Slide 1: The great shutdown - dealing with the debt burden
The great shutdown - dealing with the debt burden Russell Silberston Strategist 19 May 2020
Slide 2: Disclaimer
Disclaimer All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information
Slide 3: 3
3
Slide 4: The long term view of government debt
The long term view of government debt Outside of war, it has never been higher ‒ Post GFC - government debt has been rising Gross government debt to GDP % rapidly 300 ‒ Covid-19 pandemic - governments stepped 250 in to protect jobs and the economy 200 ‒ Exactly the right thing to do! 150 ‒ Legacy fo
Slide 5: It’s not just government debt
It’s not just government debt We need to consider households and companies Major economy debt (Sep-19) - Across all All sector debt, $bn as at Sep19 60000 sectors (US$): 50000 ‒ United States $52.8 trillion 40000 30000 ‒ China $35.0 trillion 20000 ‒ Eurozone $32.5 trillion 10000 0 ‒ United Kingdom $
Slide 6: Post global financial crisis sectoral changes
Post global financial crisis sectoral changes The paradox of thrift ‒ GFC - A turning point for many western Change in debt since Dec08, % of GDP economies 60 ‒ Households - have paid down debt 50 40 ‒ Corporates in EZ & UK - have done the 30 same 20 ‒ Interest rates pushed down – as both 10 sectors
Slide 7: Does the debt burden actually matter?
Does the debt burden actually matter? How long does the music play? ‒ Chinese debt – Now more debt as a % of All sector debt to GDP, % as at Sep19 GDP than the US does 400 ‒ Paradox of Thrift - Post Covid19, the risk is it 350 102.9 reasserts itself more forcefully 300 ‒ Japanese style debt deflatio
Slide 8: What then, are the options for dealing with the huge debt burden?
What then, are the options for dealing with the huge debt burden?
Slide 9: 1. Financial repression
1. Financial repression Dealing with the debt burden ‒ Financial repression - government policies Real yield, % that channel funds to themselves at below market yielding rates that, in a deregulated 2.5 2.5 market environment, would go elsewhere. 2.2 2.0 1.3 ‒ Historically been very successful at 1.
Slide 10: 2. Inflation
2. Inflation Dealing with the debt burden ‒ Debasing the value of debt through inflation can be traced back 1000s of years ‒ Increasing inflation - to erode the real value of debt is much more difficult in practice ‒ Covid19 will decrease inflation Thick modelling: Phillips Curve-based decomposition
Slide 11: 3. Default
3. Default Dealing with the debt burden ‒ Default has long been a method of dealing with debt ‒ For governments, it is a political choice ‒ Can a government that prints its own money default? ‒ Technically, a debt will be repaid, but in worthless currency ‒ In 1923 the German Rentenmark was worth a
Slide 12: 4. Growth
4. Growth Dealing with the debt burden ‒ For all sectors - inclusive and sustainable YoY real GDP growth – 5 year rolling average % growth is the way to ease a debt burden 14 ‒ Economic growth - driven by working age 12 population and productivity 10 ‒ Major economic blocs - underlying rate of 8 eco
Slide 13: 5. Taxation
5. Taxation Dealing with the debt burden ‒ Increasing a government’s income by raising US household assets and liabilities, U$ tn Dec19 tax would clearly shift the burden of debt ‒ Government debt is ‘secured’ against future tax streams from households and corporations but the level at which this is
Slide 14: 6. Reduce spending
6. Reduce spending Dealing with the debt burden ‒ Reductions in government spending are not on the immediate horizon ‒ The appetite for austerity has a mixed record ‒ Arguably, Northern Europe has been able to unleash a massive stimulus to fight Covid as ‘they fixed the roof whilst the sun was shini
Slide 15: 7. ‘Funny money’
7. ‘Funny money’ Dealing with the debt burden ‒ Drastic times call for drastic measures What? Why? How? Modern Monetary The only constraint on Government spending ‒ Long list of possible routes that policy Theory government spending is the accelerator, is inflation and whilst taxation the brake make
Slide 16: Dealing with the debt burden
Dealing with the debt burden Conclusion: no easy choices Source: IMF & Ninety One calculations 16
Slide 17: Thank you
Thank you www.ninetyone.com