Many countries have too much debt today—and debt levels are moving higher, said Dr. Lacy Hunt, executive vice-president of Hoisington Investment Management Company, at a recent CFA Society event.
There’s a difference between productive debt and non-productive debt, he explained, noting that non-productive debt does not generate income to repay the principal or interest. “Instability comes from taking on too much of the wrong kind of debt,” he added.
Looking at the debt levels of major countries around the world—Japan, the United States, Australia, the eurozone, the United Kingdom, Canada and China—many countries are highly overleveraged. In fact, noted Hunt, “with the exception of the U.S., every one of these countries is more leveraged today than during the Lehman crisis.”
In the U.S., despite stronger markets, fundamental performance is deteriorating, said Hunt. Many academics believe that quantitative easing is not a macro stimulus. Meanwhile, savings rates are declining, and households are living beyond their means. “What we’re trying to do today is solve an indebtedness problem by taking on more debt,” he added.
And Canada’s not in much better shape. Canada’s total private and public debt in 2013 was 286.3% of GDP, compared to 244.2% in 2008, according to Hunt’s research. And, he explained, when the debt level for a country rises above 275%, “bad things happen.”
China, too, is a concern, since investment spending is 50% of its GDP. Hunt added that one small silver lining for the U.S. is that the U.S. dollar should be able to hold its levels because of the U.S.’s debt situation relative to its key trading partners.
All in all, it’s a grim global picture. So brace yourselves for more upsets in the future: Hunt believes another crisis is on the horizon. “The crisis has merely been contained…by creating coercive conditions that encourage people to overspend.”