by Tyler Durden
March 09, 2014
While the US may be rejoicing its daily stock
market all time highs day after day, it may come as a surprise to many that
global equity capitalization has hardly performed as impressively compared
to its previous records set in mid-2007.
In fact, between the last bubble peak, and
mid-2013, there has been a $3.86 trillion decline in the value of equities
to $53.8 trillion over this six year time period, according to data compiled
Alas, in a world in which there is no longer
even hope for growth without massive debt expansion, there is a cost to
keeping global equities stable (and US stocks at record highs):
that cost is $30 trillion, or nearly double
the GDP of the United States, which is by how much global debt has risen
over the same period.
total global debt has exploded by 40% in just 6 short years from 2007 to
2013, from "only" $70 trillion to over $100 trillion as of mid-2013,
according to the
BIS' just-released quarterly review.
It should come as no surprise to anyone by now,
but the only reason why global stocks haven't plummeted since the Lehman
collapse is simple:
governments have become the final backstop
for onboarding risk, with a Central Bank stamp of approval - in other
words, the very framework of the fiat system is at stake should global
equity levels collapse.
The BIS admits as much:
significant expansion in government spending in recent years,
governments (including central, state and local governments) have been
the largest debt issuers,” according to Branimir Gruic, an
analyst, and Andreas Schrimpf, an economist at the BIS.
It should also come as no surprise that courtesy
of ZIRP and monetization of debt by every central bank, debt has itself
become money regardless of duration or maturity (although recent taper
tantrums have shown what will happen once rates start rising across the
curve again), explaining the mind-blowing tsunami of new debt issuance,
which will certainly never be repaid, and whose rolling will become
impossible once interest rates rise.
But of course, under central planning that is
Bloomberg reminds us, marketable U.S. government debt outstanding has
surged to a record $12 trillion, up from $4.5 trillion at the end of
2007, according to U.S. Treasury data compiled by Bloomberg.
bond sales globally jumped during the period, with issuance totaling more
than $21 trillion, Bloomberg data show.
And as we won't tire of pointing out, China's
credit expansion over this period is easily the most important, and
overlooked one. Which is why with China out of the epic debt issuance
picture, and with
the FED tapering, all bets are slowly
Bloomberg also comments, humorously, as follows:
"concerned that high debt loads would cause
international investors to avoid their markets, many nations resorted to
austerity measures of reduced spending and increased taxes, reining in
their economies in the process as they tried to restore the fiscal order
they abandoned to fight the worldwide recession."
Of course, once gross government corruption and
incompetence made all attempts at austerity futile, and with even the
austere nations' debt levels continuing to
breach record highs confirming there was never any actual austerity to begin
with, the push to pretend to reign debt in has finally faded, and
the entire world is once again engaged - at breakneck speed - in doing what
caused the great financial crisis in the first place: the issuance of record
amounts of unsustainable debt.
All of the above is known. What may not be known
is just who is issuing, and respectively, purchasing, this global
debt-funded spending spree, especially in a world in which one's debt is
the BIS's answer to that question:
investments in global debt markets since the crisis
Branimir Gruic and Andreas Schrimpf
Global debt markets have grown to an estimated $100 trillion (in amounts
outstanding) in mid-2013 (Graph C, left-hand panel), up from $70
trillion in mid-2007. Growth has been
uneven across the main market segments.
Active issuance by governments and
non-financial corporations has lifted the share of domestically issued
bonds, whereas more restrained activity by financial institutions has
held back international issuance (Graph C, left-hand panel).
Not surprisingly, given the significant
expansion in government spending in recent years, governments (including
central, state and local governments) have been the largest debt issuers
(Graph C, left-hand panel).
They mostly issue debt in domestic markets,
where amounts outstanding reached $43 trillion in June 2013, about 80%
higher than in mid-2007 (as indicated by the yellow area in Graph C,
left-hand panel). Debt issuance by non-financial corporates has grown at
a similar rate (albeit from a lower base).
As with governments, non-financial
corporations primarily issue domestically. As a result, amounts
outstanding of non-financial corporate debt in domestic markets
surpassed $10 trillion in mid-2013 (blue area in Graph C, left-hand
The substitution of traditional bank loans
with bond financing may have played a role, as did investors’ appetite
for assets offering a pickup to the ultra-low yields in major sovereign
Financial sector deleveraging in the
aftermath of the financial crisis has been a primary reason for the
sluggish growth of international compared to domestic debt markets.
Financials (mostly banks and non-bank
financial corporations) have traditionally been the most significant
issuers in international debt markets (grey area in Graph C, left-hand
panel). That said, the amount of debt placed by financials in the
international market has grown by merely 19% since mid-2007, and the
outstanding amounts in domestic markets have even edged down by 5% since
Who are the investors that have
absorbed the vast amount of newly issued debt? Has the investor base
been mostly domestic or have cross-border investments grown at a similar
pace to global debt markets?
To provide a perspective, we combine
data from the BIS securities statistics with those of the IMF
Coordinated Portfolio Investment Survey (CPIS).
The results of the CPIS
suggest that non-resident investors held around $27 trillion of global
debt securities, either as reserve assets or in the form of portfolio
investments (Graph C, centre panel).
Investments in debt securities by non-residents thus accounted for
roughly one quarter of the stock of global debt securities, with
domestic investors accounting for the remaining 75%.
The global financial crisis has left a
dent in cross-border portfolio investments in global debt securities.
The share of debt securities held by cross-border investors either as
reserve assets or via portfolio investments (as a percentage of total
global debt securities markets) fell from around 29% in early 2007 to
26% in late 2012.
This reversed the trend in the
pre-crisis period, when it had risen by 8 percentage points from 2001 to
a peak in 2007.
It suggests that the process of international financial integration may
have gone partly into reverse since the onset of the crisis, which is
consistent with other recent findings in the literature.
This could be temporary, though. The latest
IMF-CPIS data indicate that cross-border investments in debt securities
recovered slightly in the second half of 2012, the most recent period
for which data are available.
The contraction in the share of cross-border
holdings differed across countries and regions (Graph C, right-hand
Cross-border holdings of debt issued by euro
area residents stood at 47% of total outstanding amounts in late 2012,
10 percentage points lower than at the peak in 2006. A similar trend can
be observed for the United Kingdom.
This suggests that the majority of new debt
issued by euro area and UK residents has been absorbed by domestic
investors. Newly issued US debt securities, by contrast, were
increasingly held by cross-border investors (Graph C, right-hand panel).
The same is true for debt securities issued by borrowers from emerging
The share of emerging market debt securities
held by cross-border investors picked up to 12% in 2012, roughly twice
as high as in 2008.
BIS Quarterly Review March 2014 - International
banking and financial market developments