Saturday, May 29, 2010

Who do you owe?

There is much ado about debt, these days. The debt. Like it is owed to space aliens or something. It's not. It's some people 'owing' to other people. Lots of 'owing,' these days, which is why it is a 'problem.' This owing is kept track of in something called money, so it's some people owing lots of money to other people. The probelm is made worse by soemthing called 'interest,' which is the arrangement where, if you owe money for any length of time, then you owe more money. So if you owe money, and you don't pay it back, you owe more money, and MORE money, and MORE MONEY and, and...

Well, we'll get into that some other time. First, we ask the questions. And the first question we ask is, who owes what to whom? Which is really three questions, so let's first ask who is the money owed to. There are numerous possibilities. We can eliminate space aliens. We can also eliminate the poor. If they were owed the money, they would be rich. How about the middle class? No, they seem to be drowning in debt. How about our government. But we all know it's up to its ears in debt. Of course, there are also rich governments, who seem to be owed a lot of money. But that much? No.

So who does that leave us? Hmm? The rich. But we've got to be talking the really rich. Even the median of the top quintile, for which I have data (2004) owes $167K, though net worth of $318K. The really rich seem to be owed all that money.

And we've also answered the question of who owes. The poor, the middle class, and the government.

But what do they owe? Lots of money. Debt to GDP is at about 380%, of which 290% is
privately owed. So GDP ~$14T x 3.8 = $53T/300M people = $177K per capita, as of 2008. $354K per worker. Now $42K per capita of that is the public debt, so $354K - $84K = $270K per worker is the private debt. Now the interest on the public debt is (now) 0%, sort of, and let's figure the interest on the private debt to average out to 6%, which is probably low, since AAA bonds are yielding a little over 5% interest. So $16.2K in interest. $16,200. Interest per worker. That's all going where? The company store? Sixteen tons?

Take a step back: 6% on 290% of the GDP means $2.44T or 17% of the GDP goes to interest payments, aka debt service. Non wonder demand is somewhat contracted. And the interest on the US debt is not really 0%, so we probably should add a percent or two.

Just by the way $53T is slightly more than the value of all the assets in the US.

Now of course, this isn't owed one person to another, this is all owed to banks. $16.2K to the banks. But apparently many banks aren't doing all that well, so who do the banks owe? Well, they 'owe' their owners, they owe their bondholders, and they owe their depositors. Now their depositors aren't getting much in the way of interest. So all the interest must be going to the bondholders, and the owners. But if the banks are still in trouble, that means it must be the bondholeres who are getting all the money. Owners are just making up their losses, recapitalizing their balance sheets. (Are they? And who does own the banks?) Bondholders must just love this deflation we're having.

Well, we've spun our wheels a little bit here, and it's hard to find out who owns what. But if you own a lot, you're probably owed a lot. And you're rich.

So if you owe, you owe probably owe the rich. Or maybe some pension fund. Another possibility, among others.

1 comment:

  1. I like to take the personalities out of it, and not focus on the who and whom. It is enough to focus on the own and the owe.

    Even in a world of absolute and permanent equality, the continuous growth of debt would eventually cause problems, because it shifts income away from the "non-financial" sector (i.e. the productive sector) and into the facilitative sector (i.e. finance).

    It's like putting more and more oil into your engine, or more and more fertilizer on the garden.

    Economists oh-so-clearly see the laffer limit when it applies to tax rates, but they fail to see it anywhere else. Not enough is no good, so more must be better. Too much?? Can't be!

    // I got here by clicking your name on a comment at Worthwhile Canadian. Took a quick look. I like a lot of what I see here.