All this debt!

We get an investment note from Hoisington Investment Management’, specialists in the long bond. 

Barrons: Much of their continuing dour outlook on U.S. and global growth revolves around the explosion of combined private and public debt as a percentage of economic output. According to Hoisington, in the U.S., that has jumped from 200% in 1987 to about 370%. In the euro zone, it has gone from about 300% of GDP in 1999 to more than 460%. Japan’s debt stands at a monstrous 650% of GDP, while China’s total debt has quadrupled since 2008, to 300% of GDP. And that’s probably a conservative measure, considering that China consistently juices its GDP growth numbers.

According to Hunt, the growing debt load, especially in the past decade, acts as a blanket of snow and ice, freezing growth. Money is wasted by financing temporary boosts in consumption, rather than being used for sensible capital spending and infrastructure projects that would yield much future growth. As China has shown, capital investment is unproductive if it just builds highways to nowhere, redundant industrial capacity, and empty housing complexes.

Debt growth is sustainable only if the projects it underwrites produce a stream of income sufficient to repay the interest and principal. This, according to Hunt, is becoming problematic in many areas of the globe, including the U.S., where the energy and mining sectors are in a world of hurt.

According to Hunt, overindebted economies have certain telltale characteristics. Jumps in economic growth, inflation, and high-grade bond yields prove short-lived because debt constrains economic activity. Difficulties in making debt payments, in turn, push economies into frequent downturns and hurt productivity. Monetary policy loses effectiveness as the debt overhang stunts expansion of the money supply, slows monetary velocity, and quenches the animal spirits of producers and confidence of consumers.

I boldfaced the part about covering interest and principal.  There is no Kanosian trick, and the Swamp never pays off interest and simply rolls over principal, and that means low capital efficiency in the Swamp, bad multipliers.  The double entry accounting system does notice this, and business activity drops as the flow of interest payments increase.   HT Mish.