Debts of the Super Rich

Posted: October 9, 2013 in General
Tags: , , , , ,

Nothing surprised me more the other day than to learn that even the world’s super powers are stinking from debts.Here I break it down for you.

USA
The Federal Reserve has been looking at the progress of the US economic recovery and may begin to end stimulus programs if progress remains steady. That includes eventually winding down the amount of debt it purchases from the Treasury – currently $85 billion a month in long-term bonds – though purchases will continue for the time being. That’s a lot of debt we’re selling – to ourselves.

As of June 2013, the federal government’s outstanding debt surpassed $16 trillion. Who are the nation’s creditors? The government owes the most money to — itself. U.S. government agencies, including giant trust funds of the Social Security and Medicare systems, and the independent Federal Reserve System account for 41 percent of the federal debt, more than $2 of every $5.

We’re not the only ones buying, though. Nearly one-third of the national debt is owed to other countries. China is the biggest foreign creditor ($1.144 trillion), followed by Japan ($1.076 trillion), but together they own less than 15 percent of it. Mexico and Canada together are owed $90 billion.
Russian Prime Minister Vladimir Putin denounced the United States as a “parasite” on the global economy . At the time, the U.S. Congress was embroiled in a debt-ceiling debate that many believed would result in a default on the government’s loans from foreign countries. With hundreds of billions in U.S. Treasury securities, Russia had a lot to lose from a massive American default. But even the debt-ceiling debacle didn’t scare Russia away from the relative security of American debt. Since the day Putin called America a “parasite,” Russia has increased its holdings in American debt by tens of billions of dollars.

Where does Russia get all of its buying power? The answer is oil. Russia is the world’s largest oil producer, and has used the commodities markets — and investment in U.S. Treasury bonds – to build impressive cash reserves in foreign securities. Some world economists believe that Russia could be facing its own serious debt crisis by 2030, unless the country decreases spending. Bullish-minded ministers within the Russian government still urge growth, including huge infrastructure projects like the 2014 Winter Olympics and the 2018 World Cup.

In 1989, New York real estate investor Seymour Durst spent $120,000 to erect a “National Debt Clock” in Times Square to track the exact amount of money that the U.S. federal government was borrowing to pay its bills. At the time, the country had run up a $2.7 trillion tab, but that figure seems almost quaint today. In 2008, the clock briefly ran out of available digits when the debt topped $10 trillion. By January 2013, the upgraded clock — it can now display up to a quadrillion dollars — registered $16.43 trillion and some change.

Now, it’s important to understand that U.S. doesn’t owe that entire $16.43 trillion to its creditors, which is everyone that owns U.S. Treasury bonds and securities: individual American citizens, banks, corporations, state and local governments, and foreign investors. Treasury securities are essentially government-backed IOUs. In exchange for a cash loan, the government pays you interest. Only $11.56 trillion of the national debt represents the debt held by the public or public debt, the money the federal government borrows from outside sources to fund its budget. The other $4.87 trillion is tied up in intragovernmental holdings, mostly in the federal government’s largest trust funds: Social Security and Medicare.

Offshore banking makes it harder to tell who exactly owns the U.S. debt.Belgium is one of the top 10 purchasers of U.S. debt.I know you’re thinking: Belgium? Really? The gross domestic product (GDP) of this small European nation tucked between France, Germany and the Netherlands ranks No. 32 in the world, behind Nigeria and Malaysia.The secret is something called “custodial bias” . Belgium has made a name for itself as one of Europe’s most vibrant international banking centers. Like Switzerland, bank accounts in Belgium historically offered a high degree of secrecy, although that changed in 2011 when the Belgian government began disclosing account information to improve tax transparency . Still, Belgium offers big tax breaks for foreign companies that create Belgian subsidiaries and benefits for investors who choose Belgium for offshore accounts.

Belgium’s status as a tax haven makes it a popular place to buy U.S. debt, even if the investors aren’t from Belgium. The U.S. Treasury tracks purchases of U.S. debt by geographic origin, not the specific nationality of the buyer . This is where custodial bias distorts the debt figures.


Japan

As of 2013, Japan’s public debt hit one trillion quadrillion yen. That is roughly $10 trillion. It will reach 247pc of GDP this year (IMF data).

It turns out that Japan’s debt, while incredibly high, is not unsustainable. The Japanese economy is still very strong. It boasts the world’s fourth-largest GDP, and unemployment is below 5 percent. But the biggest difference between Japanese and American debt is that Japanese citizens own 95 percent of their country’s debt, with only 5 percent in the hands of foreigners . In contrast, around 47 percent of U.S. debt is owned by foreign investors, a far riskier proposition.

Another reason the Japanese economy remains so stable is that Japan is heavily invested in U.S. debt securities, some of the most financially sound investments in the world.

China
China’s spends 39% of its GDP paying off debts.Last year China pumped $3.4 trillion into China’s economy, according to a new report by credit rating agency Fitch. And for another fun number: local governments have amassed $3.3 trillion in debt, says a Chinese government-affiliated economist.

On their own, the numbers might be hard to grasp. But comparing what China owes on those loans to its GDP reveals that the country’s “debt service ratio” (DSR)—the proportion of interest and principal on loans that businesses owe against a country’s GDP—is now 38.6%, according to calculations by Wei Yao, an economist at Société Générale. That means that more than $3.2 trillion of the country’s GDP now goes toward paying down debts.

Even without a crisis, though, rising costs of repayment still threaten to choke growth, already testing a 20-year low. If money is used to service debt, companies can’t invest as much as they otherwise would and local governments might have to limit what they spend on crucial public services.

England

It has the debts which have been dubbed as the highest in the world.The UK had by 2008 become the most indebted of all the big, rich economies, more indebted even than debt-engulfed Japan.

It has now become widely recognised that perhaps the greatest economic policy failure in the UK, US and eurozone during the 16 boom years before the crash of 2008 was the explosion of borrowing by banks, households, businesses and governments – or, to use the jargon, the unprecedented and massive leveraging up of entire economies.

These giant debts triggered the crash of 2008 because creditors refused to roll over short-term loans to banks, and caused the simultaneous recession because banks stopped lending, and have brought about our current economic malaise because our ability to spend and invest is hobbled by the imperative of repaying what they owe.

According to the consulting firm, by the end of March this year, the aggregate indebtedness of the UK – that’s the sum of household debts, company debts, government debts and bank debts – had risen to 492% of GDP, or almost five times the value of everything they produce in a single year.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s