At the World Economic Forum Annual Meeting in Davos, big topics of conversation will likely include inequality, the impact of technology, and how the world can transition to normalized, post-crisis economic policy.
SocGen currency analyst Kit Juckes proposes the following topic of conversation: massive debt levels (not just government, but across the private sector as well).
I have a new favourite chart… I don’t think Wefers in Davos should be talking about government debt or fiscal policy but about (excessive) overall debt, in the US and elsewhere. My favourite chart shows US debt levels (overall non-fin) as a percentage of GDP, plotted against ‘real’ Fed Funds. US debt levels have been rising in a series of steps. Steady through the 1960s and 1970s, debt levels jumped during the Reaganomics era, before stabilising through the 1990s, and then embarking on the Greenspan surge. Right now the ratio is more or less going sideways but it is much, much too high. The idea of using debt to boost economic growth is predicated on the idea that at least the debt/GDP ratio, should fall back in times of economic growth. Didn’t happen in the great moderation of the 1990s and it isn’t showing any signs of happening now, either.
Which in turn makes me wonder what this implies for future monetary policy and in particular, for any notion of a ‘neutral’ interest rate. In an over-simplification, that’s what the second chart shows. A higher and higher debt/GDP ratio has been accompanied by successively lower highs and lower lows for ‘real’ Fed Funds rate. Which comes first, the chicken or the egg? Low rates encourage debt levels to grow and then higher debt levels mean that rate hikes cause the economy to correct at lower and lower real rates.
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