Too much debt changes the game
- Debt is at very high levels
- It is a global problem
- It is not sustainable at such levels
- High growth in debt has flattered past economic growth and stock returns
- The deleveraging process will have significant implications for economic growth, market returns, and wealth management
"The number one threat facing America is its rising debt burden."
Briefing officer at the National Defense University, Time to Start Thinking: America in the Age of Descent by Edward Luce
Briefing officer at the National Defense University, Time to Start Thinking: America in the Age of Descent by Edward Luce
"There is an unprecedented level of peacetime debt globally" |
"Many presume that you never have to pay later -- but that’s a faulty assumption. That’s the difficulty that we have, and we’re trying to solve an indebtedness problem by taking on more debt." |
"Total credit market debt in the United States was $52.6 trillion at the end of the third quarter, including $2 trillion owed by foreigners. In the past decade, debt has grown at an annual rate of 7.8%, while nominal GDP has grown at an annual rate of 4.3%. Over the same period, household, government and financial debt have grown at annual rates of 7.9%, 7.3% and 8.1%, respectively. It is unlikely that debt will be able to grow faster than nominal GDP in perpetuity. The ratio of overall debt to GDP currently stands at 369%, which is the highest ratio on record. The ratio of debt to GDP has been continually increasing since the early 1950s. In the past decade, overall debt outstanding has increased by $27.2 trillion, while nominal GDP has increased by $4.9 trillion."
"The United States of America preliminary prospectus dated March 5, 2010", Grant's Interest Rate Observer
"First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more."
Carmen M. Reinhart and Kenneth S. Rogoff, "Growth in a Time of Debt", NBER Working Series Paper, January 2010
"Debt is future consumption denied" |
"If I were you, I wouldn’t start from here." |
Areté's Take:
- Debt is not sustainable at current levels
- The process of deleveraging has stalled and actually reversed
- As long as debt remains at high levels, lower economic growth is likely
- We're all in this together: The pain felt by overly indebted households affects everyone through lower demand
- In regards to wealth management, you may very well not have as much as you think you do
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