Debt Levels


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High debt levels in many of the world’s economies indicate that their GDP growth is constrained until unproductive debt levels are reduced.

Unproductive debt is defined, in this case, by the post-Keynesian economist Hyman Minsky, as debt that does not create an income stream to repay principal plus interest.  GDP growth is constrained because as unproductive debt levels grow, an income stream is not created to repay principal plus interest, and GDP eventually falls by more than the borrowed debt.  Central banks have typically been able to stimulate GDP growth in the economy by influencing the money supply (M2); but when unproductive debt levels are high, central banks lose their ability to significantly affect the M2 money supply (V=GDP/M2, V is velocity, GDP is Gross Domestic Product, M2 is the M2 money supply).  So a fall in the velocity of money can indicate unproductive debt is being taken on.

At the end of 2015, several major economies had levels of Total Private and Public Debt as a % of GDP above 250-300% — the typical threshold that signals unproductive debt is being taken on: Japan at approximately 650%; the U.K. and Eurozone, each between 450-475%; the U.S. and Australia, each between 350-375%; Canada at approximately 325%; and China at 350%, which may be much higher due to an overstatement of its GDP — a likelihood that would be consistent with China’s M2 velocity, which is lower than that of Japan.

The growth rate for over-indebted countries still cycles up and down but the previously attainable higher growth rates are now not able to be reached until unproductive debt is reduced.  The economic growth cycle of employment, sales, production, and incomes is limited by unproductive debt.

See the following charts from Hoisington Investment Management:

Chart 1 for the Total Private and Public Debt as a % of GDP for Japan, U.K., Eurozone, U.S., Australia, Canada, and China. —

Chart 3 for the U.S. Private and Public Debt as a % of GDP from 1870. —

Chart 6 for the U.S. Velocity of Money starting in 1900. —

Chart 8 for the Velocity of Money for China, Japan, Eurozone, & U.S. —