The Impact of the Pandemic on Global Debt

A recent publication by the Institutes of International Finance (IIF) gives us a clear picture of the dangers that government responses to the COVID-19 pandemic have created.  Let's look at some highlights from the report.  I'll break this posting into two parts; the first will look at debt in dollar terms and the second part will look at debt as a percentage of GDP.

  

1.) Global debt in dollar terms:  Thanks to the pandemic, total global debt for the 61 nations in the IIF's sample has increased in 2020 from $257 trillion to $281 trillion, a new record high.  Mature markets (i.e. advanced economies) are responsible for $205 trillion of this debt, up from $183 trillion in 2019.   Debt outside of the financial sector rose from $194 trillion in 2019 to $214 trillion in 2020.

  

Government debt accounted for more than half of the increase in total debt, rising by over $12 trillion compared to a rise of $4.3 trillion in 2019.  Mature markets saw the biggest increases in government debt, rising by $10.7 trillion thanks to governments' fiscal response to the pandemic and the decline in tax revenues.  The IIF expects that government budgetary deficits will continue to remain well above normal, pre-pandemic levels, with government debt increasing by another $10 trillion in 2021, reaching $92 trillion by the end of 2021.

 

Here is a table summarizing the debt in dollar terms for mature and emerging markets, comparing the 2019 and 2020 fourth quarter data:

 

2.) Global debt as a percentage of GDP:  On a global basis, government debt rose from 88.3 percent of GDP in Q4 2019 to 105.4 percent in Q4 2020.  Mature market economies saw their government debt rise by 20.7 percentage points (15.9 percent) to 130.4 percent of GDP in Q4 2020 compared to a rise of 11.1 percentage points (21.1 percent) to 63.5 percent of GDP in Q4 2020.  Non-financial private sector debt (households and corporate debt combined) rose by 41 percentage points to 165 percent of GDP in Q4 2020 and financial corporate debt saw its largest annual increase in debt ratios in over a decade, rising by 5 percentage points to 86 percent of GDP in Q4 2020.  This is the largest increase since 2007 and the first annual increase since 2016.

  

Mature markets saw the biggest increases in debt ratios during 2020 (outside of the financial sector).  The rapid buildup in debt was largely due to increases in government debt in mature markets, particularly in Greece, Spain the United Kingdom and Canada.  In emerging markets, China saw the largest increase in non-financial debt ratios followed by Turkey, Korea and the UAE.  South Africa and India recorded the largest increases in government debt ratios.

 

When looking at overall debt-to-GDP ratios, the ten largest increases were noted as follows (in order from greatest to least):

  

1.) France

 

2.) Spain

 

3.) Greece

 

4.) United Kingdom

 

5.) Belgium

 

6.) Cyprus 

 

7.) Canada

 

8.) Italy 

 

9.) Portugal

 

10.) United States

 

Here is a breakdown of debt as a percentage of GDP by sector/nation:

 

Looking forward, the IIF projects that the highest fiscal deficits in 2021 will occur in the following nations (in order from greatest to least):

 

1.) South Africa

 

2.) United States

 

3.) Australia

 

4.) China

 

5.) United Kingdom

 

6.) India

 

7.) Japan

 

8.) Spain

 

9.) Canada

 

10.) France

 

One has to wonder how long the global mountain of debt can continue to grow without causing significant pain to the global economy.  If the proponents of Modern Monetary Theory are to be believed, governments that control their own currencies can continue to increase their debt without any negative repercussions, however, the theory is completely unproven and, if its proponents are wrong, will lead to extreme levels of economic pain for individuals, corporations and governments.  The ongoing growth in debt at all levels will prove to be particularly problematic if interest rates rise or economic growth slows markedly, neither of which can be counted out.

The Greatest Crisis Facing America - Fiscal Irresponsibility

While Congress is focussing what passes for an important issue, that of the impeachment proceedings againt Donald Trump, they are failing completely when it comes to an issue that is of lasting importance and one that will have an even more significant detrimental effect on the United States over the medium- and long-term.

Let's open with this screen capture from the Debt-to-the-Penny website:

Remember when Donald Trump said that beating the federal debt and deficit were no big problem?

