|Re: Not Deleveraging|
Another IV post with more detail why financial debt is double-counted and people like Dalio and Hoisington are wrong to include it in their "total debt" numbers:
Hoisington (and Dalio) are double counting. Table D.3 of the latest Federal Reserve Z.1 report shows debt outstanding:
Total Domestic Nonfinancial Debt was $38.3t at the end of 2011, or 250% of our 15.3t GDP. Hoisington and Dalio add 13.6t of Financial debt to this to get 51.9t of "total debt", which is 340% of GDP. While Nonfinancial + Financial = Total may sound sensible, it's double counting because most financial debt is simply repackaged nonfinancial debt. If you have a $200k mortgage that's $200k of debt backed by your income. If your bank securitizes your mortgage, and Wall Street makes CDOs and CDO squareds out of the securitization tranches your 200k mortgage may show up as 400k or even 600k of financial debt.
When discussing leverage it's silly to say that because of this repackaging we now have 800k of total debt. There is still just one 200k mortgage. All that repackaging added nothing to your individual debt burden, nor to our collective one.You can still delever completely by directing 200k of income toward the principal, just as if there was no repackaging.And if you do repay your 200k mortgage, the associated 600k of financial debt will magically vanish with no additional deleveraging effort from you or anyone else.
Similarly, if everyone who's debt had been repackaged suddenly refinanced overnight into non-repackaged debt our financial debt would drop from 13.6t to almost nothing. Same thing if Wall Street figured out a way to instantly unwind all the CDOs and other structures. Hoisington's and Dalio's graphs would show massivedeleveraging. But it'd be an illusion. We'd still be in the exact same boat. Our incomes would still need to service the same 38.3t of debt.
Dalio says we delevered from "total debt" of 368% of GDP in early 2009 to only 340% now. But what actually happened is financial debt fellfrom about 130% of GDP to sub-90% while true (nonfinancial) debt rosefrom 235% to 250%. The large drop in financial debt is mostly CDOs and similar structures being unwound and/or refinanced into less complex arrangements with fewer layers of repackaging. It also represents a shift away from household debt, which was packaged and repackaged like mad during the bubble, into US federal government debt which is not widely repackaged. It does not represent actual deleveraging. Quite the contrary, our actual debt burden is still growing. We are still on the Grecian road to ruin. Using the wrong metric leads Dalio to reach the wrong conclusion, and misleading graphs like Hoisington's only encourage such errors.