Debt levels and flows

Debt levels and flows

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Debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 is used to finance and pay for entreprises and business around the world. The levels of debt – how much debt is outstanding – and the flows of debt – how much the level of debt changes over time – are basic macroeconomic data, and vary between countries.

Within mainstream economics
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...

, levels and flows of public debt (government debt) are a cause of concern, while levels and flows of private debt (especially households and corporations) is not seen as being of central importance.

Measuring debt



In measuring debt, stocks and flows are both of interest: stocks are amounts, levels of debt (e.g., $100) and have units
Units of measurement
A unit of measurement is a definite magnitude of a physical quantity, defined and adopted by convention and/or by law, that is used as a standard for measurement of the same physical quantity. Any other value of the physical quantity can be expressed as a simple multiple of the unit of...

 of currency (such as US Dollars), while flows are changes in levels – in calculus
Calculus
Calculus is a branch of mathematics focused on limits, functions, derivatives, integrals, and infinite series. This subject constitutes a major part of modern mathematics education. It has two major branches, differential calculus and integral calculus, which are related by the fundamental theorem...

 terms, the derivative
Derivative
In calculus, a branch of mathematics, the derivative is a measure of how a function changes as its input changes. Loosely speaking, a derivative can be thought of as how much one quantity is changing in response to changes in some other quantity; for example, the derivative of the position of a...

 – (e.g., $10/year), and have units of currency/time (such as US Dollars/Year).

In order to make these stock and flows comparable between countries and across time, one may normalize these by some measure of the size of the country's economy, most often GDP, that is, compute the debt to GDP ratio
Debt to GDP ratio
In economics, the debt-to-GDP ratio is one of the indicators of the health of an economy.It is the amount of national debt of a country as a percentage of its Gross Domestic Product ....

. For instance, $10 billion in 2000 is a small amount of debt relative to the size of the economy of the United States
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...

, but large relative to the size of the economy of Iceland
Economy of Iceland
The economy of Iceland is small and subject to high volatility. In 2007, gross domestic product was US$12.144bn in total and $38,400 per capita, based on purchasing power parity estimates...

, and dividing by the GDP reflects this.

Because GDP is generally quoted with units of currency/year, and debt levels have units of currency, the debt level/GDP ratio has units of years, which may be interpreted as "how many years it would take to repay the debt if all income went to debt repayment". In practice this cannot happen – some of GDP must go to survival – and historically debt repayment rates during periods of repayment have been about 4%–10% of GDP (as in the United States during the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

 and World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

), so practical time to repay debt is rather Debt/GDP times 10–25.

Overall levels


Debt levels are worth 3 years of GDP in many countries that have an annual GDP/person above $10,000. Worldwide debt levels are perhaps worth two or three years of GDP. GDP (at currency exchange rate) was $40 trillion during 2004. Debt levels may therefore be about $100 trillion.

$5.7 trillion of gross debt was issued in 2004 according to Thomson Financial
Thomson Financial
Thomson Financial was an arm of The Thomson Corporation, which was one of the world's leading information companies, focused on providing integrated information solutions to business and professional customers...

 numbers, while GDP grew $4 trillion (currency exchange rate). That does not mean that net debt grew faster than GDP on a worldwide average (even if it has done so for years after 2001 in the USA), as debt issuance may be refinancing
Refinancing
Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political...

 of existing debt, often "rolling over" debt that comes due into new debt. When debt matures new debt is many times issued to repay the old debt, perhaps from the same creditor. That is one reason why debt issuance far surpasses equity issuance in currency value.

Debt is often issued with a repayment plan (a "time to maturity" in some cases), repayment times may be between a few days (interbank cash flow management) and 50 years or longer (consumer real estate debt). The average repayment time of all worldwide outstanding debt is perhaps 10 years.

Equity is another way of financing business, as it has no set time to maturity and pays no set interest. It pays profit from the company it has a claim on.

