Measuring deleveraging

Discussion in 'Economics' started by trading1, Feb 7, 2012.

  1. I understand from the news that there’s still about 5 trillion dollars in deleveraging still to come, and that this is having an effect on deflation.
    Can anyone explain to me how deleveraging is measured? How do they even guess what the intentions of banks is in this regard?
    Thank you for any help
  2. There's a lot of metrics... You can use the household savings rate, the total debt (private and public)/GDP, etc etc.
  3. taojaxx


    The most complete way is to look at current accounts (Current account is total new saving minus total new investment for the year): increase of current account surplus or decrease of current account deficit is deleveraging. So for instance, between 2006 and 2011, the US current account deficit shrank from $800Bn to $468Bn, so $332Bn of deleveraging. China's surplus ballooned from $263Bn to $361Bn so $128Bn of de-leveraging (Source: IMF WEO Sep 2011 database). In theory you can't add them as China's surplus is mostly the mirror image of US deficit, but then they should shrink or balloon in lockstep. As they moved in oppsite direction, I think you can add them to get a rough idea of total deleveraging, so that's about $400Bn of total debt destruction or savings creation between those two countries. Of course that's total deleveraging in the country (public plus private).
    As during that time, both governments have increased their debt by stimulus (top of my head $1.3 Tn for US, $600Bn for China-unaudited figures, just what I have in mind but that's a minimum) that's another $2Tn that should be added to figure out total private sector de-leveraging. So that would be $2.4Tn of private debt destruction between those two countries. You have to add big and small European current account shrinkages and others so that's a significant margin call on the global economy...
  4. Where do you get your new savings metric and your new inestment metric...and why are you conflating the issue with balance of trade with China?
  5. Trading1, how would you estimate who much leverage was required if it was going the other way? Pondering that might help you consider a statement like how much deleveraging is required...required for what?

    'Deleveraging' is the reduction of aggregate private credit assets in an economy. You can see this in the reports published by the St. Louis fed. Look at aggregate private bank assets. Credit assets held by banks in aggregate decline as they are written off or paid off at a rate that is higher than their creation. Deleveraging can be seen by the decline in loans, especially longer loans, and the increase in short term deposits and excess reserves. The amount of credit that can sustained in an economy is a funtion of the estimation of the future income from existing assets and newly created assets. If you would presume to know what the proper relationship of debt to current assets is then you would pretend to know the future.
  6. taojaxx


    Because the current account position is the outcome of the difference between national savings and national investments.
  7. OK, so where do you get those about a cite.
  8. taojaxx


    Whaddya mean a cite? I put it in plain English: (Source: IMF WEO Sep 2011 database) Means World Economic Outlook in case you don't know the acronym

    For public sector I told you: "top of my head"

    For China I am pretty sure of the $600Bn. Check out China 2010 IMF Article IV
    For the US, 1.3Tn is a minimum: just add 2009 to 2011 budget deficits. Go to CBO website
  9. I was talking about the metric you used for national savings and national investment. I understand how the current account deficit is constructed and the source you used. I fail to see how that can be used to describe deleveraging. I would only be concerned with the private sector in any it is clear there is no deleveraging of the U.S. public secotor going on. I don't think you can understand deleveraging at all when you conflate the public and the private.
  10. taojaxx


    I am not saying otherwise. That's why you have to work year by year and country by country : Current account balance +/- Public sector balance= Private sector leveraging/de-leveraging
    If you understand how the current account deficit is constructed, then you understand that CA balance gives you the country's total net savings-investments for the year; Public sector balance gives you the same for the Government. It follows that one plus/minus the other gives you private sector leveraging/de-leveraging for the year.
    That's the best way I found to measure this as private sector debt numbers are almost non-existent as opposed to public sector debt which are all over the headlines.
    For the US, the Fed does a good job of collecting these numbers for capital market debt in the Z1 publication (Flow of Funds) but that's incomplete as I am not aware of the same data for bank finance.
    For other countries, I didn't find anything handy, hence this top-down approach.
    #10     Feb 11, 2012