May 24, 2010

WOW!! Now That’s A Lot of Debt!

Posted in Banking, Big Banks, Bonds, Capital, community banks, crises, derivatives, Finance, Forward thinking, government, investment advisor, investment banking, investments, local banks, municipal bonds, San Francisco, Stocks, Uncategorized tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , at 8:45 PM by Robert Barone

The markets are in turmoil because of the worry about the so-called PIIGS’ nations’ debts (Portugal, Ireland, Italy, Greece, and Spain).  In earlier writings (Fiscal Crises: The Next Shoe, March 14, 2010), I opined that Greece is just the canary in the coal mine and that when we look homeward, we have our own huge debt issues which are not significantly different from those of the PIIGS countries.  I believe that the only reason the European contagion has not yet spread to America is because of the dollar’s status as the world’s reserve currency.  That era is coming to an end, and it would behoove America to get its house in order.

A May 14, 2010 Barron’s piece entitled We’re Not Greece – Yet (D. Henniger) referred to a Royal Bank of Canada (RBC) study which concluded that “Although the states of California, New York, New Jersey, Massachusetts and Illinois are comparable in terms of economic output and population to Portugal, Ireland, Italy, Greece and Spain, RBC finds that states’ debt burden are nowhere near that of the PIIGS”.  This, “even after including unfunded liabilities for states’ employees’ pension and other benefits”.  As you will see below, I take issue with the above conclusion, and the first half of this piece will deal with why.  Basically, citizens of each U.S. state are responsible not only for the debt burdens of their states and localities, but they are also responsible for their proportionate share of the federal debt.  As you will see, the combination of the two produces debt ratios far in excess of those of the PIIGS.

Table 1 shows the PIIGS data that the markets are concerned with.

Table 1

Country Debt/GDP Deficit/GDP Unemployment Rate
Greece 125% 12.2% 10.2%
Italy 117% 5.3% 8.7%
Portugal 85% 8.0% 9.8%
Ireland 83% 14.7% 14.0%
Spain 66.3% 10.1% 20.0%

Source: Der Spiegel

Table 2 shows estimates (for fiscal year 2010) of the Population (1), State GDP (2),  State Debt/State GDP (3), Local Debt/State GDP (4), Unfunded Pension/State GDP (5), Other Unfunded Benefits/State GDP (6), Total Debt/State GDP (7), and Per Capita Debt (8) for the states mentioned in the Barron’s piece plus Michigan.

Table 2

(1)

Pop

(mill)

(2)

St GDP

(trill $)

(3)

StD/GDP

%

(4)

LclD/GDP

%

(5)

Pens/GDP

%

(6)

Oth/GDP

%

(7)

Tot/GDP

%

Per

Cap

($000)

CA 40.0 1.87 7.4 17.2 27.8 3.3 55.7 26.0
NY 19.5 1.16 10.6 15.7 0 4.9 31.2 18.6
NJ 8.7 .48 11.6 9.3 30.2 14.3 65.4 36.1
MA 6.6 .33 21.4 6.0 18.5 4.6 50.3 25.2
IL 12.9 .64 10.5 12.4 34.7 6.2 63.8 31.7
MI 10.0 .39 7.8 14.0 19.5 10.3 51.6 20.1

Sources: USgovernmentspending.com, Forbes, Pew Center

Using CA as an example, the population is rapidly approaching 40 million, the state’s GDP is estimated at $1.87 trillion, the State Government Debt/State GDP is 7.4%, Local Government Debt/State GDP is 17.2%, Unfunded State Worker Pension Liability/State GDP is 27.8%, Unfunded Other Health and Benefit Liabilities/State GDP is 3.3% for a Total Debt/State GDP of 55.7%.  Translating this into Debt Per Capita reveals that every CA citizen owes $26,000 for debt or liabilities contracted by their elected officials.  Looking back at Table 1, this isn’t too different than the Debt/GDP ratio of Spain.  And looking down the Total Debt/State GDP column of Table 2, it becomes apparent that both NJ and IL have Debt/GDP ratios equivalent to that of Spain.

But wait!  Citizens of the states in the U.S. are also responsible for the debt piled up in Washington, D.C.  So, to the debt of the states and localities, one must add the national debt.  The first three rows of Table 3 shows an average of all State (row 1), Local (row 2) and Federal (row 3) Debt/GDP and the Per Capita dollars owed by each U.S. citizen.

Table 3

Debt/US GDP (%) Cumulative (%) Per Capita ($000) Cumulative($000)
Average State 7.9% $3.7
+Average Local 13.8% $6.5
+Federal 94.3% 116.0% $44.6 $54.8
+Agency 18.6% 134.6% $8.8 $63.6
+Private Debt 113.4% 248.0% $53.5 $117.1

Source: USgovernmentspending.com

Using the table, look at the  intersection of the ‘Cumulative (%)’ column and ‘+Agency’ row, which represents the recognized public debt of the federal government and its agencies and an average state and local burden. One can see that at 134.6% of GDP, debt burdens are higher than those of all of the PIIGS countries that have given the markets so much heartburn.  Table 4 substitutes the debts of the states shown in Table 2 for the ‘Average State’ and ‘Average Local’ and shows the indebtedness of the citizens of these states per capita and as percentages of both State and U.S. GDPs.  All of the states shown have Debt/GDP ratios significantly higher than that of Greece.