Here is a graphic showing the total federal debt up to the second quarter of 2019 and how its growth rate increased during and after the Great Recession:

Here is a graphic showing the total federal debt as a percentage of GDP up to the second quarter of 2019:

While Washington's debt-to-GDP ratio has more-or-less stabilized at around 103 percent of GDP since the fourth quarter of 2015, this is thanks only to the continued rather modest by historical standards growth in the American economy.  If you look back to the recessions of the past, you will see that the debt-to-GDP ratio almost always rose during economic contractions, particularly during the Great Recession where it rose from 62.9 percent of GDP in Q4 2007 to 80.4 percent in Q2 2009, an increase of 17.5 percentage points or 27.8 percent.  If the debt-to-GDP ratio were to rise by the same amount during the next recession, it would hit 131.6 percent, an uncomfortably high level by any measure.  Here is a graphic from the Congressional Budget Office showing the mounting debt problem:

While Congress seems to pay attention to the federal debt issue only when the debt ceiling is either reached or technically breached, there is a greater problem.  Here is a graphic showing the interest payments on the outstanding debt going back to 1947 and current to the second quarter of 2019:

At an annualized rate of $605.1 billion, interest payments on the debt in the second quarter of 2019 reached a new record.  If individual tax revenues were the only source of income that the United States government had, roughly 35.6 cents of every dollar in individual taxes remitted would go to pay down interest on the federal debt.  As it stands now, the federal government brought in $2.036 trillion in tax receipts during the second quarter of 2019 meaning that 29.7 cents of every dollar in federal tax revenue goes to pay interest on the federal debt.

There is only one saving grace as shown here:

At 1.77 percent, interest rates on 10-year Treasuries are just slightly above their all-time low of 1.5 percent.  Here is a graphic from the Treasury showing the cumulative interest expense (blue bars) and average interest rates for fiscal 2017 - 2018 and fiscal 2018 - 2019:

In September 2019, the average interest rate on the federal debt was 2.492 percent.   If we go back in time, we find the following examples:

1.) January 2010:

2.) January 2008:

3.) January 2006:

4.) January 2004:

5.) January 2002:

As you can see, we are living in historically unique times from an interest rate viewpoint; Washington has allowed itself to believe that it can continue to spend beyond its means with no repercussions, an artifact of the four year election cycle.  If interest rates rose by even two or three percentage points, the annual interest payments on the federal would mushroom as shown on this graphic from the Congressional Budget Office:

According to the CBO's projections, net outlays for interest payments on the federal debt more than triple in relation to the size of the economy over the next 30 years, exceeding all discretionary spending by 2046, hitting 8.7 percent of GDP in 2049 (currently 4.2 percent of GDP):

While the left-leaning politicians among us are concerned about the impact of global climate change on American society over the coming decades, as you can see from this posting, it is going to be a very uncomfortable fiscal future where there are either significant cuts to discretionary programs and mandatory (entitlement) programs, increases in taxes or a combination of the two.  Pain is a given, largely thanks to Washington's fiscal irresponsibility.

Donald Trump and the National Debt - It's Not Easy to Fix

With projections showing at $4 trillion addition to the national debt over the next decade thanks to the Trump Administration's deficit-financed legislation as shown here:

...a look back to what Donald Trump had to say about the national debt prior to his tenure as president is an interesting exercise.  Here is an interview with candidate Trump on Fox News from February 5, 2016:

When Bill O'Reilly mentions that one of the biggest problems facing the United States is the national debt but that the topic rarely comes up during election campaigns, here's what Donald Trump had to say when asked why a $19 trillion debt is important to "the folks" (and please excuse the fact that my transcript of the interview is missing sections because the two men were talking over each other):

"Well, it's really $21 trillion because the new budget deal lifts it up by at least $2 trillion so the national debt in a very short period of time is going to be $21 trillion.  We are mortgaging our future, we're mortgaging our children's future..."

When asked how that's going to "hurt the kids" here's what Donald Trump had to say:

"Because we are going to have to pay this money back at some point and at some point it's going to be impossible. You know, I've always heard and read a lot on it and understand it and went to Wharton and all that stuff.  I've always heard that at $24 trillion we become Greece and to a certain extent we're getting to be a large scale version of Greece.  We never do cutting, we never do anything.  You know, I saw a statistic the other day - we are the biggest purchaser of drugs in the world, drugs, to make people better for Medicare etcetera.  We buy drugs.   We  spend the same practically as if you're going to go and buy drugs from a counter.  We spend the same.   We could have saved $300 billion a year if we did the right job with the purchasing just of drugs.  You know why this is?  Because the drug companies have all of the politicians taken care of.   They're all supporting all of these politicians.  They're not supporting me because I'm self funding, okay?" 

