Gluskin-Sheff economist David Rosenberg has been warning of a ‘new frugality’ lately, pointing to the huge, coming downdraft in debt.
He posts a chart meant to illustrate the fact that we’re merely in the “early innings” of debt deleveraging.
HOW FAR INTO THE DELEVERAGING PROCESS ARE WE?
Early innings. From the peak, the level of nonfederal debt has deflated by $260
billion. Some of this has been either paid down, written off, modified, defaulted
on or some combination of the four. No matter.
As Chart 1 illustrates, and employing Bob Farrell’s first Market Rule on the time-
honored trend towards mean reversion, this develeraging process that began two
years ago is really in its infancy stage. The current level of U.S. outstanding
nonfederal debt is $27 trillion, which is astounding both in absolute terms and
even more so relative to nonfederal GDP — a 206% ratio. It is down fractionally
from the 208% peak, but here is the rub. If mean-reversion means that we get
back to some norm of the 1990s, then we are talking about the need to extinguish
$8 trillion of nonfederal debt. The only question is how this happens, not if. If
we’re talking about mean reverting to the very stable trend of the 1960s and
1970s, then the credit contraction is very likely to exceed $11 trillion.
Either way, this process of debt elimination is ongoing and will likely last for years.
Along the way we will see the federal government test the limits of its balance
sheet to smooth the transition and it will be long-term Treasury yields that will
determine when enough is enough in terms of Washington’s fiscal largesse. Just
as the Canadian bond market delivered the same message to the Chrétien/Martin
government in the mid-1990s that ushered in a multi-year forced era of budgetary
restraint and anemic domestic demand. Until the U.S. gets its balance sheet
under control, and monetization of the debt is likely one key strategy, the trend in
the gold price will remain in one direction and that is up.
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