Jim Reid's new study of The History and Future of Debt for Deutsche Bank details the explosion of debt over the last decade that is unprecedented in a non-war period. These large debt levels have not pushed economic growth higher as expected or desired. Monetary policy has pushed rates negative on trillions of debt to jumpstart growth and reduce the cost of financing, yet these monetary innovations still leave many thinking we are in secular stagnation. These monetary policies are consistent with past efforts to control the cost of debt after WWII through financial repression.
Financial repression is often given a simple definition, an economic environment where policies are used to push or keep interest rates below the rate of economic growth. This was the case for 1946-1980 and again the case for the post Financial Crisis period. If global economies continue down the path of financial repression, the impact on asset returns will be meaningful. Look at the 1946-1980 period.
Leverage got global economies into the Financial Crisis mess and that has not changed. The debt trajectory may have slowed but the direction is still the same. There are sectors that have controlled debt growth, but the allure of low interest rates make borrowing all the more tempting.
This debt growth has occurred even during a period when many countries have engaged in fiscal austerity. The net result is a world awash with debt but limited growth to pay for what was borrowed.
Fiscal policy and thus more debt may be needed to end the growth malaise, an endless debt cycle. Monetary policy has not been enough even with $15 trillion in debt pushed to negative interest rates. The policy prescriptions have now centered on more QE or some form of "helicopter money" and modern monetary theory. Helicopter money can be considered the next level of quantitative easing whereby the monetary authority dispenses with buying bonds and focuses on increasing money more directly to the economy. Modern monetary theory (MMT) is a framework that turns conventional fiscal and monetary policy on its head. The government has the ability to spend or make injections to the economy. Taxes are a withdrawal from stimulus. The net result or imbalance has to be financed through either borrowing money or just increasing currency in circulation through accounting. The MMT crowd will say that if there is economic slack, then a direct increase in money will not be inflationary and will help with growth. Since we do not have inflation, their argument is that there is slack that can be financed with money without any dire consequences.
This debt study shows there are no easy answers and the thought that we will be anywhere near normal in the next few years is a pipe dream. Unconventional monetary policy and greater fiscal policy is most likely ahead. The impact is more financial repression and sub-growth interest rates. This is not a good prospect for investors even if in the short-term there is a gain from increasing bond prices.
Financial repression is often given a simple definition, an economic environment where policies are used to push or keep interest rates below the rate of economic growth. This was the case for 1946-1980 and again the case for the post Financial Crisis period. If global economies continue down the path of financial repression, the impact on asset returns will be meaningful. Look at the 1946-1980 period.
Fiscal policy and thus more debt may be needed to end the growth malaise, an endless debt cycle. Monetary policy has not been enough even with $15 trillion in debt pushed to negative interest rates. The policy prescriptions have now centered on more QE or some form of "helicopter money" and modern monetary theory. Helicopter money can be considered the next level of quantitative easing whereby the monetary authority dispenses with buying bonds and focuses on increasing money more directly to the economy. Modern monetary theory (MMT) is a framework that turns conventional fiscal and monetary policy on its head. The government has the ability to spend or make injections to the economy. Taxes are a withdrawal from stimulus. The net result or imbalance has to be financed through either borrowing money or just increasing currency in circulation through accounting. The MMT crowd will say that if there is economic slack, then a direct increase in money will not be inflationary and will help with growth. Since we do not have inflation, their argument is that there is slack that can be financed with money without any dire consequences.
This debt study shows there are no easy answers and the thought that we will be anywhere near normal in the next few years is a pipe dream. Unconventional monetary policy and greater fiscal policy is most likely ahead. The impact is more financial repression and sub-growth interest rates. This is not a good prospect for investors even if in the short-term there is a gain from increasing bond prices.
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