America brings home the debt

Outside of the top 20 per cent of wealthiest households in the US, debt trumps assets.

Eventually all of this debt, largely tied up in housing, needs to go somewhere if it can’t be repaid. It is alarming to see just how indebted pockets of the US economy really are.  

For the wealthy in the US, surging equity markets encouraged by aggressive monetary policy have meant even more wealth. Evidently not everyone has benefitted equally from the aggressive monetary policy measures already undertaken.

The reason why this graph matters is because we are approaching what could be shaping up to be a significant week where monetary policy is concerned. Talks of the eurozone considering quantitative easing and a change of leadership at the Federal Reserve are front and centre.

In a bid to find inflation, European Central Bank executive board member Peter Praet said the central bank might buy assets. Yes, quantitative easing. As there are potential legal challenges that may need to be navigated for the European Central Bank to bring this to reality, it isn’t a foregone conclusion just yet.  

Inflation data will likely be central to the ECB decision in influencing any monetary policy decisions in the months ahead. There is, however, no guarantee an aggressive monetary policy program in the eurozone would foster the desired inflation. The US example has equity markets up and inflation now lower than 2011 when round two of quantitative easing was in full force.      

Janet Yellen, the likely successor of Ben Bernanke as head of the Federal Reserve, will front the Senate Banking Committee tomorrow in the early stages of the formal approval process. The consensus from market players is she is a dove and will favour monetary policy until unemployment is at a longer-run normal level.

However it will not only be Yellen making decisions at the Federal Reserve, which surprised markets in September by not winding back the current bond buying program. Agreement will need to be reached at Federal Open Market Committee meetings, possibly moving Yellen from her ingrained dovish position to somewhere in the middle of the spectrum between dove and hawk.

What we do know is reactions in both bond and equity markets indicate the monetary policy measures undertaken by developed countries do in fact offer some support to the financial system. Whether it is an actual reality or merely a perception is difficult to unravel.

Latest suggestions from the ECB conclude western economies are clearly hooked on devouring debt, further distorting the risks and returns of traditional asset classes.