Download Large Budget Deficits, High Levels of Government Debt

Large Budget Deficits, High Levels of
Government Debt - A Force for
Lower Interest Rates
by Lacy H. Hunt, Ph.D., Chief Economist
Hoisington Investment Management Co.
Presented to:
Grant's Conference
New York, NY
October 4, 2016
6836 Bee Caves Road Building 2, Suite 100
Austin, Texas 78746
512-327-7200 Fax 512-327-8646
www.Hoisington.com
●
Gross Federal Debt as a % of GDP
(Excluding Off Balance Sheet Liabilities)
quarterly
110%
100%
110%
Federal Outlays as a % of Total Outlays
Discretionary and Mandatory
fiscal year
80%
Mandatory
80%
90%
70%
60%
60%
80%
50%
50%
40%
40%
70%
30%
Discretionary
20%
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
70%
30%
20%
20%
80%
70%
60%
Avg. = 55.2%
50%
30%
90%
2012
60%
40%
100%
Q2 2016:
Debt = 19.3 tril.
GDP = 18.4 tril.
Debt/GDP ratio 104.9%
Net present value of unfunded
liabilities = $60 trillion in excess of
Social Security and other trust
funds.
52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15
50%
40%
30%
20%
Source: Federal Reserve Board, Bureau of Economic Analysis. Office Management and Budget.
Through Q2 2016.
page 1
Six Considerations Indicate Federal Finance Will
Produce Slower Growth
1. The government expenditure multiplier is already negative.
2. The composition of the spending suggests the multiplier is likely to trend even more negative.
3. The federal debt-to-GDP ratio moved above the deleterious 90% level in 2010 and has stayed
above it for more than five years, a time span in which research shows the constriction of
economic growth to be particularly severe. It will continue to move substantially further above the
90% threshold as debt suppresses the growth rate.
4. Debt is likely to restrain economic growth in an increasingly nonlinear fashion.
5. The first four problems produce a negative spiral from federal finance to the economy
through the allocation of saving, productive investment, productivity growth and eventually to
demographics.
6. The policy makers force themselves into a downward spiral when they rely on more debt in
order to address poor economic performance. More of the same does not produce better results,
only more of the same but worse, a situation we term a policy trap.
page 2
Bibliography of Government Expenditure
Multiplier Studies
1. Alesina, Alberto, Carlo Favero and Francesco Giavazzi. “The Output Effect of Fiscal Consolidation Plans”, NBER
working paper 18336 (2015). Forthcoming in the peer reviewed Journal of International Economics.
2. Barro, Robert J. “The Ricardian Approach to Budget Deficits, The Journal of Economic Perspectives”, Vol. 3
(Spring, 1989). “Macroeconomics A Modern Approach, Thomson/Southwestern” (2008).
3. Blanchard, Olivier, and Roberto Perotti. “An Empirical Characterization of the Dynamic Effects of Changes in
Government Spending and Taxes on Output”. Quarterly Journal of Economics (2002).
4. Dupor, William, and Rodrigo Guerrero. “Does Government Spending Create Jobs, Even During Recessions”.
The Regional Economist (2016).
5. Ilzetzki, Ethan, Enrique G. Mendoza and Carlos A. Vegh Gramont. “How Big (Small?) are Fiscal Multipliers?“,
IMF working paper (March 2011).
6. Owyang, Michael T., Valerie A. Ramey and Sarah Zubairy. “Are Government Spending Multipliers Greater during
Periods of Slack? Evidence from Twentieth-Century Historical Data”. American Economic Review, Volume 103,
No. 3 (May 2013). “Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical
Data”. (June 9, 2016).
7. Perotti, Roberto. “Estimating the Effects of Fiscal Policy in OECD Countries”, IGIER working paper 276
(December 2004).
page 3
U.S. Birth Rate
Japan Births
200
annual
Thousands
Thousands
1989 = 103,900
2015 = 83,804
-19.3% decline
180
32
200
180
160
160
140
140
120
120
100
100
80
80
60
60
59
63
67
71
75
79
83
87
91
95
99
'03
'07
'11
Births/1000 Population, annual
'15
30
28
26
26
24
24
22
22
20
20
18
18
16
16
14
14
12
12
1909
1919
Japan: Productivity: Output per Employed Person
1991
1996
2001
2006
2011
2016
Sources: Cabinet Office, Ministry of Health, Labour & Welfare, Haver Analytics. Through 2015.
