Embed Size (px)
DESCRIPTION
Richard Vague and Steve Clemons present their findings regarding private debt to GDP ratios.
Citation preview
Presentation to
The Global Interdependence Center
Steve Clemons and Richard Vague
www.debt-economics.org
2/12/13
0
50
100
150
200
250
300
1945 2011
Debt to GDP
The Raging Debate Between Stimulus and Austerity
on Public Debt
Blue — Federal Debt
Red — Private Debt
Debate tends to omit discussion of private debt
Rapid Increase in Private Debt Caused the Great Recession
0
10
20
30
40
50
60
70
80
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
U.S. Home Mortgages as a percent of GDP (in percent)
Mortgage Loans/GDP
Mortgage Loans if Continued 16% Trend
4
Average 16% growth in previous four decades
RUNAWAY LENDING! 68% growth in ten years and 46% growth in six years
$2.5 trillion in excess mortgages vs trend line
Inevitable spate of non-payment after a period of binge lending brought the Great Recession
Higher asset values not a mitigant, true constraint is income
Why Does High Debt to GDP Matter?
• If a home or business owner has high levels of debt, reduced capacity for additional spending and investment
• In aggregate, a country’s capacity for growth is constrained if its citizens and businesses collectively are operating at high leverage
• Though borrowing equals lending, borrowers and lenders are largely different groups, and income is the ultimate constraint on lending
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
GDP Non-FinancialPrivate Debt
Total Public Debt Money Supply Trade Tax Receipts
2011 Comparison of Economic Categories (in billions)
6
$9 trillion growth in the last ten years
GDP growth correlates more to private debt growth than government debt growth
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
U.S. Growth in GDP, Private Debt, and Public Debt
1970-2011
Growth in GDP
Growth in Private
Growth in Public
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
Japan Growth in GDP, Public Debt, and Private Debt
1990-2010
Growth GDP
Growth Public Debt
Growth PrivateDebt
Also correlates more than M2, trade imbalances
Analysis tends to look to the liability side of private balance sheets and other other variables, rather than asset side of the balance sheet
If runaway private lending caused the Great Recession, did it also lead to the Great
Depression?
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
19
19
19
20
19
21
19
22
19
23
19
24
19
25
19
26
19
27
19
28
19
29
19
30
19
31
19
32
19
33
19
34
19
35
Nominal Private Debt Totals 1919-1935 (in billions)
66% growth 1919-1929
9
80
100
120
140
160
180
200
1 2 3 4 5 6 7 8 9 10 11
Private Debt to GDP Trends prior to the Great Depression and Great Recession
(in percent)
Private Debt/GDP 1920-1930
Private Debt/GDP 1997-2007
Runaway Lending: 40% Private Debt to GDP Growth
If the 1920s and 2000s had 40% private debt growth, how many
OTHER times in the last century has private debt growth been 40% in a
single decade?
0
50
100
150
200
250
19
16
19
19
19
22
19
25
19
28
19
31
19
34
19
37
19
40
19
43
19
46
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
KEY GRAPH: Private Debt and Public Debt to GDP 1916-2011
(in percent)
Private/GDP
Public Debt/GDP
1916 2011
0
50
100
150
200
2501
91
6
19
19
19
22
19
25
19
28
19
31
19
34
19
37
19
40
19
43
19
46
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
Only Three Periods with Very High Debt Growth Private Debt to GDP 1916-2011
(in percent)
Private Debt to GDP
Only three periods of private debt to GDP growth of 40%
12
0
50
100
150
200
2501
91
6
19
19
19
22
19
25
19
28
19
31
19
34
19
37
19
40
19
43
19
46
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
Only Two Periods with 150% Private Debt Levels Private Debt to GDP 1916-2011
(in percent)
Private Debt to GDP
Only two periods with 150+% absolute private debt to GDP
13
0
50
100
150
200
250
19
16
19
19
19
22
19
25
19
28
19
31
19
34
19
37
19
40
19
43
19
46
19
49
19
52
19
55
19
58
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
Combining the Two is Predictive Private Debt to GDP 1916-2011
(in percent)
Private Debt to GDP
Only two periods with private debt to GDP growth of 40% and 150+% absolute private debt to GDP
14
VOILA!
