Ten Times Worse Than RadioShack

Updated 8 February, 2015

David Stockman has written a very thorough piece on the condition of the economy – specifically the amount of debt and the impact that the debt has on inflating many things, including asset prices and favored economic indicators, specifically GDP.

I would like to focus on one aspect of his commentary – and it starts right at the top:

Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.

The implied 2.9X global leverage ratio is daunting in itself.

Keep that ratio, 2.9X, in mind.

In most cases, when people speak of debt leverage ratios, they are considering debt relative to earnings or cash flow, or debt relative to assets or equity.

Comparing debt to GDP would be similar – to the extent GDP means anything (which Stockman does an excellent job later in the post of demonstrating it means little) – to comparing debt to the revenue of a company.

This is where RadioShack comes in:

RadioShack Corp. filed for Chapter 11 bankruptcy protection in the face of mounting losses, according to media reports late Thursday.

The company filed bankruptcy.

What was the RadioShack debt to revenue ratio before this cataclysmic event?  For 2013, the revenue was $3.4 billion; the debt was $614 million.  This makes the ratio 0.2X.  The debt grew significantly in 2014 – by over $200 million – pushing the ratio to somewhere around 0.3X.

Remember, the global balance sheet is levered ten times as much, at 2.9X. 

Not a fair comparison, you say?  RadioShack was a sickly company, not healthy and vibrant like the global economy?  (Don’t write to me about the “healthy and vibrant” comment; just work with me.)  It could never carry the debt load that a healthy, cash-flow-positive company could carry, you exclaim!

OK, I’ll bite.

What about 3M?  About 0.2X.

Caterpillar?  0.7X.

Exxon Mobil?  0.06X.

How about JPMorgan?  11.0X!!!!!

So many statements can be made from this simple analysis, probably none of them terribly earth-shattering.  First, globally debt is high – at a ratio 10 times as high as the now-bankrupt RadioShack.  Second, the leverage is in the banks – no big surprise, I know.  But what is the purpose of banks other than to fund productive assets?  Why should banks be so highly leveraged?

We know in today’s Ponzi-financed world that banks are not limited to funding productive assets.  With unlimited access to and free supply of cost-of-goods-sold and a backstop of government and central bank largesse, why would banks self-limit their leverage?  Of course, they don’t.

What about so-called national, or sovereign, debt ratios?  It is easy to find the ratio of government debt to GDP, but – despite the many efforts to make it so – not all GDP is available to the government to service the debt.  What about debt as a ratio to revenue – meaning tax and other receipts?

Putting together data from a couple of sources – government debt as of 2012, and government revenues of various years (2011-2014) – for countries with more than $1 trillion in outstanding debt I come up with the following ratios for debt to tax revenues:

United States - 5.9X

Japan - 5.7X

China - 1.8X

Germany - 1.7X

Italy - 2.3X

France - 1.5X

United Kingdom - 1.4X

Brazil - 1.4X

Spain - 2.3X

Canada - 1.8X

All somewhere from 5X to 20X worse than RadioShack, with the two worst offenders being the two countries whose currencies have, in the last several decades, been in most demand globally.

Back to global debt: productive assets carry a debt-to-revenue ratio of well below 1.0X, more like 0.2X.  Globally the debt ratio is 2.9X GDP – with banks and sovereigns well above this international average.  Banks and sovereigns: the two hands that wash each other, creating credit with seeming immunity to failure – thereby securing commodities at a rate far higher than a properly functioning market would allow.

There are a lot of unproductive assets being supported by the global Ponzi.  A peek into the fate of RadioShack will give us some idea of the fate of this hypothetical global company:

Shares of the 94-year-old consumer electronics chain were delisted by the New York Stock Exchange earlier in the week.

Delisted.  What might that look like on a global scale?  This is precisely what the central-bankers have been working so hard to hide from us, especially since 2007.  

The asset-price bubble will burst – when, I don’t know.  Many assets will be worth exactly zero, or less than zero as the cost to dispose of many assets will be higher than the disposal value.  Rotting buildings, rotting equipment, rotting cities and towns – left to die in place.

But not all assets.  There will remain many productive assets; the holders of these – while they might be nominally worse off (due to the re-pricing of assets) – will at least own things of value, with the ability to generate income.

Those holding the debt of those entities too highly levered (whether banks, sovereigns, or otherwise) will be left holding the bag – an empty bag.

David Stockman: Central Planner

David Stockman has a book coming out, detailing the story of crony capitalism that has led to the financial calamity that manifest in 2008.  Coincident with the book release, he has written an opinion piece for the New York Times, “State-Wrecked: The Corruption of Capitalism in America.”

Eighty percent of the commentary is directed at the sad history of economics and crony capitalism in America.  On this, few are as well qualified as Stockman to write.  He has lived in the halls of both government and business, including the private equity world.  He captures and skewers many – even taking to task the Republicans, whom he views as more hypocritical than the democrats on economic matters.

For this commentary and diagnosis, I have few quibbles (saying anything positive about World War II ending the depression is one of my quibbles).  However, it is in his treatment plan that Stockman falls short – as short as any politician, mainstream economist, or media mouthpiece.

He starts off well enough:

These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.

A “sweeping divorce” – this has real potential.  Of course, I disagree with the state-provided safety net part, but if he puts the rest into meaningful recommendations I can live with it.

…amendments to give the president and members of Congress a single six-year term, with no re-election;

This is step one?  This is the start of a “sweeping divorce”?  The office of the president is the only federal elected office with term limits, and yet, yoked with this collar, the executive branch has grown into the most powerful branch of government.

…providing 100 percent public financing for candidates;

Another spending program?  Really?

Who would decide the rules for which candidates get financed?  How would a candidate qualify?  Why eliminate the democracy of voting with dollars?  Why not, instead, eliminate that which the politicians can buy with their vote?

…strictly limiting the duration of campaigns (say, to eight weeks);

This sounds more like the wife going to mom’s for a tea because hubby didn’t like the nail polish.  Where is the divorce?

…and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll.

Why get in the business of controlling people’s employment options?  Why all this tinkering around the edges?  Eliminate the benefit of lobbying, and you will eliminate lobbying.

It would also require overturning Citizens United…

Now people cannot voluntary organize?

…and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

Stop, please stop.  My head is about to explode.

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

My head has exploded.  Give me a minute to put it back together….

….

….

….

….

OK, I’m back.