Presentation to The Global Interdependence Center Steve Clemons and Richard Vague www.debt-economics.org
2/12/13
The Raging Debate Between Stimulus and Austerity on Public Debt Debt to GDP Debate tends to omit discussion of private debt
300
250
200 Blue — Federal Debt Red — Private Debt
150
100
50
0 1945
2011
Rapid Increase in Private Debt Caused the Great Recession
U.S. Home Mortgages as a percent of GDP (in percent)
$2.5 trillion in excess mortgages vs trend line
80
RUNAWAY LENDING! 68% growth in ten years and 46% growth in six years
70
60
50
Average 16% growth in previous four decades
Higher asset values not a mitigant, true constraint is income
Mortgage Loans/GDP Mortgage Loans if Continued 16% Trend
40
30
Inevitable spate of non-payment after a period of binge lending brought the Great Recession
20
10
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
0
4
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
2011 Comparison of Economic Categories (in billions) $30,000
$9 trillion growth in the last ten years
$25,000
$20,000
$15,000
$10,000
$5,000
$0 GDP
Non-Financial Private Debt
Total Public Debt
Money Supply
Trade
Tax Receipts
6
GDP growth correlates more to private debt growth than government debt growth U.S. Growth in GDP, Private Debt, and Public Debt 1970-2011
Japan Growth in GDP, Public Debt, and Private Debt 1990-2010 12% 10% 8%
-5% -10%
Also correlates more than M2, trade imbalances
2010
2008
2006
-2% -4% -6% -8%
2004
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
0%
2002
Growth in Public
2000
5%
Growth Public Debt 1998
Growth in Private
1996
Growth in GDP
10%
Growth GDP
6% 4% 2% 0% 1994
15%
1992
20%
1990
25%
Growth Private Debt
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?
Nominal Private Debt Totals 1919-1935 (in billions)
Private Debt to GDP Trends prior to the Great Depression and Great Recession (in percent)
$180
66% growth 1919-1929
200
Runaway Lending: 40% Private Debt to GDP Growth
$160 180 $140 $120
160
$100 140
$80
Private Debt/GDP 1920-1930
$60
120 Private Debt/GDP 1997-2007
$40 100
$20
1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935
$0 80 1
2
3
4
5
6
7
8
9
10
11
9
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?
2009
2006
2003
2000
1997
1994
1916
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
1928
1925
1922
1919
1916
KEY GRAPH: Private Debt and Public Debt to GDP 1916-2011
250 (in percent)
2011
200
150 Private/GDP
100 Public Debt/GDP
50
0
Only Three Periods with Very High Debt Growth Private Debt to GDP 1916-2011
250
Only three periods of private debt to GDP growth of 40%
(in percent)
200
150
Private Debt to GDP 100
50
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
1928
1925
1922
1919
1916
0
12
Only Two Periods with 150% Private Debt Levels Private Debt to GDP 1916-2011
250
Only two periods with 150+% absolute private debt to GDP
(in percent)
200
150
Private Debt to GDP 100
50
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
1928
1925
1922
1919
1916
0
13
Combining the Two is Predictive Private Debt to GDP 1916-2011
250
Only two periods with private debt to GDP growth of 40% and 150+% absolute private debt to GDP
(in percent)
Reagan Revolution
200
Good Times 150
VOILA! Private Debt to GDP
100
50
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
1928
1925
1922
1919
1916
0
False comfort from low interest rates 14
• 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
Nominal U.S. GDP, Private Debt, and Public Debt 1920-1939 (in billions)
$180 $160 $140 $120
Private Debt $100
GDP Public Debt
$80 $60 $40 $20 $0
1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
• 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%
U.S. GDP, Private Debt, and Public Debt Trends 1998 to 2011 (in billions)
30000
25000
20000
Private Debt 15000
GDP Public Debt
10000
5000
0 1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
•
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
1991 Japan Crisis, GDP Trends, and Private & Public Debt 1980-1999 (in billions)
¥1,200,000.00 ¥1,000,000.00 ¥800,000.00 GDP
¥600,000.00
IMF Public Debt Total Private Debt
¥400,000.00 ¥200,000.00 ¥0.00 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Almost all countries are on this steep path of increased leverage Total Debt to GDP of Select Countries 1980-2010 400% Italy
350%
France
300%
Available borrowing capacity should be included when measuring a nations wealth
Germany
250%
China 200%
Brazil
150%
United States
100%
Japan 2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
50% 200%
Debt Net of Deposits 1980-2010
180% 160% 140% 120% 100%
80%
US Japan Germany France Italy Spain
60% 40% 20% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The Real Story in the Eurozone Private Debt to GDP 1980 to 2010
250%
200%
150% Spain
100% Italy
France
Germany
50%
0%
Between Scylla and Charybdis • Deleveraging contracts GDP
• Re-levering promotes growth, but increases the structural precariousness of the economy and dampens future growth
Another observation: Global growth is slowing Percent Change in GDP in international dollars
Inversely related to debt accumulation
80.00%
70.00%
60.00%
50.00%
1950-1960 1961-1970 1971-1980
40.00%
1981-1990 1991-2000
30.00%
2000-2008 20.00%
10.00%
0.00%
World
USA
Euro 5
BRIC
Rest of World
• 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 rvague@gmail.com • Steve Clemons can be reached at sclemons@theatlantic.com • The data can be reviewed at www.debt-economics.org