Indebted Economies – Where Did Prosperity Go And How Do We Bring It Back? by Lacy H. Hunt, Ph.D. – Hoisington Investment Management

Total Nonfinancial Debt as a % of GDP

(Excluding Off Balance Sheet Liabilities)

year ending levels

Indebted Economies

Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015.

Business Debt as a % of GDP

(Excluding Off Balance Sheet Liabilities)

quarterly

Indebted Economies

Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015.

Gross Federal Debt as a % of GDP

(Excluding Off Balance Sheet Liabilities)

quarterly

Indebted Economies

Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015.

Total Private and Public Debt as a % of GDP Major Countries

annual

Indebted Economies

Source: Bank of Japan, Cabinet Office, Statistics Canada, Federal Reserve, Bureau of Economic Analysis, Office for National Statistics of U.K., Statistical Office of the European Communities, Reserve Bank of Australia. Haver Analytics. Through Q3 2015. Australia through Q1. U.S. Through 2015.

Characteristics of Extremely Over-Indebted Economies

  1. Transitory spurts in economic growth, inflation and high-grade bond yields cannot be sustained because debt constrains economic activity.
  2. Due to debt repayment obligations, economies are subject to structural downturns without the cyclical excesses of rising interest rates and inflation.
  3. Due to the start and stop economy, productivity growth deteriorates but this is not inflationary, just another symptom of the controlling debt influence.
  4. Monetary policy is asymmetric – can restrain but not stimulate growth.
  5. Fiscal policy options exist provided that they do not increase aggregate indebtedness. Historically, debt overhangs in major economies have only been cured by a significant multi-year rise in saving.
  6. Inflation falls dramatically, increasing the risk of deflation.
  7. Treasury bond yields fall to extremely low levels and remain depressed for a extended period since the Fisher equation (1867-1947) states that the long risk-free yield is equal to the real yield plus expected inflation.
  8. When multiple major economies are simultaneously over-indebted the world lacks an engine of growth.

Nominal GDP, Y

year over year % change, quarterly

Indebted Economies

Source: Bureau of Economic Analysis. Through Q1 2016.

See full slides below.