The IO Nation

The IO Nation	Going20	NEW 9/6/2007 8:18:15 PM
The US has turned into the IO Nation. And IO has two meanings - IO, as in interest only, and "I Owe." Debt / GDP has risen to 340%. For reference: 2000 = 266% 1990 = 228% 1980 = 161% 1970 = 148% 1960 = 141% Further,the growth rate of debt relative to GDP, using five year periods, hasnow been greater than 20% for 23 straight quarterly measurements. Onlyin the period of 4Q84 through 1Q91 was there a longer duration ofgreater than 20%. The acceleration as measured by the five year difference has hit levels last seen in 1987. Thebull case is that low rates have enabled this level of borrowing.Perhaps. But if one assumes that all debt has the 10-year Treasury rateas the applicable interest rate, then interest / GDP is 17.5%. Whilethis is below the levels realized in the 80s, the rate picture isclearly very different. Also, this is up from 13% in 2Q05. But theproblem with this is that there is more than interest to pay, one day,some how, the entire debt load must be repaid (written off, orrefinanced). From a more conservative, realistic measure, one shouldexamine not interest only, but interest and principal. A novel idea forsure, and certainly makes the leap that debts are paid off, and notalways refinanced (as current mortgage situation is proving), and notall written off (maybe). If one assumes a ten year maturity on alldebt, and again the 10-year Treasury, the current P&I / GDP is anall time high of 44%. For reference: 2000 = 37% 1990 = 35% 1980 = 29% 1970 = 21% 1960 = 17% Also, the P / GDP ratio is at an all time high of 27%. And this ratio has basically gone up unencumbered since 3Q81. TheFDIC recently commented that for those residential borrowers that haveDTI of greater than 50% the bank should be leary. Seems quite easy toundestand this. Well, the US is at 44%, and the world should be quiteleary. The bulls argue that the Fed will cut rates and this willbail us out. But debt is not priced at Fed Funds. Perhaps a lower Primerate (300 over Fed Funds) will help, but this would place the P&I /GDP at an even higher level than described above. Perhaps all LIBORbased debt will be saved. But as spreads are ultra low, and risk is nowbeing priced in, cuts may well leave effective rates static. The bullscontinue to disregard the repayment requirement. The IO Nation israpidly coming to an end. The reality of the P is setting in, andborrowers are realizing that their cashflow is grossly deficient.Without another round of borrowing, that further enables assetinflation, the days of living off the balance sheet, and amark-to-market (or model), are over.