Have banks and corporations deleveraged significantly recently, and does that affect our future economic outcome?

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cestin's picture
cestin
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Have banks and corporations deleveraged significantly recently, and does that affect our future economic outcome?

I recently spoke with a person of considerable "means", who doesn't agree with my views on how bad the economic situation is. When I spoke about the need to clear our debt levels, as we've had to do in the Great Depression, before a recovery could take place - he said that there has already been significant de-leveraging by banks and by corporations.  He cited the loan to deb ratios of banks that have gone down over the past year.  He also said that corporations (including his) have lots of cash that they are holding onto, because they don't want to invest in business until they feel safer.  

I wonder if the reason for both of those assertions (if they are true) is that the stock market has been in a positive feedback loop: i.e. after the bailouts started, banks invested that money in the stock market, which caused the stock market to go up, and a positive feedback loop developed.  That allowed banks to make a lot of money on their bailout money, so that they could pay back their TARP money, and get their books in better order. They still didn't lend much, so that gave them good loan to equity ratios.

Similarly, corporations could have also invested in the stock market, as well as benefited from their own stock values rising to clear their debt levels during this last run-up in stocks.

My friend said that the only problem now, is Obama's deficits (he's a Republican, even though he voted for Obama). He thinks that's the worst thing, and that Obama and his spending must go in order for government debt to decrease, so we can move on into recovery.

My feeling is, there was indeed a shift of debt from corporate to government sectors.  Much of that might have been toxic assets which were "bought" from banks and now are held onto by the government?  But the cost of that massive level of government debt is going to be a currency collapse, one way or another, and that will be the way that government debt gets cleared (just as debt needed to be cleared in the last depression).

Is my theory/understanding correct?  Or does my friend's view have any validity: that business can go on as usual since corporate and bank debt are good to go?

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anton95
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Re: Have banks and corporations deleveraged significantly ...

John Maudlin's e-letter of today has a few charts which cover the drop in lending by the commercial banks (no doubt it will be on the daily digest tomorrow).

But if you really want the data you can plough through the Z1 quarterly Flow of Funds issued by the Fed (even Zero-Hedge calls it their best publication).  The Q2 2010 was published on the Fed site very recently

The bottom line is that households and non-corporate businesses are de-leveraging, corporate businesses are not, and financial businesses are doing so in a big way.    However all this de-leveraging is being entirely offset by the expanded Federal Govt borrowing.

Looking at it from the lender perspective, the shadow banking system (Asset-backed securities, funding corporations, and money market funds etc) are shrinking, but the banks are taking up the slack.

So in a weird sort of way you could say that consumer mortgages and credit card loans parked in special purpose vehicles, have been replaced by commercial banks parking money with the Fed, which has bought treasuries.

Does not sound positive for the economy.

 

SagerXX's picture
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Re: Have banks and corporations deleveraged significantly ...

There was a post I believe in a recent Daily Digest with a link to a story about so-called consumer de-leveraging.  Essentially, its point was the the vast majority of reduction in consumer debt loads was due to default/bankruptcy, rather than people cutting back their spending to pay down their debt.  And with consumer spending ~70% of the US economy...

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Re: Have banks and corporations deleveraged significantly ...
SagerXX wrote:

There was a post I believe in a recent Daily Digest with a link to a story about so-called consumer de-leveraging.  Essentially, its point was the the vast majority of reduction in consumer debt loads was due to default/bankruptcy, rather than people cutting back their spending to pay down their debt.  And with consumer spending ~70% of the US economy...

