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Tag: Debt Service

Happy Easter !

a real stoolie, worth readin
What Matters More: Debt-to-GDP, Or Supply?
There may be a flaw in the thinking our economists, financial leaders, the MSM and (even) the bloggers. Everyone is looking at the debt issue based on some ratio of total debt to GDP or debt service to GDP. This is the way it has always been done and is both right and appropriate. How much debt can be afforded is a ratio of the borrower’s income, whether it is an individual, a company, a State or a Sovereign. But there is (to me) evidence of a new metric developing. Supply is quickly becoming the determinant for the cost of borrowing, not debt to GDP levels.

Consider California. They have a monster GDP. Their debt to GDP is one of the best in the country. They have debt equal to only 6% of GDP. Massachusetts and Rhode Island are north of 20%.

But California is the official junk borrower. They just paid 5.8% for ten-year money. On a taxable equivalent yield that comes to 9%. Cali’s CDS spreads are also in the tank. Their spreads are trading even up to Bulgaria. It is not their GDP that is the problem it is their visible supply of paper.

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