that debt levels rose to more than 250 percent of GDP. Then during the 1940s, savings rates hit nearly 20 percent and by 1950 debt had dropped to less than 150 percent of GDP. It took nearly another half century before the public's mood returned to the exuberant levels of the late '20s. Today, total U.S. debt-to-GDP stands at over 300 percent and may actually be as high as 360 percent.
To place an actual figure on U.S. debt is difficult, but the federal government's gross debt - the accumulation of its annual deficits - was quoted as being about $24,000 per head of population last September. However, once the liability of the government's Social Security and Medicare commitments are factored in, the burden on each individual American rises to well above $100,000 according to the Comptroller General of the United States, Mr. David M Walker. He predicts that in order to balance the budget, either taxes will have to be doubled or benefits halved. Yet the debt is getting larger. In the first quarter of 2004, net U.S. government borrowings are expected to reach a record of $177 billion.
The present debt levels are unsustainable, both on a personal and national level, and the credit system is about to break down. If the debt cannot be repaid, individuals default, affecting the living; and governments devalue and default, affecting both the living - and those yet to be born.
The Bank of England raised base rates in November 2003 to 3.75 percent, largely on fears that consumers were taking on too much debt. Consumption fell for a month but soon revived. Habits are hard to break. Then on Thursday, February 5, it increased them to 4 percent and envisages further increases until the consumer spending boom 'subsides'. Yet advertisements for easy loans abound and the average mortgage is now seven times the average income (2.75 is the historical norm) and the consumer can still obtain a loan of up to 150 percent of the value of their home provided they have an income to sustain the re-payments.
Considering the fact that over 40 percent of mortgages in both the USA and the UK were in order to release equity and spend, rather than to move, it is no wonder that the consumer has kept the economy alive.
Yet at a time of a 45-year-low in interest rates and negligible unemployment in the UK, the Department of Trade and Industry said there were 10,271 individual insolvencies in England and Wales between October and December 2003. What is more, according to independent economic consultancy Capital Economics, personal bankruptcy levels could be at their highest since records began in 1960.
Over on the other side of the World in South East Asia, credit-fueled consumer spending helped to pull the economies out of the slump into which they were pushed by the currency meltdown of 1997. LG Card of South Korea - part of the massive LG Group, one of the conglomerates or 'chaebols' which survived 1997 relatively intact - ended up with one in three of the credit cards in existence. Now consumer spending is slowing in the face of the heavy debts demonstrated by the record 14.3 percent delinquency figures. In LG's case, the consequence is a near-collapse which called for a $4.5 billion bailout. This bailout began to come apart when the Korea Exchange Bank said it was backing out and another bank, Hana, also expressed doubts. LG's state-sponsored bailout is now at risk because foreign-owned banks are reluctant to give it more money.
Finally, while sentiment toward the residential property market is still wildly bullish, Alan Abelson in his column in Barron's two weeks ago revealed that the inventory of unsold single family houses in the USA has risen to 380,000, the highest level in at least 10 years. Yet new homes are being built at record rates. All these are leading indicators and they point to a nightmare scenario once the 'Social Mood' changes and the spending binge is replaced by a repayment hangover.
When the Finance Ministers of the world's seven most powerful nations (known as the G7) met in Florida they faced a particular conundrum. One of the reasons given for the dollar's fall against the euro is that the American budgetary deficit is now estimated at around 5 percent and that the U.S. economy will find it difficult to grow out of this problem.
This explanation ignores the budgetary deficits of both Germany and France which are approaching 4 percent of GDP, and that the chances of the eurozone economy growing out of this level of deficit, based on recent performance, are virtually nil and are less than nil should the euro appreciate further against the dollar.
My predictions are that, although the dollar has further to fall, it will bottom out in the first half of this year and then rally to a level that will surprise many a Jabberwocky, economist and finance minister. It's not that the dollar will strengthen, but that the other currencies will weaken. We are approaching the stage of competitive devaluations in currencies.
On the WSE: Profits of Polish companies will be doubly hit. There is the added cost of a new set of rules and regulations which this time must be implemented, and then there is the higher cost of a new layer of politicians. Since China is cheaper (fewer rules and political parties) Poland will soon be known as the country which demands, and then begs, but does not produce.