+1 the deleveraging has been almost entirely consumer and small business defaults.  These "toxic assets" consisting of basicly defaulted bonds have been purchased by Fannie and Freddi(read as purchased by the fed) to get them off the banks ledgers.  These debts are transferred to the Treasury balance sheet as treasuries.  The consumer has not suddenly become more thrifty and paid off their credit card bills -- they simply defaulted and the fed bailed the banks out by paying full price for worthless assets.

strabes's picture
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Re: Have banks and corporations deleveraged significantly ...

cestin, your friend's mentality is shocking, but typical of corporate servants.  the banking/corporate system just received the biggest welfare handout in the history of the world, and now these welfare bums want the government to cutback welfare for everyone else, which at this point means people die.

my my my.  the callousness...heartlessness.  an evil sort of blindness reinforced by the illusion of being a free market individualist and big paychecks (that only exist because the masses and their future generations just had everything stolen from them by the corporate/government mafia and handed over to the big banks that fund the corporate system and their paychecks).

cestin's picture
cestin
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Re: Have banks and corporations deleveraged significantly ...

Totally agree, Strabes.  I've always been at a polar opposite from my friend..  But I'm always interested in what he has to say, because it tells me where the "masters of the universe" who are running things are coming from.  When I can figure out why they have their particular viewpoints, and understand the twist that invalidates their conclusions, then I have a better sense of the whole picture..  I asked the question because I don't know much about these things..  I'm just a soil-digging, plant-lovin'  permie you see..

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Re: Have banks and corporations deleveraged significantly ...
cestin wrote:

I recently spoke with a person of considerable "means", who doesn't agree with my views on how bad the economic situation is. When I spoke about the need to clear our debt levels, as we've had to do in the Great Depression, before a recovery could take place - he said that there has already been significant de-leveraging by banks and by corporations.  He cited the loan to deb ratios of banks that have gone down over the past year.  He also said that corporations (including his) have lots of cash that they are holding onto, because they don't want to invest in business until they feel safer.  

I wonder if the reason for both of those assertions (if they are true) is that the stock market has been in a positive feedback loop: i.e. after the bailouts started, banks invested that money in the stock market, which caused the stock market to go up, and a positive feedback loop developed.  That allowed banks to make a lot of money on their bailout money, so that they could pay back their TARP money, and get their books in better order. They still didn't lend much, so that gave them good loan to equity ratios.

Similarly, corporations could have also invested in the stock market, as well as benefited from their own stock values rising to clear their debt levels during this last run-up in stocks.

My friend said that the only problem now, is Obama's deficits (he's a Republican, even though he voted for Obama). He thinks that's the worst thing, and that Obama and his spending must go in order for government debt to decrease, so we can move on into recovery.

My feeling is, there was indeed a shift of debt from corporate to government sectors.  Much of that might have been toxic assets which were "bought" from banks and now are held onto by the government?  But the cost of that massive level of government debt is going to be a currency collapse, one way or another, and that will be the way that government debt gets cleared (just as debt needed to be cleared in the last depression).

Is my theory/understanding correct?  Or does my friend's view have any validity: that business can go on as usual since corporate and bank debt are good to go?

Your friend is an "economically delusional moron" who is going to get his financial clock cleaned.

The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation.~Gekko

I have 4 friends of significant wealth. Three are in the 8 figure range. Two are self made one doesn't get this, one does. One is a combo self made and lots of old money, took me 5 minutes to spell this out to him. He knew it all along but it wasn't in focus. Sure on all other aspects your friend is smart and has common sense, economically he is clueless. Likely he just doesn't want to see what he knows.

BTW the banks are insolvent. Mark to fantasy accounting won't save them. Look for TARP II this fall.

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Davos
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Re: Have banks and corporations deleveraged significantly ...

Now, JPM is in great shape. 1.7 trillion in assets, great. Oh, what is that off balance sheet? Hmmmm 87 trillion in derivatives. 1.7tn to 87 tn. Ugh oh. Hope the company that is insuring that toxic trash is backed by the full faith of the tax payer like AIG was.

Banks de-leveraged. Yeah, if you hide their off balance sheet turds.

And here is the consumer, who de-leveraged by 20 billion voluntarily and 600 involuntarily. As you know the consumer supports 70% of GDP. 

