“Productive Credit” and “Unproductive Credit” and State Exports

Categories: Commentary, Uncategorized |

December 8, 2014

This week we reprise something we (Gregg B.) wrote in 2012, which unfortunately remains relevant today. We also take a quick look the US Trade Deficit and individual State export volumes.

With focus continuing on pensions, and with pension bonds seemingly back in vogue, we thought it worthwhile to revisit an excerpt from our October 8, 2012 commentary, Productive vs. Unproductive Debt – Tax-Exempt vs. Taxable?  I have substituted a current deal to pay off unfunded pension debt for the subject of that commentary, issuing debt to payback Uncle Sam.

… A recent bond issue –

[Ottawa County, Michigan] caught our attention.  This debt is being issued to [pay off part of its unfunded pension liability]…  What drew my attention was the parallel to a discussion regarding “productive credit” and “unproductive credit” set forth in Mark Faber’s September 2012 Gloom, Doom & Boom report.

The Gloom, Doom & Boom report focuses on national debt and corporate debt.  Our intention is to draw, what some might consider, an applicable analogy.  Faber extensively quotes Kurt Richebacher’s May 2006 (yes 2006) report, in which he points to the reality that economic growth has come to have a strong level of dependence on consumer spending and was, as we all now know, supported by the housing bubble (recall all those loans, collateralized by one’s home, to support lifestyle).

Following the housing bubble, we have been mired in a recovery that has “an unprecedented array of escalating imbalances: declining personal savings; ever-widening current deficit; exploding government and consumer debt and a protracted shortfall in business investment, employment and … income,” Richebacher, as quoted by Faber.  (Worth noting that the quote is from 2006 but as Faber notes, still applicable today.)

As we move to the reality of credit expansion, the type of debt issued “makes all the difference between national impoverishment and growing national prosperity.  Capital and wealth increases when a community produces more than it consumes.  Capital and wealth decreases when the community consumes more than it produces.”  Id.

Turning now to “productive” v. “unproductive” debt and the economic impact of borrowing for capital investment and borrowing for consumption.  Richebacher comes to two conclusions:

  • Credit for capital investment generates cumulative employment and income growth with minimal debt growth;
  • Credit for consumption generates compounding debt growth with minimal employment and income growth.

He goes on to describe the impact of a business borrowing for fixed investment (building, plant, equipment) and the outcomes (jobs, income) as opposed to the impact of consumer credit where the economic output is short-lived (any new or further increase in spending requires more credit with compounding interest which, he notes, should be limited to those that realistically expect higher future income).  Faber points to capital spending leaving us with “railroads, canals, infrastructure and new technologies” while credit expansion that supports consumption leaves us with an “over-indebted consumer.”

Turning to municipal debt and the application of the above summary regarding the use of debt.  That brings us back to the [Ottawa County, Michigan] deal (and others to come) — Pension bonds and debt of a similar nature.

Debt for the purpose of building schools, bridges, hospitals and the like strike an uncanny resemblance to credit used for corporate capital investment which, as noted above, generates employment and income growth and, according to Richebacher, “impacts the economy successively from the demand and supply sides and … creates current and future incomes.” One might call this “productive debt” in the public sector.

In contrast is debt like unemployment and pension issues deals that strike us as being more akin to credit for consumption purposes (not including debt that affords a municipality the opportunity to refinance at a lower rate).  In essence, these deals are needed to finance an existing obligation and need to be undertaken because funds are not available to pay for this pre-existing obligation (if all goes well for PA, its unemployment fund is expected to be solvent by 2019).  While there are certainly distinguishing factors that may support some of these deals, the reality is that the debt and compounding interest exist without the corresponding increase in infrastructure, employment and income.  One might call this “unproductive debt.”  Instead of addressing the reality that spending is out of line or obligation structures are unsustainable, debt is issued.

Outstanding debt, debt per capita, income, jobs created and use of proceeds are critical factors to contemplate as one explores new opportunities and evaluates current portfolios.  DIVER Analytics offers data and tools to help and DIVER Advisor’s Muni Bond Report provides a succinct view of relevant information regarding the bond issue, disclosures, news and pertinent sector-based demographic and economic data.

One last thought on this subject coupled with the status of tax-exemption of municipal debt.  If the new Republican Congress decides to pursue tax reform in a way that impacts municipal bonds, distinguishing between productive and unproductive debt should be a top priority for market advocates and policymakers.  Productive debt should be tax-exempt and unproductive debt probably not.  Yes, the devil is in the details but this distinction just may instill discipline and promote growth.

US Trade Deficit Improves

Last week the Census Bureau reported that the seasonally adjusted US trade deficit decreased in October to $43.4 billion from $43.6 billion in September.  With the economic recovery progressing unevenly around the world, commodity prices in flux, and currency exchange rates shifting, we believe international trade will become an increasing focus of domestic economic policy makers.  The impacts of shifts in trade will be felt differently across the nation due to product mix and trading partner concentrations.


Source: DIVER Analytics-Map Module

The moderately positive October improvement offset some of the large move seen between August and September.  The September deterioration was driven by a -1.7% decline in exports.  Large exporter Texas (18% of national), accounted for over half of the September decline. While Texas rebounded slightly in October, Washington, California, and Louisiana were the primary drivers of October’s improved export picture. Oil accounts for approximately 20% of Texas’s exports; so expect more volatility in this series.

Value of Goods Exported by State

(Non-seasonally adjusted)

12-08-14 2

Source: U.S. Census Bureau, DIVER Analytics-Data Access Module, DIVER Data Solutions

This week, the Lumesis team will be in New York and in Boston for the 2014 Massachusetts Investor Conference.

Have a great week,


Gregg L. Bienstock Esq. & Michael Craft, CFA


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