Headline Nov 11, 2014/

''' O'' DEBT- DOOM *AND* 

DINKY DUCHY '''

MOST EMPIRICAL STUDIES look at government debt . But the origins of the 2008 financial crises lay instead in private sector liabilities:

Especially mortgages, which account for a big part household debt, and massive borrowing by the banks. 

The debts by non-financial firms played a big role in Japan's crisis in the early 1990s but not in the global crisis in 2008. 

Analysis show the expansion of household and corporate debt in recent years-

for a variety of rich countries, expressed as a percentage of GDP.

Much of what companies, households and governments owe, they owe to banks and other financial firms, which extend loans and also buy securities. These financial firms, in turn, owe a lot of money themselves:

To their depositors, the householders and a variety of other  ''lenders to the lenders''. 

***Banks are in essence middlemen or   ''financial intermediaries''=  that borrow in order to lend. They hold a lot of assets and a lot of liabilities at the same time***.

In fact, the debts of financial companies often dwarf the debts of governments, households and non-financial firms.

According to the  OECD , a club of rich countries, Luxembourg's financial sector had debts worth over  4,900 %  of the country's GDP in 2011. The dinky duchy is an extreme case.

But the figures are also striking in other countries with prominent financial sectors, such as Ireland  - where financial-sector amounted to 1,434% of GDP and Britain 837%.

The scale of these debts can seem alarming, although in theory financial firms are also supposed to to hold assets of comparable value.

When firms or households hold a lot of debt, however, even a small fall in the value of their assets can bring them to the brink of bankruptcy.

If a family owns a $100,000 home and owes $90,000 to the bank, their net worth is $10,000.

But if the value of their home drops by 5%, their net worth halves. The steep fall in asset prices during the crisis caused even more severe losses: many families found their homes were worth less than their mortgages-

While financial institutions that had borrowed heavily to invest found that their losses exceeded their equity  -the money the owners put into the business.

As well as being vulnerable to declines in asset prices, the highly indebted are also more exposed to fluctuations in their incomes. Their past borrowings leaves them less room for further borrowing to cushion financial blows.

Thus highly indebted households find it harder to  ''smooth''  their consumption and similarly burdened firms find it harder to invest when their revenues dip.

To asses the threat debt poses to economic stability, Douglas Sutherland and Peter Hoeller of the OECD have calculated trend rates of debt to GDP, smoothing out the cyclical ups and downs.

They note that financial sector debt tends to exceeds its trend during the big, long booms of the kind most rich countries enjoyed before the crisis.

But the  build-up of this financial sector debt makes it more likely will come to an end, Messrs Sutherland and Hoeller find.

And the bust are often deeper, as has been the case this time  

The Honour and Serving of this operational research continues. Thank you for reading and see Ya all on the next one.

With respectful dedication to all the Leaders of the free world. See Ya all Your Excellencies, on !WOW!  -the World Students Society Computers-Internet-Wireless:

And with loving and caring dedication to Imran Khan, for so many a tutorials and insights. 

This Imran Khan, like the great O''Captain, is a good lad and a leader in the making.

.He is also, ever the good son! : Much obliged and many a thanks! See you on the PhD reckoning at Harvard.

''' Debt Canary '''

'''Good Night and God Bless

SAM Daily Times - the Voice of the Voiceless