Searching for Accurate Maps

Mish posts snippets of “an extraordinary interview by Kate Welling of Dr. Lacy Hunt, the chief economist of Hoisington Investment Management.”  The original PDF is posted on John Mauldin’s site here. Not included in Mish’s snippets is this graph of total (public and private) Japanese debt. If you’re holding a hot beverage, you might want to put it down before looking at this. You might need a stiff beverage afterwards. (See bottom of the post for US/UK total debt horror story, but after seeing the Japan one, Hey! That’s nothing!!)

via Mish’s Global Economic Trend Analysis: Face The Music: Road Back To Prosperity Is Through Shared Sacrifice, Not Government Stimulus; Case Against Fractional Reserve Lending.

But hey! No worries, because most of the debt is held by domestic investors!!

Snark aside, Dr. Hunt says a few things which buck the trend, and as that in itself is so unusual, and a different opinion often offers food for thought, here are my snippets:

1. a great study by the McKinsey Global Institute Study, listing what they call the Four Archetypes of the Delevering Process. What it boils down to is that austerity is required in about 75% of the cases. Either you do it yourself or it’s imposed upon you. They do address the possibility of “growing out of debt” and they cite the case of the U.S. in World War
   II and a couple of other instances. But to my way of thinking, the U.S. during WWII was also an austerity case. If you look at my chart of the personal savings rate back to 1929, you can start to see that what really brought us out of the Great
   Depression were our exports. Our allies’ countries were being disrupted by actual fighting and they had manpower shortages. So we were selling them everything that we could produce — but meanwhile, our people could not spend the income we were receiving.
   The Delevering Process: Four Archetypes
   1. “Belt Tightening”. The most common delevering path. Episodes where the rate of debt growth is
   slower than nominal GDP growth, or the nominal stock of debt declines. Examples are Finland ’91-’98,
   Malaysia ’98-’08, U.S.’33-’37, S. Korea ’98-’00.
   2. “High Inflation”. Absence of strong central banks, often in emerging markets. Periods of high
   inflation mechanically increase nominal GDP growth, thus reducing debt/GDP ratios. Examples are
   Spain ’76-’80, Italy ’75- ’87, Chile ’84- ’91.
   3. “Massive Default”. Often after a currency crisis. Stock of debt decreases due to massive private and
   public sector defaults. Examples are U.S. ’29-’33, Argentina ’02- ’08, Mexico ’82- ’92.
   4. “Growing out of debt”. Often after an oil or war boom. Economies experience rapid (and off-trend)
   real GDP growth and debt/GDP decreases. Examples are U.S. ’38- ’43, Nigeria ’01- ’05, Egypt ’75-’79. [p.15]
2. Q: It’s more than a little perverse to pull for another world war to pull us out of this mess. Wasn’t the debt deflation in the 19th Century simply cured by the passage of time?
   A: In the earlier case, the excessive indebtedness just burned itself out. That was the title of Kindleberger’s chapter on policy responses: “Letting It Burn Out and Other Devices.” I sent you an excerpt from that, too. You might do better to
   just let it burn out. Everybody rejects that as being too harsh; “How could you possible advocate that?” But it it might be better.
   Q: Sure, like a forest fire. But that argument isn’t very strong in today’s highly interconnected economy. We’re not facing any isolated conflagration.
   A: Well, you hear that argument, but I’m not sure that I buy it. I think the world was very interconnected in the 1920s and I really see a lot of parallels.
3. Q: Suppose one of Europe’s Hail Mary passes actually miraculously works, and the Chinese decide to lend them a ton of dough?
   I’m not an expert on China. But I did spend some time there earlier in my career, and I don’t think the situation is that stable. I sent you a quote from the book, Red Capitalism, by Carl Walter and Fraser Howie. Carl Walter is a pretty serious
   observer, Stanford Ph.D., has lived in Beijing for about 20 years, speaks Mandarin. His basic point is that the government has forced the banks, which they control, to make loans to the provincial governments for all of these expansion projects. There’s now a great deal of excess capacity and the projects are not generating sufficient cash flow to service the high levels of debt that the banks have extended. We’re reaching the point at which the banks will have to be recapitalized. We had an episode of that in the late ’90s when the Chinese banks needed to be recapitalized and the government had to shift expenditures into bank recapitalization. That caused the Asian economic crisis. Now there’s some evidence to suggest that China will have to recapitalize the banks again and when it does that, it will produce economic weakness in China that will reverberate around the world. So the Chinese may be more of a problem than a solution.
4. Q: I suppose all this means you expect a recession this year?
   Well, consumer spending will slow this year very dramatically from a very weak base. We had a decline in real disposable income in 2011. GDP rose, but GDP measures spending, not prosperity.