Characteristics of Over-Indebted Economies

By John Mauldin,

Dr. Lacy Hunt gave a presentation at the recent Strategic Investment Conference. Let’s see if I can summarize his conclusions about over-indebted economies:

– Temporary economic growth spurts can’t be sustained.
– Weak demand caused by payment obligations creates structural downturns.
– Productivity falls without inflation.
– Monetary policy is ineffective.
– Inflation falls dramatically.
– T-bonds fall to extremely low levels.
– Nominal GDP is the best indicator to judge over-indebtedness. Per capita GDP shows standard of living growth averaged 1.9% from 1790–1990 but only 1.0% from 2000–2014. The real indicator and culprit for the weakness is public plus private debt as a percentage of GDP. Currency devaluations don’t help, because they simply steal growth from others, who then retaliate.

Tendencies of over-indebted economies:

– High debt tends to be a global phenomenon.
– Rolling currency devaluations get thwarted by the Nash equilibrium.
– Currency changes deliver no net gain, only a transitory benefit.
– Currency devaluations reinforce global disinflationary conditions.
– The only cure is a significant multi-year savings boom OR austerity.

Austerity is either self-imposed, forced by external demands, or naturally evolves through fortuitous circumstances.

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