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Boeckh Investment Letter

Investment and economic commentary by J.Anthony Boeckh and Robert Boeckh

Deleveraging and the Global Debt Crisis

Assessing the financial risk of a nation requires comparing the aggregate debt of all sectors with a measure of the ability to service that debt.  The typical measure of debt to GDP, akin to the “revenue” of a nation, can be misleading, especially during the false prosperity generated within a financial bubble.  Instead, comparing debt to savings provides a more direct measure of leverage that is far less vulnerable to the distortions created during a bubble.  For example, in a case where GDP growth is weak or stagnant, national savings nevertheless can be growing.  This scenario means that support for the debt load is actually improving faster than the GDP figures would indicate. In contrast, a case might develop where GDP is growing (e.g. due to a credit bubble), but savings are decreasing and the nation’s ability to carry its debt load is actually faltering.  Gross Saving is analogous to cash flow, so we call this approach debt to cash flow (Debt/CF) analysis.

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