1989
1999
Sources: National Center for Health Statistics, Haver Analytics. Through 2014.
2009
annual
25%
0%
20%
20%
-2%
15%
-4%
10%
2%
1986
1979
25%
2%
1981
1969
30%
4%
-6%
1959
30%
4%
1981-1991 = 3.2%
2005-2015 = .50%
1949
35%
6%
-4%
1939
35%
6%
-2%
1929
Japan: Household Gross Saving Rate
annual % change
1989 = 3.3%
2015 = .20%
30
28
Source: Ministry of Health, Labour & Welfare, Haver Analytics. Through December 2015.
0%
32
1990 = 16.7
2014 = 12.5
-6%
5%
1980
1989 = 26.6%
2014 = 5.6%
15%
10%
1985
1990
1995
2000
2005
2010
2015
5%
Sources: Cabinet Office, Haver Analytics. Through 2014.
page 4
United States: Debt as % of GDP and 30 year
Government Bond Yield
annual
120%
Japan: Debt as % of GDP and 30 year
Government Bond Yield
6.0%
110%
5.0%
100%
90%
4.0%
80%
70%
60%
Debt to GDP:
left scale
3.0%
50%
40%
1998
yield:
right scale
2000
2002
2004
2006
2008
2010
2012
2014
Sources: Federal Reserve, O.E.C.D, Haver Analytics. Through Q1 2016.
2.0%
2016
240%
230%
220%
210%
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
1998
annual
6.0%
5.0%
100%
4.0%
90%
80%
3.0%
70%
50%
1998
2.5%
2.0%
1.5%
1.0%
Debt to GDP:
left scale
2000
2002
0.5%
yield:
right scale
2004
2006
2008
2010
2012
2014
0.0%
2016
Euro Area: Debt as % of GDP and 10 year
Government Bond Yield
annual
115%
6.0%
110%
110%
60%
3.0%
Sources: Ministry of Finance Japan, O.E.C.D, Haver Analytics. Through Q1 2016
United Kingdom: Debt as % of GDP and 10 year
Government Bond Yield
120%
annual
2.0%
Debt to GDP:
left scale
2000
2002
2004
2008
2010
2012
2014
Sources: Bank of England, O.E.C.D, Haver Analytics. Through Q1 2016.
100%
4.0%
95%
3.0%
90%
85%
80%
2.0%
Debt to GDP:
left scale
75%
yield:
right scale
2006
5.0%
105%
1.0%
2016
70%
1998
1.0%
yield:
right scale
2000
2002
2004
2006
2008
2010
2012
2014
0.0%
2016
Sources: European Central Bank, O.E.C.D, Haver Analytics. Through Q1 2016.
page 5
Correlation Coefficients Between Gross
Government Debt to GDP and Long Term
Government Bond Yields in Four Major Economic
Areas 1998-2016
annual
Correlation Coefficients
(A)
(B)
1.
U.S.
-0.95
2.
Euro Area
-0.85
3.
Japan
-0.80
4.
United Kingdom
-0.94
Source: HIMCO.
page 6
Total Nonfinancial Debt as a % of GDP
(Excluding Off Balance Sheet Liabilities)
275%
250%
225%
year ending levels
Change in Debt per $ of GDP:
1952-1999 $1.7
2000-2015 $3.3
Q1 2015-Q1 2016
$4.4
Q2 2015-Q2 2016(est.)
$5.5
Q1 2016
= 249.9%
Q4 2009
= 245.5%
275%
250%
225%
200%
200%
175%
175%
Avg. 167.5%
150%
125%
100%
Q1 2015 - Q1 2016
Debt: +$2.19 tril.
GDP: +$.5 tril.
Q2 2015 - Q2 2016(est.)
Debt: +$2.4 tril.
GDP: +$.44 tril.
52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15
150%
125%
100%
Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q1 2016.
page 7
Business Debt as a % of GDP
(Excluding Off Balance Sheet Liabilities)
quarterly
80%
Q4 2008
= 73.42%
Q4 2007
= 68.7%
70%
40%
30%
20%
70%
Q4 2014
= 67.7%
60%
50%
Q1 2016
= 71.3%
80%
Avg. = 51.7
60%
50%
Q1 2015 - Q1 2016
Debt: +$833 bil.
