[OPE-L:5358] Re: Re: Re: Re: the bursting bubble and the U.S. working class

From: Rakesh Narpat Bhandari (rakeshb@Stanford.EDU)
Date: Thu Apr 19 2001 - 05:58:50 EDT

Steve writes:

>A large part of the fall in the burden comes from the lower interest 
>rates which prevail now, but there is no denying that the level of 
>debt financing has risen dramatically over the past 6 years. Pardon 
>me for burdening everyone's in-tray with a couple of files, but I 
>think the following are instructive.
>The data is taken from the Federal Reserve's web pages; I don't know 
>how they define debt, but I'm prepared to accept their definition 
>here. Notice that the debt to M1 ratio has risen from 11:1 tp 16:1 
>during the internet boom--a substantial rise in the extent to which 
>economic activity is debt-financed, rather than cash-flow financed.
>Also, the WSJ article you mention quotes interest costs to sales 
>ratios; like a lot of "new economy" math, the numbers look 
>persuasive until you ask what they mean. You don't repay interest 
>costs out of sales--you repay them out of earnings. I expect that 
>the interest/earnings ratios don't look so hot, and of course they 
>will be the ones to collapse should a depression strike.

Well it seems that earnings have been indeed been hot, largely due to 
sinking interest costs (itself the effect as Fred has shown of the 
surge in the intake of foreign capital, which I think will continue 
to be strong). The point is that the maintainence of recent earnings 
growth on this basis would only be possible if interest costs were 
going to drop to nothing. And they may now be moving in the opposite 
direction. What will feed earnings growth now? It seems that we are 
in the process of a massive wave of labor cost cutting 
rationalization. Firms are also not risking the costly build up of 
inventory; in fact they are writing them down and effectively 
disaccumulating, which is what lead Greenspan to the surprise rate 

>One key point not covered in these official stats, though, is the 
>level of financial corporations debt, and off-balance sheet trades. 
>The former may well be three times the debt/GDP ratio of 
>private/non-financial debt; the latter is simply unknown, but a 
>rough estimate is that US$30 trillion worth of interest rate swaps 
>are extant. While the impact of that is slight when liquidity 
>prevails--only the servicing costs, which are comparatively trivial, 
>impact on the economy--things can get nasty if any of the parties to 
>these swaps go bankrupt. Then you can have events of the magnitude 
>of Long Term Capital Management, and a true liquidity crisis can 

Surely seems possible.

Yours, Rakesh

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