[OPE-L:6610] Re: Re: NYTimes.com Article: Scandal's Ripple Effect: Earnings Under Threat

["Fred B. Moseley" <fmoseley@xxxxxxxxxxxxx>]

On Wed, 13 Feb 2002, Paul Cockshott wrote:

> Subject: [OPE-L:6569] Re: NYTimes.com Article: Scandal's Ripple Effect:
>     Earnings Under Threat
>
> > Andrew Smithers, who runs Smithers & Company, an economic
> > consulting firm in London, offered one way to judge the
> > size of off-balance-sheet debts: look at total debt in the
> > financial sector, which has been rising faster in recent
> > years than that of businesses and households. As recently
> > as 1996, financial debt amounted to 32 percent of total
> > debt in the private sector. Now it stands at 36 percent.
> >
> > Some financial debt is household obligations, like
> > automobile leases, Mr. Smithers said. But he thinks most of
> > it represents off-balance- sheet debts of corporations.
> >
> > "U.S. companies are already highly leveraged," he said. "It
> > is unlikely that they could take on balance sheet much of
> > their off-balance-sheet debt without many companies being
> > in breach of their debt covenants." If, for example, just
> > half of all financial debt were moved onto corporate
> > balance sheets, the leverage would jump to 163 percent of
> > companies' net worth, based on replacement cost of assets,
> > Mr. Smithers said.
> >
>
> If the personal, the financial and the corporate sector are
> all net debtors and increasingly so, who holds the corresponding
> credit balances?
>
> Is it:
>
> 1. The state sector due to a budget surplus?
>
> 2. The overseas sector due to a trade deficit?
>
> --
> Paul Cockshott, University of Glasgow, Glasgow, Scotland


Hi Paul,

The financial sector is not a NET debtor.  It is a debtor and a big one,
but it is also an even bigger creditor, so that it is a net creditor.  In
the last few years, the US financial sector has borrowed about $1 trillion
and lent about $1.8 trillion each year.

The data that the Smithers in your quote is talking about is data for the
DEBT ONLY of the financial sector (from the Fed's Flow of Funds Accounts).
The relevant fact is that the borrowing of the financial sector has
increased much faster in the 1990s than the borrowing of the
non-financial sector (more than twice as fast).  But now we realize that
much of the increase of the "financial sector" was the really the hidden
debt of the non-financial sector, i.e. was debt of "special purpose
vehicles" of the non-financial sector, for which the latter was still
liable.  Hence the debt of the non-financial sector is much greater than
the Fed's data show.  How much greater no one knows at the present
time.  But it is probably very significant, and it means (along with the
greatly inflated profits of the non-financial sector by similar accounting
tricks), that the financial condition of non-financial corporations is
much weaker than previously thought.

If Mr. Smither's high estimate is roughly correct (that half of the debt
of the financial sector in the 1990s is really non-financial sector debt),
then the debt of the latter would double!

"Trouble ahead, trouble behind.  And you know that notion just crossed by
mind" [not really].  (Grateful Dead)

Comradely,
Fred