LACEY HUNT: Debt is hurtling the US towards an economic crisis

Debt is going to get the US into a monumental pickle, or at least Lacy Hunt thinks so.

Hunt, one of the leaders of Hoisington Investment Management, which manages over $4 billion, said that the increasing debt among corporations and the government is going to take the country down a startling path.

“The traditional business cycle model said that recessions are brought in by rising interest rates and rising inflation,” said Hunt during an interview at the Mauldin Economics’ Strategic Investment Conference.

“However, when economies are extremely over indebted, the economies can turn down under the weight of the debt. We’ve seen four recession in Japan in the last 7 years with interest rates at zero and inflation negative.”

Japan is the classic example of the type of problem Hunt is forecasting. The debt-to-GDP ratio of the country is higher than any other country in the world, growth has been anemic, and the country has gone to extreme measures to cure its economic ills.

It’s not that debt is a bad thing necessarily, according to Hunt, it’s the addition of debt without a corresponding rise in current growth that’s the core problem.

“Debt becomes very problematic when it does not generate an income stream to replace future interest,” he said.

“Even more problematic is when the debt causes asset prices to rise when corporate profits are falling or when real intrinsic value of some asset such as real estate is falling. Debt can cause a downturn as opposed to inflation and interest rates.”

Hunt is correct that leverage among US corporates has increased over the last few years, while at the same time corporate profits are going through a recession.

“It means the average American is not doing that well. The standard of living is the same as 20 years ago and I think that’s why people don’t feel good about things.”

This has lead to a number of ills for the country, said Hunt. Fewer job opportunities, the highest number of people on food stamps in history, and a record percentage of millennials living at home.

To be fair, there is one important place where debt has decreased — households. The average American’s pile of debt to their income is much lower than during the lead-up to the financial crisis. Additionally, counter to Hunt’s point, the labour market in the US is strong.

Despite this, Hunt believes that the issues facing Americans are primarily coming from the debt that is accumulating.

“These are all manifestations of the fact that debt has restricted the growth in economic activity and the consequences are very real for many, many households in the country.”

When asked what average investors should do to make it through the downturn, Hunt had one reply: stay out of debt.

Here’s the full interview:

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