Of course, I'm sure he knows that his consumers got their money from HELOCs. Jim Quinn's piece on this was phonemail, in the middle of it he shows that consumers borrowed 9 billion dollars in 2008 to to spend on 4 dollar coffees at Starbucks, after the crash they closed 900 stores. They knew where a lot of their consumers were getting their spending money from.

n the last five years, our live-for-today Boomers sucked over $3 trillion of equity out of their homes to fund their selfish lifestyles. At the end of June, there were 2.72 million mortgage loans in default at an annualized rate. For all of 2008, defaults will hit 3 million, up from approximately 1.5 million in 2007, and 1 million in 2006.

What “essentials” do the Boomers invest all this borrowed money in every year? The U.S. Census bureau provides the answers:

  • $200 billion on furniture, appliances ($1,900 per household annually)
  • $400 billion on vehicle purchases ($3,800 per household annually)
  • $425 billion at restaurants ($4,000 per household annually)
  • $9 billion at Starbucks (SBUX) ($85 per household annually)
  • $250 billion on clothing ($2,400 per household annually)
  • $100 billion on electronics ($950 per household annually)
  • $60 billion on lottery tickets ($600 per household annually)
  • $100 billion at gambling casinos ($950 per household annually)
  • $60 billion on alcohol ($600 per household annually)
  • $40 billion on smoking ($400 per household annually)
  • $32 billion on spectator sports ($300 per household annually)
  • $150 billion on entertainment ($1,400 per household annually)
  • $100 billion on education ($950 per household annually)
  • $300 billion to charity ($2,900 per household annually)

Of course we have 22% unemployment. Part II of this weeks Financial Sense News Hour with John Williams and Jim Puplava spell this out should your friend be an MSNBC/CNBS boobaling.

Then you have the fact that with our insane debt - 127.5 trillion dollars in debt and unfunded liabilities so the average consumer now works from January 1 until August 15th to pay for Uncle Scam. Of course, with Globalization we now compete agains some poor soul in a LCD who makes 2 bucks a day, so our wages are 4 decades stale, circa 1973. That helps the economy.

Of course, Wal-Mart's CEO recently did a disclosure on our 40 million on food assistance - his little blurb revealed modern day bread lines, they form at midnight, on the last day of the month when the food stamp electronic cards get filled up, the poor folks were out there buying baby formula. Now THAT is an economy that has rebounded.

 

Profits And Baby Formula – Our pal, Rich Yamarone, over at Bloomberg picked up an eye-opening statement made by the Wal-Mart CEO last week.

I don't need to tell you that our customer remains challenged…You need not go farther than one of our stores on midnight at the end of the month. And it's real interesting to watch, about 11 p.m. customers start to come in and shop, fill their grocery basket with basic items – baby formula, milk, bread, eggs – and continue to shop and mill about the store until midnight when government electronic benefits cards get activated, and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.

And of course, here is his s-corp or c-corps reserve of cash expressed in dollars to gold (value of cash going SOUTH). Supply and demand, they print, supply goes up, demand aka value goes south.

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Tommygun
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Re: Have banks and corporations deleveraged significantly ...

Here is a question for anyone. I have two whole life insurance policies i bought (from a friend who started selling insurance) about 9 years ago. I have about $29,000 in cash value built up. The policies are worth upon my death $209,000. I am 54 years old and healthy. I am wondering if I should cash them out now. Will the major insurance companies have the cash to pay out when i die ? and what will the dollar be worth in 20 years ? Just looking for opinions and ideas.  Just fishing around for ideas. Should I "borrow" from the policy and buy gold and pay back the amount owed in future dollars from golds run? I already have some money in PM. My wife thinks the policy is a good bet in case I kick off  early.

Any ideas ?

Tommygun  (I know whole life policies weren't the best investment vehicle, but the guy was a friend so I bought them.

docmims's picture
docmims
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Posts: 644
Re: Have banks and corporations deleveraged significantly ...

Keep them but borrow out the cash for insurance on the insurance in the way of silver/gold.  You have basicly paid up the insurance part since you have been in 9yrs -- so it is basicly free insurance  now.  If things get bad enough that the insurer is insolvent then your silver/gold would be worth the policy.  If things don't crash and we have a slow spiral down over the next decades you will have paid up insurance and silver/gold for a backup plan.

My opinion only.  I am NOT an investment professional.

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