The dollar is falling this year despite zero or negative interest rates in much of the developed world. Part of this is attributable to massive U.S. government transfer payments, as well as the fact that foreigners are no longer buying Treasurys, according to DoubleLine CEO Jeffrey Gundlach.
There appears to be “no end in sight” to wave after wave of government stimulus, Gundlach observed yesterday in a webcast. Indeed, “No End In Sight” was the title of the webcast. A weak dollar also is inflationary and it could force the U.S. Treasury to offer higher rates to purchase a huge, continuous stream of government securities.
Gundlach cited a JPMorgan research report that predicted the U.S. could issue another $1.8 trillion in public debt next year. Currently, public debt stands at about 128% of GDP.
As the government keeps pumping out money, the efficacy of each additional dollar of debt is falling when measured against the GDP growth it generates. Gundlach cited the work of Hoisington Capital’s Lacy Hunt, who found that in in the 1970s each additional dollar of debt produced 70 cents worth of growth. Today, that number has fallen about 50% to somewhere just above 30 cents on the dollar. Hunt has estimated that in nations like Japan with more debt than the U.S., that figure is in the mid teens.
The consumer economy is “living off of government transfer payments,” Gundlach observed, and he predicted it will “continue as far as the eye can see.”
Thanks to government transfer payments, this is the first recession in modern memory where household income has actually risen. In contrast, it took household income three years after the Great Recession to return to 2008 levels.
Government largesse went from 10% of GDP to the 23% area this spring, he pointed out. It has now declined to the 16% to 17% area. Ironically, this has produced a reduction in credit card, auto loan and subprime delinquencies.
Covid-19 is producing some serious cross-currents changing in consumer behavior, at least temporarily. Hourly pay is up about 5%—not because people are receiving huge raises, but because many low-paid workers remain unemployed. Gundlach cited a news story he read claiming that Christmas tree sales are way up, about 30%.
Spending on services is way down thanks partly to lockdowns. However, durable goods spending is up significantly due largely to the boom in home sales.
On the other hand, in most of the country, more than 10% of renters and homeowners are behind on their mortgage payments. In some places, that figure exceeds 20%. But new mortgages being written today are going to people with very high credit scores.