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Impediments to Growth

In Hoisington's Fouth Quarter Review (not yet posted online), Lacy Hunt takes a look at the Trump economy, policy lags, and impediments to growth.

Hunt sees five major impediments, in his report.


1. Impediments to Growth: Unproductive Debt

At the end of the third quarter, domestic nonfinancial debt and total debt reached $47.0 and $69.4 trillion, respectively. Neither of these figures includes a sizeable volume of vehicle and other leases that will come due in the next few years nor unfunded pension liabilities that will eventually be due. The total figure is much larger as it includes debt of financial institutions as well as foreign debt owed. The broader series points to the complexity of the debt overhang. Netting out the financial institutions and foreign debt is certainly appropriate for closed economies, but it is not appropriate for the current economy.

Total debt gained $3.1 trillion in the past four quarters, or $5.70 dollars for each $1.00 of GDP growth. From 1870 to 2015, $1.90 of total debt generated $1.00 dollar of GDP.

We estimate that approximately $20 trillion of debt in the U.S. will reset within the next two years. Interest rates across the curve are up approximately 100 basis points from the lows of last year. Unless rates reverse, the annual interest costs will jump $200 billion within two years and move steadily higher thereafter as more debt obligations mature.

This sum is equivalent to almost two-fifths of the $533 billion in nominal GDP in the past four quarters. This situation is the same problem that has constantly dogged highly indebted economies like the U.S., Japan and the Eurozone.


2. Impediments to Growth: Record Global Debt

The IMF calculated that the gross debt in the global non-financial sector was $217 trillion, or 325% of GDP, at the end of the third quarter of 2016. Total debt at the end of the third quarter 2016 was more than triple its level at the end of 1999.

Debt in China surged by $3 trillion in just the first three quarters of 2016. Chinese debt at the end of the third quarter soared to 390% of GDP, an estimated 20% higher than U.S. debt-to-GDP. This debt surge explains the shortfall in the Chinese growth target for 2016, a major capital flight, a precipitous fall of the Yuan against the dollar and a large hike in their overnight lending rate.

Such policies lose their effectiveness over time. [As stated by] Nobel laureate F. A. Hayek (1933): "To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about."


3. Impediments to Growth: Weak Global Growth

Based on figures from the World Bank and the IMF through 2016, growth in a 60-country composite was just 1.1%, a fraction of the 7.2% average since 1961. Even with the small gain for 2016, the three-year average growth was -0.8%. As such, the last three years have provided more evidence that the benefits of a massive debt surge are elusive.

World trade volume also confirms the fragile state of economic conditions. Trade peaked at 115.4 in February 2016, with September 2016 1.7% below that peak, according to the Netherlands Bureau of Economic Policy Analysis. Over the last 12 months, world trade volume fell 0.7%, compared to the 5.1% average growth since 1992.


4. Impediments to Growth: Eroding Demographics

World trade volume also confirms the fragile state of economic conditions. Trade peaked at 115.4 in February 2016, with September 2016 1.7% below that peak, according to the Netherlands Bureau of Economic Policy Analysis. Over the last 12 months, world trade volume fell 0.7%, compared to the 5.1% average growth since 1992.

Real Disposable Personal Income per Capita

In the fiscal year ending July 1, 2016, U.S. population increased by 0.7%, the smallest increase on record since The Great Depression years of 1936-1937.

For the decade ending in 2015, 39.5% of 18-to 34-year olds lived with parents and/or other family members, the highest percentage for a decade since 1900, with the exception of the one when new housing could not be constructed because the materials were needed for World War II.


5. Impediments to Growth: Exhausted Pent-Up Demand

In late stage expansions, pent-up demand is exhausted as big-ticket items have already been purchased. At the start of 2017, the current expansion reached its 79th month, more than 20 months longer than the average since the end of World War II. At this stage of the cycle, setting new records is a reason for caution, not optimism.

Numerous signposts of this late cycle risk include low factory use, weakness in new and used car prices as well as most discretionary goods, a rising delinquency rate on the riskiest types of vehicle loans and a fall in office and apartment vacancy rates.


End - Lacy Hunt - Hoisington

Those are many of the same themes I have been discussing for quite some time. In general, Hunt and I see things similarly.

Debt may be good as long s it is put to productive use and can be serviced. That hasn't been the case.

I sarcastically commented on the alleged lack of debt in We Need More Debt: $152 Trillion is Simply Not Enough to Stimulate the Global Economy!

Paul Krugman tells us Debt is Good.

Krugman says … "Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there's a reasonable argument to be made that part of what ails the world economy right now is that governments aren't deep enough in debt."

Too Much Savings

Larry Summers speaks of The Age of Secular Stagnation.

Summers says … "The core problem of secular stagnation is that the neutral real interest rate is too low. This rate, however, cannot be increased through monetary policy. Indeed, to the extent that easy money works by accelerating investments and pulling forward demand, it will actually reduce neutral real rates later on. That is why primary responsibility for addressing secular stagnation should rest with fiscal policy. An expansionary fiscal policy can reduce national savings, raise neutral real interest rates, and stimulate growth."

There you have it. Despite being $152 Trillion in debt, we actually have too much in savings.

How Much Additional Debt Do We Need?

So, how much debt do we need? It's hard to say. Perhaps another $200 trillion would be enough. To be safe, perhaps a quadrillion dollars in new debt is necessary.

Then again, perhaps Krugman and Summers are trapped in academic wonderland or some alternate universe.

Those in the real world may wish to consider the distinct possibility debt is the problem, not the solution.


Other concerns

In addition to debt, I am very concerned about global trade wars, currency wars, real wars, and equity bubbles, all of which waste productive resources.

Equity valuations are stretched beyond belief in an Everything Bubble setup. Those equity bubbles are an enabler of destructive consumer borrow-and-spend habits.

In Trump's "America First" world, Boeing is likely to a Major Trade War Casualty.

On January 27, I took a look at What's Behind the Collapse in Global Exports in the US, Japan, EU, Emerging Markets?

And major trade wars have not even started.

Finally, I once again call attention to my Rebuttal of Larry Summers' Secular Stagnation Thesis.

Throwing more debt at the world cannot possibly be the solution to the stagnation problem. Nor can trade wars.

 

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