Investment: -$64 bil.
52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15
40%
30%
20%
Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q1 2016.
page 8
Bibliography of Debt Studies Post 2009
1. Arcand, Jean-Louis, Enrico Berkes and Ugo Panizza. "Too Much Finance?" IMF Working Paper, Number
12/161 (June 2012).
2. Buttiglione, Luigi, Philip Lane, Lucrezia Reichlin and Vincent Reinhart. "Deleveraging? What
Deleveraging.” Geneva Reports on the World Economy 16, International Center for Monetary and Banking
Studies (September 2014).
3. Cecchetti, Stephen G., M S Mohanty and Fabrizio Zampolli. “The real effects of debt.” BIS Working Paper,
number 352 (September 2011).
4. Checherita, Cristina and Philipp Rother. “The Impact of High and Growing Government Debt on Economic
Growth, An Empirical Investigation for The Euro Area.” European Central Bank Working Paper, Number 1237
(August 2010).
5. Dobbs, Richard, et al. “Debt and (Not Much) Deleveraging.” McKinsey Global Institute (February 2015).
6. Jorda, Oscar, Moritz Schularick and Alan M. Taylor. "When Credit Bites Back: Leverage, Business Cycles,
and Crises." NBER Working Paper, Number 17621 (November 2011).
7. Kumar, Manmohan S. and Jaejoon Woo. "Public Debt and Growth." IMF Working Paper, Number 10/174
(July 2010).
8. Mian, Atif and Amir Sufi. "Consumers and the Economy, Part II: Household Debt and the Weak U.S.
Recovery.” Federal Reserve Bank of San Francisco Economic Letter (January 2011).
page 9
Bibliography of Debt Studies Post 2009 (cont.)
9. Mian, Atif and Amir Sufi. House of Debt. University of Chicago Press, 2014.
10. Mian, Atif and Amir Sufi. "Household Leverage and the Recession of 2007-2009.” IMF Economic Review
Volume 58 (August 2010): Pages 74-117.
11. Pattillo, Catherine, Helene Poirson and Luca Antonio Ricci. "External Debt and Growth." Review of
Economics and Institutions Volume 2, Number 3, Article 2 (Fall 2011).
12. Reinhart, Carmen M., Vincent R. Reinhart and Kenneth S. Rogoff. "Public Debt Overhangs: AdvancedEconomy Episodes since 1800." Journal of Economic Perspectives Volume 26, Number 3 (Summer 2012):
Pages 69-86.
13. Roxburgh, Charles, et al. "Debt and Deleveraging: The global credit bubble and its economic
consequences.” McKinsey Global Institute (January 2010).
14. Roxburgh, Charles, et al. “Debt and Deleveraging: Uneven progress on the path to growth.” McKinsey
Global Institute (January 2012).
15. Taylor, Alan M. “The Great Leveraging.” NBER Working Paper, Number 18290 (August 2012).
page 10
Characteristics of Extremely Over-Indebted
Economies
1. Growth is abnormally weak. Transitory spurts in economic growth, inflation and high-grade bond
yields cannot be sustained because debt constrains economic activity.
2. Due to debt repayment obligations, economies are subject to structural downturns without the cyclical
excesses of rising interest rates and inflation.
3. Deterioration in productivity is not inflationary but just another symptom of the debt overhang.
4. Traditional monetary and fiscal policy actions are asymmetric. They can restrain but not stimulate
growth. Fiscal policy options exist provided they do not increase aggregate indebtedness.
5. Inflation falls dramatically, increasing the risk of deflation.
6. Treasury bond yields fall to extremely low levels and remain depressed for an extended period since
the Fisher equation (1867-1947) states that the long risk-free yield is equal to the real yield plus expected
inflation.
7. When multiple major economies are simultaneously over-indebted, the world lacks an engine of
growth.
8. Indebtedness problems cannot be solved with more debt and if that is the course, the first seven
symptoms will not only persist, they will worsen. Historically, debt overhangs in major economies have
only been cured by a significant multi-year rise in saving of which different ways can achieve this result.