Good Times
Reagan Revolution
False comfort from low interest rates
• GOOD NEWS: we now have a tool for predicting — and preventing — the next major crisis of this magnitude
• But how did we miss something so obvious?
• Because many prevailing economic theories and forecasting models ignore debt altogether — since debt is “net zero”
• In addition, we missed it because it is widely held that debt growth is always bullish — witness the commentary about increased home ownership in the 2000s and the welcome we give loan growth today — and it is the objective of monetary stimulus
• WE ARE STILL WELL ABOVE 150% PRIVATE DEBT TO GDP — and growth is harder when you have high debt
• SO HOW WOULD YOU ADVISE DECREASING OUR HIGH RATIO OF DEBT?
– Pay down debt
– Getting government debt under control
– Growth or Inflation
– Debt restructuring
– Live with it
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
Nominal U.S. GDP, Private Debt, and Public Debt 1920-1939 (in billions)
Private Debt
GDP
Public Debt
• Treasury Secretary Andrew Mellon advised President Herbert Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
• He advocated weeding out “weak” banks as a harsh but necessary prerequisite to the recovery of the banking system. This weeding out was accomplished through refusing to lend cash to banks or put more cash in circulation.
• The single biggest lesson of the Great Depression for economists was to AVOID major debt pay down — a “liquidity crunch”
• Thus, in the 2000s, we again had runaway lending, but no massive debt pay down after the crisis point, so instead of private debt contraction of 25% and unemployment of 25%, it was 3% and 9%
0
5000
10000
15000
20000
25000
30000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
U.S. GDP, Private Debt, and Public Debt Trends 1998 to 2011 (in billions)
Private Debt
GDP
Public Debt
• We avoided Depression, but we have a NEW DILEMMA, a heavy overhang of personal and business debt, so they do not have as much capacity to lead vigorous growth
• EUROZONE CRISIS is also about runaway private debt
• Runaway lending happened in Japan in 1991 — almost 40% in ten years then a crash — and 22 years later Japan’s economy has barely grown, with private debt still at 150% of GDP. Once the world’s second largest economy, Japan is now a lackluster third
¥0.00
¥200,000.00
¥400,000.00
¥600,000.00
¥800,000.00
¥1,000,000.00
¥1,200,000.00
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
1991 Japan Crisis, GDP Trends, and Private & Public Debt 1980-1999
(in billions)
GDP
IMF Public Debt
Total Private Debt
50%
100%
150%
200%
250%
300%
350%
400%
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
Total Debt to GDP of Select Countries 1980-2010
Italy
France
Germany
China
Brazil
United States
Japan
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Debt Net of Deposits 1980-2010
US
Japan
Germany
France
Italy
Spain
Almost all countries are on this steep path of increased leverage
Available borrowing capacity should be included when measuring a nations wealth
The Real Story in the Eurozone
0%
50%
100%
150%
200%
250%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Private Debt to GDP 1980 to 2010
Spain
Italy
France
Germany
Between Scylla and Charybdis
• Deleveraging contracts GDP
• Re-levering promotes growth, but increases the structural precariousness of the economy and dampens future growth
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
World USA Euro 5 BRIC Rest of World
Percent Change in GDP in international dollars
1950-1960
1961-1970
1971-1980
1981-1990
1991-2000
2000-2008
Another observation: Global growth is slowing
Inversely related to debt accumulation
• SO HOW WOULD YOU ADVISE DECREASING OUR HIGH LEVELS OF DEBT? – Paydown — causes economic contraction
– Getting government debt under control — a must at some point, but does create short-term GDP pressure and does not address private debt levels
– Growth or Inflation – takes 15 to 20 years — and bumps up against the dampening effect of debt on growth
– Debt restructuring — obstacle of moral hazard and objections regarding wealth transfer — but a trillion in restructuring is better than a trillion in new stimulus
– Live with it — don’t we always?
Questions and Provocations
• Global leverage is increasing unabated – how and when will that trend end?
• In the context of perpetually increasing leverage, all bank lending criteria is perpetually becoming obsolete
• Global GDP growth has been decelerating in the last few decades — what will cause that trend to reverse?
• How can we delever without contracting GDP?
Thank you, and stay tuned …..
• Richard Vague can be reached at [email protected]
• Steve Clemons can be reached at [email protected]
• The data can be reviewed at www.debt-economics.org
