A few days ago I made a post about European debt to GDP ratio’s and how they did not show any signs of excess. Hereby are the same charts but this time for the USA. The first chart is a long term chart which shows the debt to GDP ratio for US non-financial corporations, the US government and US households from 1975 till 2019. As can be seen households have been deleveraging since the start of the Financial Crisis in 2008 while corporations and the US government have been steadily getting more in to debt.
Thanks to low rates and the above mentioned deleveraging of households debt service ratios for US households are the lowest in 40 years.
Here is a chart depicting the the debt to GDP ratios for non-financial corporations, governments and households in the Eurozone from 2000 till 2019. The chart shows how Eurozone households have been deleveraging since 2010. European governments and corporations have started deleveraging more recent in 2015.
Here is another chart showing Eurozone debt service ratios for households and non-financial corporations from 2000 till 2019. These are a GDP-weighted average of France, Germany, Italy and Spain. Helped by low rates these ratios are now as low as in 2000. No sign of excess as in 2008.
As I noted in another post back in November American companies have been loading up on debt the last few years. Right now the amount of Corporate debt outstanding is so big it is at an all time high if you compare it to GDP.
Corporate Debt to GDP
This is possible because the yield on corporate bonds has been steadily declining to all time lows the last few years.
Corporate Bond Yields
What is staggering is that this has happend at the same time while corporate profits as a percentage of GDP have never been higher.
EDIT (April 3, 2014): Please read this article regarding the relevance of the CP/GDP chart.
Corporate Profits As A Percentage Of GDP
Meanwhile all this extra money has not been used to massively invest in new products or services. Companies have been laying of a lot of workers the last few years also. This can be seen in this chart below which depicts what percentage of corporate profits has been used to invest.
Net Domestic Investment (Private Business) To Corporate Profits
Instead companies have been using all this new money to buy back their own stock or to pay a dividend to shareholders. Activist shareholders like Carl Icahn have been pushing companies like Apple to give money back to shareholders instead of investing it in new products.
Although total US credit market debt-to-GDP is trailing down the last few years (as shown in this post) non-financial companies have been loading up with debt. A lot of these companies seem to use the money for share buy back programs. A prime example of this is Apple’s (AAPL) recent bond issue but a company like Home Depot (HD) is also doing it. This generally improves a company’s EPS and justifies a higher stock price.
Too much debt was one of the main causes for the credit crisis in 2008. So I have been trying to figure out if the total debt-to-GDP ratio has been declining the last few years.
Total US credit market debt-to-GDP has indeed been declining from 385% in 2008 to 355% in December 2012.
Update (November 2013): Right now the ratio seems to be around 345%
In dollars total credit market debt has still been going higher, mainly fueled by the government spending, while household debt has been declining.
US Government debt.
We are moving in the right direction. To much household debt is bad for an economy because people who have run up to much debt will stop spending. Their debt needs to go down so they will have more money to spend on goods and services instead of on interest.
This long term chart which also shows total US credit market debt as a percentage of GDP for the great depression shows that we are following the same pattern as in the great depression.
We are going to a more sustainable ratio. Only we are going a bit slower than in the ’30’s but that is maybe a good thing if we want to prevent a lot of civil unrest and the rise of fascist political movements as happened in the ’30’s .