When asked again how he was going to bring down the debt in light of the payments for both Medicare and Social Security, here's what Donald Trump said:

 "We have a country with no growth, last quarter practically zero growth which is almost unheard of...we're going to create a dynamic economy again.  We're going to bring the jobs back from China, from Mexico, from Japan, from Vietnam...because the country is going to start growing and we'll be put to four and even five percent.  And, when we do that, we can pay it back so easily.  It's easy to pay it back...essentially, if you look at the country like a profit-making corporation or a losing corporation,d right now we're a losing corporation, we're going to make it a profit-making corporation...the problem we have is our taxes are so high that everybody is choking... the politicians have caused this problem over years.... we are going to make our country dynamic again...we are going to create a dynamic economy where real jobs are going to be pouring into the country and we'll have a country that is sustainable."

Please watch Bill O'Reilly's response at the 6 minute and 57 second mark! 

Let's look at what has happened to the debt since Donald Trump took office onn January 20, 2017.  According to the Treasury's Debt to the Penny website, the debt is as follows:

January 20, 2017

Debt held by the public - $14.404 trillion

Intragovernmental debt - $5.544 trillion

Total public debt - $19.947 trillion 

July 31, 2019

Debt held by the public - $16.211 trillion

Intragovernmental debt - $5.811 trillion

Total public debt - $22.022 trillion 

That works out to an increase in the federal debt of $2.075 trillion over the two and a half years.

It is an informal rule of thumb that governments take on debt during economic contractions and reduce that debt (or at least reduce the rate of accrual of that debt) during economic expansions.  With the current economic expansion starting in the third quarter of 2009, we are now ten years into the latest cycle.  Since the beginning of the third quarter of 2009, the federal debt has risen from $11.518 trillion as shown on this graphic:

This is an increase of $10.504 trillion or an increase of 91.2 percent, a near doubling of the debt over the past decade.

Here is a graphic showing the monthly deficit or surplus data since the beginning of the latest economic expansion in June 2009:

Over the 119 months since the economy began to expand at the end of the Great Recession, there have only been 26 months where there has been a budgetary surplus.  Since Donald Trump took office, there have only been budgetary surpluses in 7 out of 29 months or 24 percent of the time.

Apparently, paying back (or balancing the budget for that matter) is turning out to be far less easy than candidate Trump thought it would be back in 2016.

United States - Debt by President - 2019 Edition

Updated February 13, 2019

With the U.S. federal debt passing the $22 trillion mark, I thought that it would be a good time to revisit a posting that I have done several times over the past eight years; an examination of the debt accumulation by each of the administrations that have "ruled" Washington since John F. Kennedy took office on January 20, 1961. 

As I have done in the past, I have sourced the data for this posting from the Treasury Direct website which provides us with a year-by-year and month-by-month update of Washington's debt reality.  For the purposes of this posting, I have used the Treasury's debt figures from the end of the month of January in each president's inauguration year except in the cases of the Kennedy, Johnson and Nixon Administrations when I have used the debt data from the end of their last month of service (Kennedy and Nixon) and from the end of the first month of service (Johnson).

From the Treasury's data, I have calculated the following:

1.) Nominal increase in the debt during each president's term in office

2.) Percentage increase in the debt during each president's term in office

3.) Compound annual growth rate or CAGR of the debt during each president's term in office

While you may not be familiar with the term compound annual growth rate, it is calculated as follows:

This measure provides us with the compounded average annual growth rate of the debt over all of the years that each president served in office.

Let's start by looking at the growth of the federal debt going back to 1966 (current to July 2018):

You will note that the debt grew at a much faster rate during and after the Great Recession than it did during the decades prior to the event which very nearly caused the global economy to collapse.  Since the Great Recession, the federal debt growth rate has remained at elevated levels despite the "health" of the American economy.

Here is a graph which shows the federal debt as a percentage of GDP:

Thanks to relatively reasonable economic growth levels, the federal debt as a percentage of GDP has stalled at between 100 and 110 percent, however, should the economy suffer a period of negative growth, the federal debt-to-GDP level could see rapid growth as it did during the period between 2008 and 2009 when it rose from 62.8 percent in late 2007 to 93.4 percent at the beginning of 2011.