9. During periods of prolonged over-indebtedness, demographics may deteriorate reinforcing the negative
influences of the first eight characteristics.
page 11
Nominal GDP, Y
year over year % change, quarterly
25%
Q4 to Q4 %
change
2013
2014
2015
Q2 2016
y-o-y %
change
(A)
(B)
(C)
(D)
(F)
1.
Nominal
GDP
4.3%
4.1%
3.0%
2.4%
2.
Real GDP
2.7%
2.5%
1.9%
1.2%
20%
15%
25%
20%
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
Y = P(price level)*Q(Real GDP)
Y = M*V
48
55
62
69
76
83
90
97
'04
'11
-10%
Source: Bureau of Economic Analysis. Through Q2 2016.
page 12
Real Per Capita GDP Growth, Selected Periods
average annual growth
2.5%
2.0%
2.5%
2.0%
1.9%
1.5%
1.5%
1.0%
1.0%
1.0%
0.5%
0.5%
0.0%
0.0%
1790-1999
2000-2016
Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget,
N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through Q2 2016.
page 13
Real Per Capita GDP Growth,
Current Expansion vs. Prior Expansions
3.0%
average annual growth
3.0%
2.7%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.3%
1.0%
1.0%
Q2 16 y-o-y = .46%
0.5%
0.0%
1790-2008
2009-2016
0.5%
0.0%
Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget,
N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through Q2 2016.
page 14
Nonfarm Business Sector: Productivity
6 year % change a.r., quarterly
5%
5%
4%
4%
3%
3%
Avg.
2%
2%
1%
1%
0%
0%
-1%
-1%
53
56
59
62
65
68
71
74
77
80
83
86
89
92
95
98 '01 '04 '07 '10 '13 '16
Sources: Census Bureau. Bureau of Labor Statistics. Through Q2 2016. Real Median HH Income through 2014.
page 15
M2 Money Stock
30%
annual % change
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
Avg. = 6.6%
5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-15%
-20%
-20%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Sources: Federal Reserve Board. Bureau of Labor Statistics;
Monetary Statistics of the United States. Through August 2016. Last plot is 12 months ending August
2016 vs. same period a year ago.
page 16
Velocity of Money 1900-2016
Equation of Exchange: GDP(Y) = M*V
annual
2.25
V = Y/M
2.25
1997 = 2.2
1918 = 2.0
2.00
1.75
2.00
avg. 1900
to present = 1.74
1.75
avg. 1953 to 1983 = 1.75
1.50
1.50
Lowest since 1950
1.45
1.25
1.25
1946 = 1.2
GDP = MB*m*V
1.00
1.00
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Sources: Federal Reserve Board; Bureau of Economic Analysis;
Bureau of the Census; The Amercian Business Cycle, Gordon, Balke and Romer. Through Q2 2016.
Q2 2016; V = GDP/M, GDP = 18.4 tril, M2 = 12.7 tril, V = 1.46
page 17
Composite M2 Growth for China, U.S., Japan and
Europe
annual % change
12%
12%
10%
10%
8%
8%
Avg. = 7.6%
6%
6%
4%
4%
1999
2004
2009
2014
Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau
of Statistics, Haver Analytics. Through Q4 2015.
page 18
M2 Velocity
annual
2.4
2.4
2.2
2.2
2.0
2.0
1.8
1.8
U.S.
1.6
1.6
1.4
1.4
1.2
1.2
Euro
1.0
1.0
0.8
0.8
0.6
Japan
0.6
0.4
China
0.4
0.2
0.2
1998
2001
2004
2007
2010
2013
Sources: Bureau of Economic Analysis, Federal Reserve, European Central Bank, Bank of Japan, China
National Bureau of Statistics, People's Bank of China, Haver Analytics. Through Q4 2015.
2016
page 19
Long-Term Government Bond Yields Starting with
Historic Panic Years: Japan 1989, U.S. 1873 and 1929
annual average
7%
U.S. panic year 1873 = year 1
U.S. panic year 1929 = year 1
Japan panic year 1989 = year 1
6%
5%
Japan 1989
7%
6%
5%
U.S. 2008
4%
4%
U.S. 1873
3%
U.S. 1929
3%
2%
2%
1%
1%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Sources: Federal Reserve Board, Homer & Sylla. Bank of Japan. (U.S. 2016 through July)
page 20