Tito's Blog

Economist and FT on Private Deleverage vs Public Borrowing

Martin Wolf explains why extra government borrowing will be met by increased private (mostly corporate) savings, à-la Japanese lost decade. In general it makes a lot of sense, even though it makes two strong assumptions:

1. the somewhat paradoxical net flow of capital from developing to mature countries via reserve accumulation and currency manipulation will continue indefinitely
2. dollars and pounds will still be considered a safe heaven

On private corporation deleverage, The Economist has a good article on this week print edition (“Show us the money”) on increased cash generation by US and UK companies, due to lower investments.

Deleverage: The Supply Side And The Demand Side Story

Deleveraging is not only driven by credit crunch (supply side of credit, or banks) but also from an effort by companies to save, pay down debt, hoard cash to improve their resilience in uncertain times.

The Huffington Post has an interesting round-up: Citigroup, Bank Of America Among Companies Hoarding Cash

Supply side: banks are restricting credit and hoarding cash.

The four largest U.S. banks by assets — Bank of America Corp., JPMorgan, Citigroup and Wells Fargo & Co. — have increased their combined liquidity by 67 percent to $1.53 trillion as of Sept. 30 from $914.2 billion in June 2008, before Lehman’s collapse, according to the companies’ third-quarter reports. The amount equals 21 percent of the banks’ total assets, up from 15 percent.

Demand side: companies are saving or reducing their net indebtedness:

In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier.