After years of paying off debt after the recession, both households and companies in America are finally adding debt again.
But according to Michael Kelly, global head of multi-asset investing at PineBridgeInvestments, the debt being added in the economy are actually just fine.
“We have gone through a 5 to 7 year deleveraging cycle,” Kelly told Business Insider.
“In fact all inclusive debt-to-GDP is down substantially. But if [debt] starts going up just a hair, people start to freak out when it’s actually a good thing.”
On the household side, the amount of income going to debt obligations of Americans is at it lowest in decades after a long post-crisis de-leveraging, but consumer credit is slowing ticking up. And Kelly said the increased debt load is actually a positive for the economy
“The period of growth-dampening because of deleveraging is behind us,” said Kelly, whose firm manages $84 billion in assets. “It would be a problem if we were to approach the debt levels of where we were before the crisis, but we have a long ways to go to get to that point so a little increase isn’t a bad thing.”
The basic reason that debt repayments tamp down economic growth is because people spend more money paying for things they have already purchased rather than new goods. And of course economic growth hinges on the continued purchase of new stuff.
“We can sustain a higher debt-to-GDP than we have now, and more people taking on some debt and turning that into spending is stimulative to the economy and will help growth,” Kelly said.
He added that, as we’ve noted before, much of the aversion to increases in debt is a function of the post-financial crisis mindset. Since the recession was caused by a significant bursting of a credit bubble, there is an aversion to any increase in debt.
But a little bit of debt isn’t a bad thing.
“If debt goes up even a tiny bit everyone freaks out and says ‘Oh, we’re about to have another financial crisis’,” said Kelly. “The extreme pessimism isn’t warranted.”