This Could Spark Another Economic Crisis
Portfolio manager Lacy Hunt warns soaring debt levels are holding back the economy and could potentially spark a U.S. economic crisis.
Too much debt is unproductive and unsustainable in the United States, says Lacy Hunt. He warns it could cause a U.S. economic crisis, as it has already stunted growth. Untenable debt is not just a problem for the United States; it could easily cause a worldwide economic crisis. (Source: “LACY HUNT: Debt is hurtling the US toward an economic crisis,” Business Insider, May 26, 2016.)
Hunt said that the largest economies in the world have a higher ratio of total debt to gross domestic product (GDP) today than at the beginning of the Great Recession in 2008. Meanwhile, many households in the U.S. as well as abroad are living far beyond their means.
Lacy Hunt, whose Austin, Texas-based Hoisington Investment Management company specializes in fixed-income portfolios for large institutional clients and manages more than $4.0 billion in assets, warns that this kind of indebtedness is such that it could trigger a U.S. economic collapse.
Debt has become the likeliest trigger of a recession. In fact, at the current level, debt could easily trigger an economic crisis, warns Hunt: “The traditional business cycle model said that recessions are brought in by rising interest rates and rising inflation… When economies are extremely overindebted, the economies can turn down under the weight of the debt. We’ve seen four recessions in Japan in the last seven years with interest rates at zero and inflation negative.” (Source: Ibid.)
Hunt points to Japan to prove his point. He says that the once highly productive country’s debt-to-GDP ratio is so high—it’s the world’s highest, in fact—that none of the prescriptions it has followed to revive growth have worked. The core problem, therefore, is not debt itself, but the lack of growth. Debt, adds Hunt, causes asset prices to inflate just as profits or real estate values are dropping.
For investors, Lacy Hunt’s assessment actually means that the “average American is not doing that well.” In other words, the average American has not seen any true rise in the standard of living since at least 20 years ago. This has a negative psychological effect, making people feel bad about the overall state of the economy. One might add that such negative sensations have a self-fulfilling effect, which increases the chances of economic collapse. Hunt mentions that there are already fewer job opportunities and a record number of adults living with their parents—a self-fulfilling effect would add to those numbers.
The level of indebtedness in the U.S. is on the edge of triggering an overall economic crisis, as it prevents average citizens from growing to their full potential—which is, after all, one of the pillars of the American dream.