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Steen Jakobsen is the chief economist and chief investment officer of Saxo Bank, a Denmark-based investment bank, who is also one of the more bearish analysts in the market today. He caught our attention recently in a CNBC interview, where he specifically identified rising national debt as a major contributor to both lackluster economic growth and an increased risk of a severe market crash.
Unsustainable debt will be the cause of the crash, according to Jakobsen, and will occur when the cash returns on assets become insufficient to service the debt taken on to acquire those assets in the first place. He gives no timeframe for his thesis but says that the problem of huge debts has been swept under the carpet by central bankers and policymakers and will come back as low inflation or even deflation….
Jakobsen calls debt the “elephant in the room” and uses a simple equation on the U.S. economy to put across his point. He argues that U.S. productivity growth is low when if you consider that any shortfall in growth is being made up by increased debt.
“The move onto the internet has ironically made us bigger consumers and less productive. Had we remained at pre-1970s productivity, the U.S. GDP (gross domestic product) would have been 55 percent higher and the outstanding debt to GDP would be easily fundable,” he claims in his note.
“No serious policymaker or central banker is talking about the truth told by simple maths and hoping that things turn out well. Hope is not good policy and it belongs in church, not in the real economy.
The interview followed Jakobsen’s research note from September 26, 2014. We’ve excerpted the U.S.-specific content below, in which Jakobsen introduces the concept of a “Minsky moment” to describe the potential danger that would result from such an event:
Mads Koefoed, Saxo Bank’s macro economist, projects US growth at around 2.0% for all of 2014. That will be the sixth year with US growth near 2.0%, so despite lower unemployment and a record high S&P500, the economy has a hard time escaping that 2.0% level.
Any talk of higher interest rates is hard to take seriously when US growth is going nowhere and world growth is considerable weaker than was expected back in January (or as recently as July, for that matter). It seems everyone has forgotten that even the US is a part of the global economy….
In the US, interest on US government debt cost over 6% of budget outlays in 2013. This is relatively down from its worst levels when interest rates were much higher, but only because the Federal Open Market Committee has so drastically lowered the costs for the US government to issue debt with a zero interest rate policy.
And now the debt load is vastly larger than it was before the financial crisis, at 80% of GDP (net debt according to IMF) versus 45% of GDP a mere 10 years ago.
So are we actually to believe that the Federal Reserve can lift the entire front-end of the curve from 0-1% (current rates out to three years) to 2-4% over the next two years without adding massive further stress onto the deficit, and only adding to the debt?
Servicing 2% interest when growth is 2% means you are doing worse than standing in place if you also have a budget deficit.
Whatever the timing, the US, China and Europe are all headed for another Minsky moment: the point in debt inflation where the cash generated by assets is insufficient to service the debt taken on to acquire the asset. Productivity growth in the US last year was +0.36%. The real growth per capita was about 1.5%.
Anything which is not productivity is consumption of capital. So, the only way to grow an economy without productivity growth is to do so temporarily through the use of debt – about 75% debt and 25% productivity growth, in this case.
Since the 1970s, US productivity growth rates have fallen by 81% – the move onto the internet has ironically made us bigger consumers and less productive. Had we remained at pre-1970s productivity, the US GDP would have been 55% higher and the outstanding debt to GDP would be easily fundable.
The debt load that Jakobsen cites refers to the percentage of the publicly held portion of the U.S. national debt with respect to the nation’s Gross Domestic Product (or national income). If the U.S. government’s total public debt outstanding is taken into account, the debt load is really much closer to 100% today.
So it’s quite possible that Jakobsen is actually understating the potential risks for the United States.
U.S. Forest Service