Sunday, January 11, 2015

Financial Business Debt



The graph shows Financial Business; Credit Market Instruments; Liability, Level, Billions of Dollars, Annual, Not Seasonally Adjusted, or TCMDODFS at FRED. The trend line is exponential, by Excel, based on the years 1950-1975, just like the past two days' graphs.

The graph shows financial business debt hugging the early trend not for 25 years, but for a full 50. Only around 2002 does the debt fall away from trend -- slowly at first, massively after the crisis.

5 comments:

jim said...

Hi Art,

Your graph shows the sum of credit market instruments issued by the financial institutions. The credit market instruments are just a small portion (less than 20%) of the total debts of financial businesses. If you go to line 28 of this FRB report you'll find the current total liabilities of the financial sector are around $79 trillion:

http://www.federalreserve.gov/releases/Z1/current/accessible/l107.htm

In comparison, the total debts of non-financial business sector is around $20 Tn and of households around $14 Tn.

The Arthurian said...

Yikes! Thanks Jim, I never looked at those files before, and your hint ("go to line 28") helped a lot.

But wait...

Oh I see, TCMDODFS is pat of credit market debt and only part of all debt. I have to look at this more, again.

The Arthurian said...

So Jim, in the "Business Debt" post Greg was talking about the difference between "debt owed to banks and debt owed to corporate bondholders"

"Debt owed to banks" is part of credit market debt, I'm thinking, and "debt owed to corporate bondholders" is not.

jim said...

Debts owed to banks are bank assets. That page lists assets as well as liabilities. Residential Mortgages are for instance, credit market debt owed to banks.

Debt owed to bondholders is also credit market debt. But it looks like most corporate bonds are not held directly by households. Household bond holdings are usually held indirectly through investment funds like pension funds and mutual funds. From the flow of funds data it looks like most of the corporate liabilities are owed to financial businesses which then owe a like amount to households.

Financial businesses owe $20 Tn in pension fund entitlements; $12 Tn in mutual funds; and $15 Tn in various types of bank deposits. None of those liabilities are credit market debt. Most of those liabilities of financial businesses shows up as assets of households. Credit market debt and non credit market debt is the same in that all of it was created out of thin air where the accounting process creates an asset and liability at the same tinstant.

Greg said...

"Financial businesses owe $20 Tn in pension fund entitlements; $12 Tn in mutual funds; and $15 Tn in various types of bank deposits. None of those liabilities are credit market debt. Most of those liabilities of financial businesses shows up as assets of households. Credit market debt and non credit market debt is the same in that all of it was created out of thin air where the accounting process creates an asset and liability at the same instant."

Thanks Jim, those are some big numbers owed to households, I should feel richer than I do!!!

One comment about your last sentence though; when you say both credit market debt and non credit market debt are both created out of thin air I suppose that is true but I was trying to get at something else, and maybe Arts post today with the JK Galbraith quote, gets more to the point i was trying to make in my comment. When a household or a financial institution working for a household purchases a corporate bond, they use a stock of savings to pay for it. There is no uncertainty about future income flows that need to be considered which is unlike the case with a bank debt like a mortgage. The security of a mortgage is dependent on income flows usually, which can change ,so the repayment of the mortgage bond is
less certain. I guess it would be accurate to say that in the first case the stock of savings is being leveraged while in the second case its the flow of income being leveraged. So very different risks.