Accounting


All credit is debt, a liability. Debt is created by lenders and borrowers agreeing to exchange the use of money for the promise to repay. The unit of money lent is the asset of the creditor and the liability of the debtor.

Notes are paper with terms of exchange, hence credits or access to money. All currencies are notes ("This note is legal tender for..."). Money is based on a fiat whereupon all agree upon the exchange values of similar pieces of paper. This extends to savings and checking accounts which are depository receipts for money loaned to bankers who in turn lend it to other borrowers. And thus it multiplies, a deposit becomes a loan that becomes another deposit and so on.

The terms of the lending agreement are the key elements of the contractual terms of a promissory note regarding repayment including the amount(s) loaned and to be repaid, loan fees, time value and risk value interest charges, due dates, balloon payments, default terms and more. All material information should be disclosed on financial statements or footnotes.

2004


Worldwide debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 and equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 underwriting
Underwriting
Underwriting refers to the process that a large financial service provider uses to assess the eligibility of a customer to receive their products . The name derives from the Lloyd's of London insurance market...

 reached a record $5.69 trillion. Worldwide debt underwriting grew 4.3% year-over-year to $5.19 trillion. Syndicated lending was up 34.3% year-over-year. worldwide high-yield corporate debt climbed to over $163 billion eclipsing the previous record of $150 billion set in 1998. US Asset-backed securities
Asset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...

 volume increased 41.7% to $857 billion.

Worldwide equity & equity-related issuance totaled $505bn for the year, representing a 29.9% increase over the $389bn raised in 2003. Initial public offerings increased nearly 220%.

2003


Worldwide Debt, Equity and Equity-related issuance reached record-breaking levels with over $5 trillion in proceeds raised, surpassing 2001’s record of $4.4 trillion. The $5 trillion of borrowings represented 14% of the GDP flow during the year (4.938/36.3) (see world economy
World economy
The world economy, or global economy, generally refers to the economy, which is based on economies of all of the world's countries, national economies. Also global economy can be seen as the economy of global society and national economies – as economies of local societies, making the global one....

). 93% of the issuance was debt, 7% was equity. Note that these numbers don't include all mortgage borrowing, which was $3.8 trillion in the United States during 2003. $900 billion of it is in mortgage-backed securities
Mortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...

, at least $546 billion in US Federal Credit Agency.

Flows


Flows mean issued and sold debt. Debt and equity issuance reported by Thomson Financial
Thomson Financial
Thomson Financial was an arm of The Thomson Corporation, which was one of the world's leading information companies, focused on providing integrated information solutions to business and professional customers...

 (http://www.thomson.com/financial/investbank/fi_investbank_league_tablearchive_debt.jsp) ($ billions and number of issues).

Worldwide Debt, Equity & Equity-related
  • 2004: 5,693 (20,066) (Q4 2004 report)
  • 2003: 5,326 (19,706) (Q4 2003 report)
  • 2002: 4,257 (?) (Q4 2003 report)


Worldwide Disclosed Fees
  • 2004: 15.401 (6,890) (Q4 2004 report)
  • 2003: 14.461 (8,023) (Q4 2003 report)
  • 2002: 14.762 (6,696) (Q4 2003 report)


Worldwide Equity and Equity-related
  • 2004: 505 (3,628) (Q4 2004 report)
  • 2003: 388 (2,418) (Q4 2003 report)
  • 2002: 319 (?) (Q4 2003 report)


Worldwide Debt
  • 2004: 5,187 (16,439) (Q4 2004 report)
  • 2003: 4,938 (17,287) (Q4 2003 report)
  • 2002: 3,938 (?) (Q4 2003 report)


Worldwide High Yield Corporate Debt
  • 2004: 163 (606) (Q4 2004 report)
  • 2003: 146 (524) (Q4 2003 report)
  • 2002: 63 (?) (Q4 2003 report)


Worldwide Loans (syndicated, leveraged)
  • 2004: 2,640 (7,147) (Q4 2004 report)
  • 2003: 1,966 (?) (Q4 2004 report)
  • 2002: ? (?) (Q4 2003 report)