Now, let's look at the debt on a president-by-president basis.  Here is a graph showing the federal debt at the end of each president's term in office (excluding Donald Trump since he has not served a full term):

It is quite clear that the growth rate of the debt rose significantly during the Reagan Administration and then accelerated even further during the Bush II Administration.

Here is a bar graph which shows the nominal growth in the federal debt for each of the last eleven administrations:

As you can see, the nominal debt grew by the most under the Obama Administration, however, should the debt continue to grow at the same rate that it has grown at for the first two years of the Trump Administration, in nominal terms the debt growth under a two-term Trump Presidency will be the second largest in history.  What is also concerning is that the debt has grown by more than a trillion per year over the past two years during a relatively healthy economic expansion.

Here is a bar graph which shows the percentage increase in the federal debt for each of the last eleven administrations:

By a very wide margin, the percentage growth in the federal debt was the highest under the Reagan Administration when the debt grew by 188.84 percent.  In second place, we find the Obama Administration with debt growth of 87.59 percent and in third place, we find the Bush II Administration with debt growth of 86 percent.  Fortunately, in all three cases, the presidents served for two terms; had the Bush I and Carter Administrations been two-term presidency, it is entirely possible that the overall growth in the federal debt could have surpassed the marks set by the Bush II and Obama Administrations.

Finally, here is a bar graph showing the compounded annual growth rate (CAGR) of the federal debt under each of the last eleven administrations:

Once again, the Reagan Administration comes in first place followed by the Ford Administration at 12.99 percent and the Bush I Administration at 11.48 percent.

Let's close with one last statistic.  If we take the current federal debt of $22,012,840,891,685.32 and divide it by the 327,167,434 American men, women and children according to the Census Bureau, the per capita share of the debt is:

$67,283

...and, interestingly, given the recent budget impasse in Washington, this is what the Census Bureau website looked like during the partial government shutdown:

One thing that American taxpayers can count on is that, no matter which political party is controlling Washington's finances, nothing will be done to reduce the federal debt or try to live within the debt ceiling of the day, an issue which could prove to be problematic during the next recession.

Irresponsible Fiscal Management in Washington - The Worsening Debt and Deficit

With Russiagate and the Kavanagh confirmation hearings consuming all of the mainstream media's "bandwidth", there is one very important aspect of Washington that is getting a pass from the media.  

With Donald Trump having promised to "drain the swamp" and with the Republicans supposedly being the party of fiscal prudence, the latest press release from the United States Treasury Department should cause American taxpayers to question whether anything has really changed in Washington.

During and just after the Great Recession took hold of the United States economy, there was great concern about Washington's growing debt and deficit problems.  As you can see on this graph from FRED, just after the beginning of the Great Recession in December 2007, the growth rate of the federal debt accelerated markedly:

Just in case you were curious, here is the current debt-to-the penny:

Here is a graph showing a history of the federal surplus/deficit:

As you can see, after growing to $1.413 trillion in fiscal 2009 and hitting $1.294 trillion in fiscal 2010 and $1.299 trillion in fiscal 2011, the federal deficit declined to a post-Great Recession low of $438.5 billion in fiscal 2014.  Since then, the deficit has started growing again, hitting $665.4 billion in fiscal 2017 indicating that Washington is, once again, showing its true fiscal abilities.

The most recent Monthly Treasury Statement from the Treasury Department for the month ending August 31, 2018 shows that little has changed under the new guard:

During one month alone, Washington had total outlays of $433 billion against total receipts of $219 billion leaving a shortfall of $214 billion or roughly one-third of the total deficit in fiscal 2017.

Let's look at the fiscal picture for the first 10 months of fiscal year 2018:

Outlays totalled $3.883 trillion against total receipts of $2.985 trillion leaving a shortfall of $898 billion, a deficit that is now 35 percent higher than the deficit in fiscal 2017.

Here is a table showing a summary of receipts, outlays and surpluses/deficits for fiscal years 2017 and 2018:

Both the spending of $433.3 billion and the deficit of $214.15 billion are the highest monthly totals in the last two fiscal years as shown on this graphic: 

In fact, when it comes to federal outlays, August's total sets a new record as shown on this graphic from FRED:

The only saving grace that Washington currently has is low interest rates on its debt as shown here and here:

Despite low interest rates, since the beginning of fiscal year 2018, Washington has paid out $332 billion on its current debt, an amount that consumed most of the federal government's income from corporate income taxes, duties and taxes other than individual taxes and Social Security and other payroll taxes which totalled $393 billion.

