I just don't get these numbers from Wikipedia and other sites as well. I thought that the external debt for the U.S. was only around 40%. They show the U.K. as having debt of 375% of GDP. What am I missing? Why do you state it as 12%? Do you have a site where I can get these figures?

US government obligations are close to $10 trillion. This is almost 80% of GDP. There is no such thing as external or internall, since people can take their assets out of USA when they get back their money.

Of course, a small accountign gimmick is used - About 1/3rd of the national debt was borrowed from social security trust fund... which is no much different from taking it from our savings account in a bank.

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What do you mean no such thing as external debt? I can't find the link but I think approximately 40% of our bonds are owned by foreigners. Presumably the rest is owned domestically. External debt is supposedly money owed to foreigners. If only 40% of our debt is owed to foreigners then why do many websites show external debt as near 90%?

Hi Qed,

The UK's public sector debt will rise to about 80% of GDP from levels just shy of 40% pre-crisis. The figure of 375% covers the total of public and private sector debt.

A great portion of the UK's private sector debt emanates from the highly leveraged financial sector. Banks in the UK are global in their business models, having moved away, particularly in recent years, from a saturated domestic market in the search for greater profits abroad.

This means the UK banks, in addition to their bloated exposure to the domestic economy, are now holding large amounts of non-sterling assets, denominated mainly in dollars, against which they fund with deposits in the same foreign currency, mainly from foreign institutions in the interbank market. Each one of these deposits counts as a liability and is, therefore, included in the total private sector debt.

The dangers of a country having excessive external debt levels become obvious when we look at emerging market crises of the past, when foreign investors quickly lost faith in the fiscal competence of the incumbent government and/or the economic growth prospects of that country, thereby leading to a funding strike (a refusal to fund the growing deficits) and a reversal of FDI flows. This presents the affected emerging economy with a funding crisis, leaving their currency at the mercy of speculators, and the IMF often called in as a last ditch solution.

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Don't you remember seeing it a few days ago in the EUR/USD forum? Here is the post.

http://forexforums.dailyfx.com/271955-post14488.html

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Rickos.

Yes, I did see the post and that is what got me looking at debt levels.

Here are the sector weightings for the S&P500 and Japanese TOPIX150. Note that Technology has taken the top spot in the SPY and financials are shrinking. The leading sectors in the TOPIX are consumber goods, industrials, and financials. These are the leveraged industries or industries that depend on the consumer.

Technology companies on the other hand are not leveraged and do not depend on financiing. That is why they are performing so well. The U.S. technology sector is up 15.5% for the year. Basic materials are up 9.2%. Industrials are down 8.7%.

This is the problem with Japan and even Europe for that matter. They have cyclical industrial companies that depend on leverage and financing, two things that are not available at the moment. Deleveraging of the U.S. consumer will continue to hurt Japan IMO. My long term bullish view for the USDJPY has not changed.

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Thanks Paul,

I had thought about asking you this question directly because I was sure you would have the answer.

Based on External debt who would you say is better positioned, the U.K. or the U.S? Should I be looking at the public and private debt combined or just the public external debt when judging a currency? When I look at that external debt number per person in the U.K. it seems very scary.

But wait. Deleveraging will cause deflation, taking currency out of circulation. The question then becomes, will the deleveraging be greater in the US or in Japan. The currency with the most deleveraging will appreciate against its counterparts as money is brought back to the lenders and isn't reissued as new loans, yes? That is really the whole conumdrum we have in the currency markets in general. We have right now money being printed and a competition among countries to see who can issue more debt than the rest. But that would seem unsustainable and lead to a huge deflationary spiral at some point as public debt blows up somewhere. Where will it begin? Seems like the market is most scared of GBP being the first to blow up at the moment.

You seem to be summing it up correctly. The way I see it Japan has had deflation for years and I don't see that changing due to a very old population. And I view Japan as an extension of the U.S. consumer. The U.S. consumer is delveraging. This cannot be good for Japan. But it seems unlikely that the U.S. will suffer the same immediate fate as Japan. They had a commercial and residential property bubble which was larger in scale than what we have in the U.S. because they have limited land available for building. So their crash in property values and the resulting deflation was much more dramatic.

The present administrations policy will crush U.S. consumption and slow U.S. GDP growth. This is not good if you are exporting value added goods to the U.S. I still favor China as an investment because they add little value to exports at the present time. I am not sure what will happen to the USD over the long run. What do you think?

Without doubt, the US is deleveraging more than Jpn. At current levels, Jpn is still deflationary, but there is very little downside room. I am seeing how US corporate and consumers are downsizing and streamlining their expenditures. From corporate jets down to business class, from business class down to coach. In Asia, some executives fly budget airlines... so there is really very little room to stream line further in Asia.

Current vacation travel to Jpn seems to be totally shut down due to the high yen. Travellers are flocking to AZ and NZ instead. And some to the US and shopping for property and education for their children. Anyway, this is a foreigners' perspective of US vs Jpn.

The US consumer is undoubtedly de-leveraging but the US treasury clearly is not. The Japanese consumer, by virtue of rising unemployment, is losing it's propensity to save (according to Goldman savings rates have plunged to 2.2%) but this decline in savings (see todays retail sales) is not funding an uptick in consumption. So, they aren't "de-leveraging" as such but the government is clearly in a massive mood to sell JGB's and spend and "re-lever"

I keep coming back to the question...who buys all these JGB's ? Especially when savings are shrinking.

9595 SEEMS LIKE GOOD RESISTANCE #

I took profit on my USDJPY short this morning. Not the best price; but the stall around 96 has signaled to me that it is time to take something out of my heavy exposure to risk aversion (I have been short AUDUSD, USDJPY and EURCHF).

Tempted to get in on a medium-term, position size controlled AUDJPY short though. What do you guys think? Risk aversion strong enough to keep this pair moving down? Growth, interest rates and (IMO) even true safety attributes fall in favor of the Australian dollar. This is an iffy proposition.

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There is too much cash on the sidlines to bet on risk aversion unless it is a short term play. I have been buying the AUDJPY on pull backs. It is my favorite pair. They are saying that China steel demand will fall 15% this year and only India will see a rise. Is this a problem for Australia as they are such a large exporter of iron ore?