State and local government debt:
State and local governments … face adverse demographics that will drain underfunded pension plans…. The state and local governments do not have the borrowing capacity of the federal government. Hence, pension obligations will need to be covered at least partially by increased taxes, cuts in pension benefits or reductions in other expenditures.
Lacy adds this note on total debt, which includes nonfinancial, financial, and foreign debt:
Total debt … increased by $1.968 trillion last year. This is $1.4 trillion more than the gain in nominal GDP. The ratio of total debt-to-GDP closed the year at 370%, well above the 250-300% level at which academic studies suggest debt begins to slow economic activity.
Lacy makes the key point that overindebtedness impairs monetary policy, not just in the US but globally:
The Federal Reserve, the European Central Bank, the Bank of Japan and the People’s Bank of China have been unable to gain traction with their monetary policies…. Excluding off balance sheet liabilities, at year-end the ratio of total public and private debt relative to GDP stood at 350%, 370%, 457% and 615%, for China, the United States, the Eurocurrency zone, and Japan, respectively…. The debt ratios of all four countries exceed the level of debt that harms economic growth. As an indication of this over-indebtedness, composite nominal GDP growth for these four countries remains subdued. The slowdown occurred in spite of numerous unprecedented monetary policy actions – quantitative easing, negative or near zero overnight rates, forward guidance and other untested techniques.
Read it and think about this, gentle reader. We’re digging a great big hole that is likely to cave in on us before we manage to claw our way back out of it. We need to “wargame” how we respond in our personal lives. That is going to be a big focus of my letters in the coming months.
Lacy’s firm, Hoisington Investment Management Company (www.Hoisingtonmgt.com), is a registered investment advisor specializing in fixed-income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $5 billion under management and is the sub-advisor of the Wasatch-Hoisington US Treasury Fund (WHOSX).
My days continue to be full of information downloads, phone calls, decisions. Probably not unlike yours. Am I the only one that feels that in a world where we have ever more tools that are supposed to simplify our lives, our lives are becoming more complex? Time seems to be a dwindling resource.
But I really can’t complain because it’s a fascinating complexity to explore. I have roughly 120 people, sorted into various sized groups, doing research on nearly two dozen topics dealing with the future that we will cover in the new book. The groups are beginning to get their research and outlines for the chapters back to me, and overall I’m quite impressed with what I’m reading. We’re talking about 1000+ pages of dense research and links to other articles. As I was thinking about the design of particular chapters and assigning groups to research them, I had a general idea of the direction in which things would go. More often than not, though, I had little idea of the complexity (there is that word again) and the scope of information that the research on each topic would reveal.