Tag Archives: debt

US debt to GDP and household debt service ratio

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.

US debt to GDP ratios for US non-financial corporations, the US government and US households from 1975 till 2019
US debt to GDP ratios for US non-financial corporations, the US government and US households from 1975 till 2019

Thanks to low rates and the above mentioned deleveraging of households debt service ratios for US households are the lowest in 40 years.

US household debt service ratio (Debt payments as % of disposable personal income)
US household debt service ratio (Debt payments as % of disposable personal income)

Via Guide to the Markets – United States

Corporate Debt To GDP And Corporate Profits To GDP Are At An All Time High

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

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

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

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

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.

Companies Have Been Loading Up On Debt In The Last Few Years

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.

FRED St Louis fed total credit liabilities non financial companies

Where Will Interest Rates Go In The Next Few Years?

I love long term charts. I think they are a great refreshment from all the short term thinking that is going on in the financial world on a daily basis. Those long term charts really show you some perspective.

Most of the time that we are shown the US 30 year treasury bond yield’s people will come up with this chart:

30 year us treasury bond yield st louis fed

Judging from this chart rates are exceptionaly low now. Some would say that bonds at these level are a bubble and that they will have to crash soon.

But then there also is this chart.

This is a long term chart, covering 222 years, of the interest rate on US 30 year treasury’s: (Source Ritholtz)

ritholtz long term us treasy bond yields 30 year 222 years

Here is one for the treasury’s for the Dutch State. Again a very long term chart. (Source in Dutch)

lange termijn rente nederlandse staats obligaties bonds 500 jaar

These charts really shows how exceptionally a 30 year bond yield of 6% actually is. Most of the time in the last 100 years bond yields were under 5%.

Will interest rates really shoot up to 6% maybe 7% soon? That’s an event that is highly unlikely in the low-growth, paying-down-debt environment we are in now. People are not spending and borrowing enough. Rates will go up when inflation(-expectations) go up or when there is fear amongst investors that a government will not pay down its debt.

Examples of this can be found in the 70’s when inflation was really high and bond yields went up to keep up with that inflation. Nowadays inflation is very low.

long term inflation dshort cpi

The only countries that pay a high yield on their bonds right now are countries of whom investors are afraid that they may default (partially) on their debt in the future. The higher yield is simply a risk premium.

My take is that interest rates will remain low the coming years. Probably stay between 2% and 4% on the 30 year bond.

I’ll leave you with Japan’s bond yield. Which has been below 2% for more than 15 years. I talked about Japan´s Huge Debt in another post found here. In Japan there has been almost no inflation the last two decades and there hasn’t been any fear that the government can’t pay down its debt. So far.

japan government bond yield long term

Total US Credit Market Debt As A Percentage Of GDP Is Declining

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%

us total credit market debt to gdp long term liabilities

In dollars total credit market debt has still been going higher, mainly fueled by the government spending, while household debt has been declining.

total credit market debt total household debt st louis fed

US Government debt.

US government total 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.

total us credit market debt to GDP long term 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 .