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Debt

What Drives Long-Term National Debt Growth?

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What Drives Long-Term National Debt Growth?

What Drives Long-Term National Debt Growth?

With the current 106% debt-to-GDP ratio, there’s no doubt that today’s government debt is high. The last time the United States reached this mark, it was during the aftermath of WWII in the late 1940s.

But despite nearly historic debt levels, it does not seem that the national debt is a key issue for most citizens and groups. What drives this accumulation of debt in the long run, and at what point does the debt level become so high that it becomes an undeniable and critical issue for the country?

Today’s infographic comes from the Peter G. Peterson Foundation, a NYC-based group that focuses on educating people about the fiscal challenges of growing government debt. The graphic illustrates the main factors driving the debt upwards, as well as the potential impact down the road.

Rising Temperatures

The trouble with debt is that it delays today’s challenges well into the future, making it a tempting short-term solution when other things aren’t working. However, over time, that burden increases steadily, and the situation quickly represents the “frog and boiling water” parable.

So what’s raising the temperature of that water?

Right now, the aging of the Baby Boomers is a key factor, and the amount of people receiving social security benefits will swell from 62 million to 88 million people by 2035. At the same time, Medicare’s hospital trust fund will run out of money by 2029, and the program will only remain solvent until 2034.

Whether it’s the growing enrollment in these programs or the rapidly escalating costs of healthcare itself, more money will be put towards Social Security and healthcare over the coming years.

By about 2045, government spending on major health programs will nearly double in size to greater than 9% of GDP.

Boiling Water

Today, interest on the debt is equal to about 1.4% of GDP.

However, if the projected pace is maintained, it’s anticipated that interest payments could be equal to 6.2% of GDP by 2047 – this is roughly 2x the average annual amount the federal government spends on education, infrastructure, and R&D combined.

As economists will point out, the government controls the monetary supply and can easily “print” money to make these payments. This is absolutely true, but it also creates an array of other problems such as inflation and increasing distrust in the monetary system.

Though this boiling point looms further down the road, having a plan to cool the temperature (or to jump out of the water) could be a prudent one to keep in our back pockets.

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Debt

Visualizing the Meteoric Rise of Bond ETFs

Bonds are a staple in every portfolio, but up until recently were hard to own. Here’s how bond ETFs changed that, reaching $1 trillion in global AUM.

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Visualizing the Meteoric Rise of Bond ETFs

Bonds are a staple in almost any investment portfolio — but up until very recently, they weren’t exactly the easiest thing to own.

Despite the bond market being bigger than the equities market, bonds mostly trade over-the-counter (OTC) and not on any centralized exchange.

In fact, traders mostly swapped bonds over the phone, negotiating prices and making deals. However, this “old school” approach came with several disadvantages, including high transaction costs, illiquidity, and a lack of true transparency in the market.

A New Way to Play

Today’s infographic comes to us from iShares, and it shows that over the last two decades, the bond market has been dramatically transformed and democratized from the “old school” approach that relied on phones, traders, and giant bond calculators.

The biggest factor in this transition: the use of exchange-traded funds (ETFs) in the bond market, which just hit a new global milestone of $1 trillion of AUM in June 2019.

Let’s look at the journey of how this rapidly rising segment of the market took off, the factors driving it, and what the future may hold for Bond ETFs.

Bond ETFs: Journey to $1 Trillion

Below is a year-by-year account of new innovations in bond ETFs, and how the usage of them has changed over time:

2002: New tech

A new financial technology, the ETF, shakes up the bond market for the first time – and the first fixed income ETFs launch in the United States.

2003: More variety

Just one year in, and there are already numerous types of bond ETFs that allow investors to fulfill different portfolio needs:

  • Government bond ETFs
  • TIPS ETFs
  • Corporate bond ETFs
  • Aggregate bond ETFs

2006: Achievement unlocked

The global bond ETF industry hits $25 billion in AUM.

2007: Bond ETF innovations

The bond ETF universe continues to expand as investors demand even more options:

  • Mortgage-backed security bond ETFs
  • Muni bond ETFs
  • High yield bond ETFs

2008: A new source of liquidity

Liquidity for individual bonds dries up during the 2008 Financial Crisis. However, bond ETFs step up to the plate by providing a new source of liquidity and volume increases, allowing investors to efficiently access fixed income markets.

2010: More precise strategies

The first term-maturity ETFs launch. These special bond ETFs specifically hold bonds that all mature in the exact same year.

2012: Achievement unlocked

The global bond ETF industry hits $250 billion in AUM.

2015: More product innovation

At this time, factor-based bond ETFs start to hit the mainstream. These use a rules-based approach to employ multiple investment factors, such as low volatility, quality, value, or momentum.

2016: Achievement unlocked

The global bond ETF industry hits $500 billion in AUM.

2017: Green bonds

Green bonds ETFs provide investors with the ability to invest in bonds that are tied to sustainability purposes.

