We had our Sovereign Debt Conference call last week (email us if you want the slides), and highlighted that on a number of metrics, specifically debt-to-GDP and deficit-to-GDP, the United States has comparable ratios to the PIIGS. In effect, the United States is a PIIG.
We have highlighted our concerns over growing debt issuance in the United State many times, and we are not alone in this regard. According to our estimates debt issuance by the U.S. government grew by 24% in 2008 and 22% in 2009. Currently, the United States has $12.6 trillion in debt on its balance sheet, with a debt-to-GDP ratio of 88% (this according to estimates at usdebtclock.org). Our view is that too much debt is bad, and based on long term historical studies, we are nearing that “too much” level.
Those who support increasing levels sovereign debt levels in the United States, point to Japan. The Japanese currently have a debt-to-GDP ratio of almost 200%, and, as the narrative fallacy goes, they are fine. This higher debt ratio is cool because most of it is owned domestically by the government (about half) and 95% of the remainder is owned by Japanese citizens, so foreign investors have very little sway. In addition, Japan has very low interest rates, and its overall cost of servicing debt is 1.3%. All good, right? Being Japanese is cool?
Now certainly, these are facts, and facts are good, but the question remains: Do we want to become like the Japanese? This is certainly not a bigoted point, and I for one absolutely love Sushi, but one look at a long term chart of the Nikkei 225 over the past thirty years, and we get our answer. This major Japanese stock index has done nothing but go straight down for the last 20+ years. So, while the country hasn’t defaulted and her interest rates are low, Being Japanese, is not all it is cut out to be.
Obviously the primary issue in Japan is long term deflation, and our view is that the opposite will likely occur in the U.S., at least in the short term, which is inflation. The point is, though, as the counter argument goes, if we are wrong on inflation, then maybe all this debt isn’t so bad. It probably isn’t bad if you don’t mind two decades of lower highs in your stock market.
Daryl G. Jones
Managing Director
