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The shaky edifice of global finance
I disagree with the author's opinions on the significance our reserve currency status. In my view, reserve status is only a small part of the picture, and it comes with a heavy downside (forcing us to run a corresponding current account deficit, thereby suppressing wages and employment, etc.). Our broad political and economic stability, strong taxing authority and currency sovereignty will enable us to continue borrowing at low rates, whether or not foreign countries prefer to save in dollars. Our Central bank can easily control short term rates.
The rest is good. Private debt, in particular private financial debt, is at the heart of this ongoing clusterfuck. The focus on sovereign debt is a distortion.
The shaky edifice of global finance
Much of being made of the profligacy of southern European countries, their unsustainable levels of debt. It is worth asking how big this debt is in the overall scheme of things. You get some interesting answers. According to McKinsey & Company, global public debt last year was about $41 trillion. Private debt, consisting of financial institution bonds, non-financial corporate bonds, securitised loans and non-securitised loans is estimated at $117 trillion. So how big are these European debts in that context? Italian debt is $2.4 trillion, about 118% of GDP. It is 1.2% of global debt. Spain’s $900 billion, or 60% of GDP is 0.5% of the global total. Germany’s $2.6 trillion (78% of GDP) is 1.6% if the total. France’s $2 trillion (80% of GDP) is 1.8% of the total and the UK’s $1.8 trillion (80% of GDP) is 1.1% of the total. Add up them all and it is only 6.1% of the total global debt. The US has $15 trillion in debt, a touch over 100% of GDP and Japan as $12 trillion in debt or 225% of GDP. And the profligacy is where, again?
(snip)
So the picture that we are getting, that European debt is massive and unsustainable is plainly wrong. What is rather happening is that the real culprit, the explosion of private debt, much of it the fictions of what I call “meta-money” rests on a foundation of the “real” economy and when that “real” economy cracks from the strain then the whole edifice starts to sink.
Think of it like this. Imagine the global financial system as a block of flats. The first floor is conventional economics transactions plus the cash flow of those economies. The second floor is conventional forms of finance, such as government bonds, equity markets, corporate bonds, bank lending and confected forms of new finance: securitisation, new forms of new debt creation, debt/equity hybrids and so on. The third floor is extreme meta-money: $600 trillion of derivatives and who knows what else. None of it on balance sheet and much of it untraceable. Over $3 trillion of it spins around the world each day — Europe’s entire debt in about two days. That third floor has been the price of allowing financial “de-regulation” — that is, letting traders make up their own regulations.
Now, as we see, the second floor is getting pretty large. It is about 300% of the global annual GDP. Not cause for panic, but cause for concern. But the third floor …. Wow. At face value it is 12 times global GDP. Even if it “nets out” at at a quarter of that amount, it is still another 300% of global GDP. Because it is meta money, it does not use conventional debt with conventional interest rates, but it requires massive amounts of leverage to work because the trades are on such fine margins, as Long Term Capital Management (LTCM) displayed back in 1998 when the hedge fund’s debt threatened to undo the world’s financial system, requiring a bailout of the investment banks.
read more: http://www.macrobusiness.com.au/2011/12/the-shaky-edifice-of-global-finance
Much of being made of the profligacy of southern European countries, their unsustainable levels of debt. It is worth asking how big this debt is in the overall scheme of things. You get some interesting answers. According to McKinsey & Company, global public debt last year was about $41 trillion. Private debt, consisting of financial institution bonds, non-financial corporate bonds, securitised loans and non-securitised loans is estimated at $117 trillion. So how big are these European debts in that context? Italian debt is $2.4 trillion, about 118% of GDP. It is 1.2% of global debt. Spain’s $900 billion, or 60% of GDP is 0.5% of the global total. Germany’s $2.6 trillion (78% of GDP) is 1.6% if the total. France’s $2 trillion (80% of GDP) is 1.8% of the total and the UK’s $1.8 trillion (80% of GDP) is 1.1% of the total. Add up them all and it is only 6.1% of the total global debt. The US has $15 trillion in debt, a touch over 100% of GDP and Japan as $12 trillion in debt or 225% of GDP. And the profligacy is where, again?
(snip)
So the picture that we are getting, that European debt is massive and unsustainable is plainly wrong. What is rather happening is that the real culprit, the explosion of private debt, much of it the fictions of what I call “meta-money” rests on a foundation of the “real” economy and when that “real” economy cracks from the strain then the whole edifice starts to sink.
Think of it like this. Imagine the global financial system as a block of flats. The first floor is conventional economics transactions plus the cash flow of those economies. The second floor is conventional forms of finance, such as government bonds, equity markets, corporate bonds, bank lending and confected forms of new finance: securitisation, new forms of new debt creation, debt/equity hybrids and so on. The third floor is extreme meta-money: $600 trillion of derivatives and who knows what else. None of it on balance sheet and much of it untraceable. Over $3 trillion of it spins around the world each day — Europe’s entire debt in about two days. That third floor has been the price of allowing financial “de-regulation” — that is, letting traders make up their own regulations.
Now, as we see, the second floor is getting pretty large. It is about 300% of the global annual GDP. Not cause for panic, but cause for concern. But the third floor …. Wow. At face value it is 12 times global GDP. Even if it “nets out” at at a quarter of that amount, it is still another 300% of global GDP. Because it is meta money, it does not use conventional debt with conventional interest rates, but it requires massive amounts of leverage to work because the trades are on such fine margins, as Long Term Capital Management (LTCM) displayed back in 1998 when the hedge fund’s debt threatened to undo the world’s financial system, requiring a bailout of the investment banks.
read more: http://www.macrobusiness.com.au/2011/12/the-shaky-edifice-of-global-finance
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