Europe


All Euromarket Issues
  • 2003: 1,397 (3,568) (Q4 2003 report)
  • 2002: 877 (2715) (Q4 2002 report)


European Leveraged Loans
  • 2003: 107 (222) (Q4 2003 report)
  • 2002: ? (?) (Q4 2002 report)

United States


US Investment grade
  • 2003: 659 (1,868) (Q4 2003 report)
  • 2002: 549 (?) (Q4 2003 report)


All US Federal Credit Agency Debt. FHLB dominated the agency market in 2003, raising $545.5 billion in proceeds, a 35% increase in volume from 2002.
  • 2003: 1,191 (13,152) (Q4 2003 report)
  • 2003: 923 (?) (Q4 2003 report)


US Mortgage-backed Securities
Mortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...

  • 2003: 900 (1,203) (Q4 2003 report)
  • 2002: 805 (?) (Q4 2003 report)


US Asset-backed securities
Asset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...

  • 2003: 581 (1,175) (Q4 2003 report)
  • 2002: 456 (?) (Q4 2003 report)


US Syndicated Loans
  • 2003: 980 (2,962) (Q4 2003 report)
  • 2002: 1,051 (?) (Q4 2003 report)


US Leveraged Loans
  • 2003: 368 (1,549) (Q4 2003 report)
  • 2002: 344 (?) (Q4 2003 report)

Levels


Levels mean market or balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

 liability of borrowing party (or asset of lending party) value. Numbers are end-of-year levels, unless otherwise stated.

Euro area


Credit market debt
  • 2003: ?

Households
  • 2004: 86% of households’ gross disposable income

Non-financial corporations
  • 2003: 78.9% of GDP

Government
  • 2003: 70.7% of GDP

Japan


Credit market debt
  • 2003: ?

Households
  • 2003: 110.5% of households’ gross disposable income

Non-financial corporations
  • 2003: 110.5% of GDP

Government
  • 2003: 141.3% of GDP

United States


Dollar amounts are debt owed by each sector (amounts borrowed by each sector)

Credit market debt
  • 2008/Q1: $49.6 trillion (349% of GDP)

Household sector
  • 2008/Q1: $13,959.9 billion (99% of GDP) (% of "households’ gross disposable income")

Domestic Financial sectors
  • 2008/Q1: $15.9 trillion (112% of GDP)

Nonfinancial corporate business
  • 2008/Q1: $6.474 trillion (46% of GDP "Non-financial corporations")

Nonfarm noncorporate business
  • 2003: $2.241 trillion

Farm business
  • 2003: $208 billion

Government
  • 2008/Q1: $7.470 trillion (52.6% of GDP "Government")

Federal government
  • 2008/Q1: $5.244 trillion

State and local governments
  • 2008/Q1: $2.226 trillion

See also

  • Bond (finance)
    Bond (finance)
    In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

  • Bond market
    Bond market
    The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...

  • Credit bubble
  • Debt
    Debt
    A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

     (loan
    Loan
    A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

    , credit
    Credit (finance)
    Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...

    )
  • Debt market (credit market)
  • Equity market
  • Fixed income
    Fixed income
    Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....

  • Government debt
    Government debt
    Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...

  • Securitization
    Securitization
    Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...

  • Structured finance
    Structured finance
    Structured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid lawsStructured finance is a broad term used to describe a sector of finance that was created to help transfer risk and avoid laws...

  • World economy
    World economy
    The world economy, or global economy, generally refers to the economy, which is based on economies of all of the world's countries, national economies. Also global economy can be seen as the economy of global society and national economies – as economies of local societies, making the global one....



Specific:
  • Eurodad
    Eurodad
    Eurodad is a network of 58 non-governmental organisations from 19 European countries. Eurodad and its members make up a network, this network researches and works on issues that are related to debt, development finance and poverty reduction.Recently this network has focussed on issues such as...

  • Thomson Financial league tables

External links


Thomson Financial


ECB


United States


Federal Reserve