As we can see, little has changed when it comes to Washington's spending habits.  It seems that no matter which party holds the reins of power, irresponsible fiscal management is the order of the day with the federal government, an issue that is likely to become worse with the impending tax cuts. 

The Search for Yield - A Warning to Investors

A brief section entitled "Has the Search for Yield Gone Too Far" in the IMF's most recent Global Financial Stability Report provides investors with a summary of all that is wrong in the global bond market today. and why investors must be wary.

As all investors know, the current extended period of ultra-low interest rates has pushed investors to "seek yield".  This means that in order to get a decent return on an investment, investors have had to take on additional levels of risk, risk that they may not ordinarily have been willing to take.  For example, investors that normally invested in the "safest assets" (at least in the eyes of the market) like ten-year Treasuries, have seen the yield do this since the Great Recession began:

In order to get a return that meets traditional expectations, fixed income investors may have invested in higher risk corporate junk bonds which have a higher yield as shown here:

The IMF notes that the global universe of fixed income products looks far different than it did before the Great Recession.  While the investment grade fixed income market has mushroomed from $19.5 trillion in 2007 to $45.7 trillion in 2017, the portion of bonds that yield over 4 percent has dropped from 80 percent in 2007 to less than 5 percent as shown here:

In fact, of the $45.7 trillion in investment grade fixed income investments, only $1.8 trillion have a yield of over 4 percent, down from $15.8 trillion in 2007.

This has created a dynamic shift in the bond market.  Foreign investors have shifted away from their traditional investments in U.S. Treasuries into higher-yielding U.S. corporate bonds with non-U.S. investors now holding nearly 30 percent of U.S. corporate debt, up from 12 percent and1990 and up 25 percent from before the Great Recession.

Not only has the search for yield impacted the U.S. corporate bond market, it has had a profound impact on the issuance of debt by the world's emerging market economies.  The current prolonged period of ultra-low interest rates has led to increased borrowing by many of the world's lower-rated nation as shown here:

...and here:

What is not terribly surprising is, that with the desperate search for yield, non-resident investors are buying increasing volumes of higher-risk emerging market debt since the Great Recession as shown here in billions of U.S. dollars:

...and here shown as a percentage of GDP:

In the first eight months of 2017, non-resident investors picked up $205 billion of emerging market debt, the highest level since 2015 and 2016 and 2017 looks set to approach the levels last seen during the period from 2010 to 2014.

The great concern about the move by investors into lower-rated debt issued by nations with questionable economic futures is that the level of interest owing on the increased level of outstanding debt has risen substantially when measured against revenues as shown here:

It is also concerning that the demand for lower-rated debt has pushed the spread in bond yields  (i.e. the risk premium) between emerging market nations and higher-rated U.S. debt as shown here:

The global bond market is no longer reflecting the level of risk that investors face when buying debt from emerging market nations, nations that will likely face debt crises similar to the PIIGS crisis back in the first half of the current decade.  In fact, if you want a sense for how the debt market has lost its way and no longer reflects reality, look no further than the yields on the following PIIGS debt (2 year bonds):

Italy:

Greece:

It is hard to imagine that either nations' fiscal picture has improved to the point where the yield on their 2 year debt should be either negative (Italy) or just below 1.75 percent (Greece).

Let's close this posting with a quote from the IMF on the current search for yield:

"The low-interest-rate environment has stimulated a search for yield in markets, pushing investors beyond their traditional risk mandates. This has compressed spreads, reduced the compensation for credit and market risk in bond markets, contributed to low volatility, and facilitated the use of financial leverage. While these supportive financial conditions have helped boost growth, as intended, they have also raised the sensitivity of the financial system to market risks. Prolonged normalization of monetary policy could extend these trends. Unless well managed, these rising medium-term vulnerabilities could lead to significant market disruptions if risk premiums and volatility decompress rapidly." (my bold)

In other words, investors beware.  You have been lulled into a false sense of bond market security.  This time is not different; high risk debt is still high risk debt no matter what yield may suggest and the odds of a cascade of defaults is certain to rise over time, leaving investors with a very uncomfortable haircut.