Table 4

State & LocalDebt Per Capita ($000) Fed & Agency Debt Per Capita ($000) Total Public Debt Per Capita ($000) Tot Debt/State GDP (%) Tot Debt/ US GDP (%)
CA $26.0 $53.4 $79.4 170% 168%
NY $18.6 $53.4 $72.0 150% 152%
NJ $36.1 $53.4 $89.5 162% 189%
MA $25.2 $53.4 $78.6 157% 166%
IL $31.7 $53.4 $85.1 172% 180%
MI $20.1 $53.4 $73.5 188% 155%

Now, I am not an expert on debt levels in European countries.  And, it could well be that citizens of those countries have taken on public debt which would be similar to U.S. State and Local debt that isn’t in the figures shown in Table 1.  But, because the absolute levels of the Debt/GDP shown for the PIIGS have been a cause for concern, then the debts of the citizens of the U.S., and, specifically those states shown in Table 4, should also be cause for grave concern.  For the most part, the European states are at least considering austerity measures.  And while some U.S. states are being forced into austerity because of their inability to print money, the major contributor to the indebtedness, the U.S. Congress, doesn’t seem all that concerned.  This is a major difference from what is occurring in Europe.

So far in this piece, I have only talked about public debt.  usdebtclock.orgusdebtclock.org as expanding; the other three categories of consumer debt are contracting.  I wish I could say the same about public debt!)  So, on top of all of the public debt, each U.S. citizen, on average, owes privately $53,525.  Adding the public and private debt together totals $117,181 per capita, or a total Debt/GDP ratio of 248% (see Table 3).  Wow! Now That’s a Lot of Debt! estimates total personal debt at $16.6 trillion, mortgage debt at $14.1 trillion, consumer debt at $2.5 trillion, and credit card debt at $848 billion. (Amazingly, of the 4 types of private debt, only consumer debt is shown at

Finally, as I have previously written (Overview – Economic Fundamentals Issues, The Ancora Advisor, Vol. 6, No. 1, January 19, 2010), the unfunded liabilities of Social Security and Medicare are nearly $109 trillion or about $352,000 per U.S. citizen (see www.usdebtclock.org/).  That number alone is a Debt/GDP ratio of 745% and is so outside the realm of rationality that I didn’t bother to put it in the table.  Clearly, the recipients of these promises cannot possibly hope to receive such benefits in current dollars.  Depreciation of the currency or significant cutbacks in the promises (or both) is inevitable.  The recognition of the real magnitude of these irresponsible promises should be enough to cause a loss of confidence in the dollar.  In my view, unless the U.S. moves to at least begin to address these issues, that day is closer than anyone might think.

All of the public debt was originated by governments and most of the private debt by banks or other financial institutions.  In feudal times, serfs owed a significant portion of their toil to their lords.  Have times really changed?  The lords are now the politicians and “Too Big To Fail” bankers.  Many ordinary people are serfs, highly indebted either voluntarily (private debt) or involuntarily (public debt).  Looking at debt in this way helps to explain the unholy alliance between Washington and Wall Street (see The Unholy Washington-Wall Street Alliance at https://ancorawest.wordpress.com/2009/11/) and why the “Too Big To Fail” and Washington politicians get richer and richer at the public’s expense.

While U.S. citizens are drowning in debt, the political system appears incapable of reducing it.  In fact, the politicians continue to expand it in the erroneous belief that more debt will help.  There are only two ways out: years of austerity or currency devaluation/inflation.  The political system will not allow the former.  Buy Gold!

Robert Barone, Ph.D.

May 19, 2010

The mention of securities or types of securities in this article should not be considered as an offer to sell or a solicitation to purchase any securities mentioned.  Please consult an Ancora West Investment Professional on how the purchase or sale of securities can be implemented to meet your particular investment objectives goals. Investments in precious metals and similar securities or commodities are subject to risks.  It is important to obtain information and understand these risks prior to investing.

Statistics and other information have been compiled from various sources.  Ancora West Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this formmay be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.

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6 Comments »

  1. […] in turmoil because of the worry about the so-called PIIGS’ nations’ debts (Portugal, author: san-francisco « WordPress.com Tag Feed VN:F [1.8.9_1076]please wait…Rating: 0.0/10 (0 votes cast)VN:F [1.8.9_1076]Rating: 0 (from 0 […]

  2. Bettie Todd said,

    ancorawest.wordpress.com’s done it once more! Great article.

  3. C.C. said,

    Robert –

    Have you spoken with/to Rob Arnott (RALLC)…?

    You two gentlemen are the only ones I’ve read/heard so far that get the actual Debt/GDP ratio (~800%) accurate…

    And your conclusions regarding ‘What we’re gonna do’ about it, are similar as well.

    Excellent.

    Thanks –

  4. Great essay

    FWIW, did a piece PIIGS vs U.S here…

    http://trueslant.com/michaelpollaro/2010/05/13/america-piigs-%E2%80%9Cr%E2%80%9D-us-too/

    imho fireworks begin in the U.S. when these states are bailed out out by the Fed’s printing press

  5. Strange story, really increadible.

  6. Gorgeous Stuff! My spouse and i had been only contemplating that there’s too much wrong important info on this theme and you also just simply updated our judgement. Appreciate your sharing a very effective piece of writing.


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