2018: Market volatility and bond ETFs

In the second half of 2018, markets get volatile and investors turn to bond ETFs to help reduce their overall portfolio risk, specifically diversifying their exposure to stocks.

2019: Achievement unlocked

The global bond ETF industry hits $1 trillion in AUM, with now over 1,300 bond ETFs available.

The Path to $2 Trillion?

In just 17 years, bond ETFs have grown to be a significant part of the investment universe, reaching $1 trillion AUM in 2019.

Impressively, it won’t likely take long to double the last milestone. According to BlackRock, it’s anticipated that ETFs will hold $2 trillion in AUM by the year 2024 — just a few short years down the road.

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Banks

Where the World’s Banks Make the Most Money

Last year, the global banking industry cashed in an impressive $1.36 trillion in profits. Here’s where they made their money, and how it breaks down.

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Where the World’s Banks Make the Most Money

Profits in banking have been steadily on the rise since the financial crisis.

Just last year, the global banking industry cashed in an impressive $1.36 trillion in after-tax profits ⁠— the highest total in the sector seen in the last 20 years.

What are the drivers behind revenue and profits in the financial services sector, and where do the biggest opportunities exist in the future?

Following the Money

Today’s infographic comes to us from McKinsey & Company, and it leverages proprietary insights from their Panorama database.

Using data stemming from more than 60 countries, we’ve broken down historical banking profits by region, while also visualizing key ratios that help demonstrate why specific countries are more profitable for the industry.

Finally, we’ve also looked at the particular geographic regions that may present the biggest opportunities in the future, and why they are relevant today.

Banking Profits, by Region

Before we look at what’s driving banking profits, let’s start with a breakdown of annual after-tax profits by region over time.

Banking Profit by Year and Region ($B)

 2009201020112012201320142015201620172018
Global ($B)$388$530$635$703$859$963$1,070$1,065$1,144$1,356
United States$19$118$176$263$268$263$291$275$270$403
China$95$135$174$225$255$278$278$270$301$333
Western Europe$78$34$21-$70$28$95$154$159$186$198
Rest of World$196$243$265$285$309$327$348$361$387$421

In 2018, the United States accounted for $403 billion of after-tax profits in the banking sector ⁠— however, China sits in a very close second place, raking in $333 billion.

What’s Under the Hood?

While there’s no doubt that financial services can be profitable in almost any corner of the globe, what is less obvious is where this profit actually comes from.

The truth is that banking can vary greatly depending on location ⁠— and what drives value for banks in one country may be completely different from what drives value in another.

Let’s look at data and ratios from four very different places to get a sense of how financial services markets can vary.

CountryRARC/GDPLoans Penetration/GDPMargins (RBRC/Total Loans)Risk Cost Margin
Global Average5.1%124%5.0%0.8%
United States5.4%121%5.0%0.4%
China6.6%147%6.0%1.4%
Singapore13.0%316%4.6%0.4%
Finland3.4%133%2.8%0.2%

1. RARC / GDP (Revenues After Risk Costs / GDP)
This ratio shows compares a country’s banking revenues to overall economic production, giving a sense of how important banking is to the economy. Using this, you can see that banking is far more important to Singapore’s economy than others in the table.

2. Loans Penetration / GDP
Loans penetration can be further broken up into retail loans and wholesale loans. The difference can be immediately seen when looking at data on China and the United States:

CountryRetail LoansWholesale LoansLoan Penetration (Total)
United States73%48%121%
China34%113%147%

In America, banks make loans primarily to the retail sector. In China, there’s a higher penetration on a wholesale basis — usually loans being made to corporations or other such entities.

3. Margins (Revenues Before Risk Costs / Total Loans)
Margins made on lending is one way for bankers to gauge the potential of a market, and as you can see above, margins in the United States and China are both at (or above) the global average. Meanwhile, for comparison, Finland has margins that are closer to half of the global average.

4. Risk Cost Margin (Risk Cost / Total Loans)
Not surprisingly, China still holds higher risk cost margins than the global average. On the flipside, established markets like Singapore, Finland, and the U.S. all have risk margins below the global average.

Future Opportunities in Banking

While this data is useful at breaking down existing markets, it can also help to give us a sense of future opportunities as well.

Here are some of the geographic markets that have the potential to grow into key financial services markets in the future:

  1. Sub-Saharan Africa
    Despite having 16x the population of South Africa, the rest of Sub-Saharan Africa still generates fewer banking profits. With lower loan penetration rates and RARC/GDP ratios, there is significant potential to be found throughout the continent.
  2. India and Indonesia
    Compared to similar economies in Asia, both India and Indonesia present an interesting banking opportunity because of their high margins and low loan penetration rates.
  3. China
    While China has a high overall loan penetration rate, the retail loan category still holds much potential given the country’s population and growing middle class.

A Changing Landscape in Banking

As banks shift focus to face new market challenges, the next chapter of banking may be even more interesting than the last.

Add in the high stakes around digital transformation, aging populations, and new service opportunities, and the distance between winners and losers could lengthen even more.

Where will the money in banking be in the future?

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