Prudent Bear is Wrong!
I like the analysis at Prudent Bear a lot, but in my opinion they are way off base in their "huge" concerns about financial sector debt. It's not so much that private debt in the US isn't very high like they say. It is. However, they are double counting portions of it.
Ex.
If I borrow $10 dollars from my father, that is one debt.
If my brother borrows $10 from my father, that is one debt.
In total, that is two debts for a sum of $20 owed to my father. He is at risk $20.
Ex2.
If I borrow $10 dollars from my father, that is one debt.
If my brother then borrows the $10 from "ME", that is one debt.
There are two debts there, but clearly the situation is different.
If my brother pays me, I can pay my father. If either my brother or I default, the most my father can lose is $10.
In the first example, his potential loss was $20.
The various asset backed securities vehicles like FRE, FNMA, etc... behave like example 2. They borrow to finance the purchase of mortages which they then either retain or sell.
If you count the debt twice, it will scare the crap out of you because it looks like total debt is running wild. That's because asset backs are a relatively new phenomenon in terms of current size of market.
Private debt in the US is very high and I don't mean to minimize the problem, but Prudent Bear has been wrong about the details of this for about the last 5 years. If those entities blow up, it will be because of the actual debt outstanding counted correctly, not because of the way they are viewing it. |
