Sunday, February 5, 2017


The central banks are thinking of increasing the interest rates in 2017. It have been well clear over the last 2 decades that Financial decision regarding economic segment is being taken by banks rather by government driven economic policies. The proof of the pudding is that the central banks reduced interest rates but never looked into where they are being deployed. This have been one of the prime reason where its being found that the world is having a debt pile of $152 trillion, or 225 percent of the world’s GDP, according to the International Monetary Fund. Now what does Debt to GDP deficit means? It means that the debt which have been raised have not being deployed to increases in output, so it cannot be paid back in the future.

Dowjones might be 20000 but its corporate profits are plummeting and at the same time they are having      a total debt (including government and private) exceed $62.5 trillion, or 334 percent of GDP, according to current Federal Reserve data. This translates to $196,000 for every man, woman, and child in US country. Now a question might come up that if Debt to GDP ratio is US economy is so high then where did the Zero interest based funding went and how did the Dowjones climbed to 20000. Buyback of shares have resulted to Dowjones to climb and also shareholders made the actual money. Now lets get into the Nuclear bomb which created 2008 recession: Mortgage.

Analyzing the data of the US debt its being found that as per the first quarter of 2016, 12.7 percent of homeowners owed more debt that valued against the property they had in their table of Mortgage. As of the first quarter of 2016, 12.7 percent of homeowners owed more than their house was worth. This means household debt is very much strong and these economic trade wars which will increase the cost of products in the long term would create ripple effect for the US economy in the long term. Consumption growth will slide in US economy as interest rates climbs and servicing the interest cost on these debts becomes a nightmare story.

Banks have stopped lending and now the situation is getting into liquidity trap. Increasing the minimum wage in US will push up the cost but at the same will push up more borrowings rather focusing on proper economic growth. When interest rates starts climbing it means credit scores comes under lens and it makes hard to borrow.

Now drilling the data of US debt pile its being found that total financial sector debt currently makes up $15.6 trillion of the $62.5 trillion total, which consists of government debt, households, private financial companies, and private non-financial companies. People have invested heavily in financial products in US and other parts of the world and now any correction of massive level will create not only erosion of investments but again a debt pile due to margin exposures. Zero interest rates and unlimited profits from trading have made positions over leveraged. As the cost of capital is zero profit is just a multiplier activity.

Household debt and private debt is the biggest risk and the numbers are just growing up. Now lets get into how much the Household Debt to Income really works out in order to know how much they are able to service the interest cost relate to the same. It reveals that data it has declined only in the past 8 years. Household Debt Service Payments as a Percent of Disposable Personal Income is only showing decline.  The global economy is at risk and this debt will take a create plunge since most of capital have been either to create host towns and buy back of shares. Gross Fixed Asset formation has been useless since it have been less of real benefit to the society.  Bridging the urban and rural gap should have been the ideal strategy for every economy to grow and deploy capital and make circulation of capital in the economy. Most of the money which have been injected have been less of economic benefit and more of stock market.


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