Dear Reader,
In the last 10 years government debt to GDP calculated as percentage has increased in many developed countries. The coronavirus disease COVID-19 pandemic economic lockdown has exacerbated that problem. Governments the world over are issuing debt to support their economies. The government debt/GDP of Italy is forecast to hit 170%, while government debt/GDP of Greece is most likely going to jump over 200%.
As of end 2019 the USA recorded government debt/GDP of 106.9%. Now, as the US economy most likely will shrink in 2020 and the US government borrowing and ploughing in trillions of USD, to support the economy, the US government debt/GDP will most likely rise above 112% in 2020.
What are the implications of rising government debt/GDP for stock markets? An interesting case in point is Japan. Japan's government debt/GDP is 238.2% as of end 2018. Japan's stock market performance has been lackluster for the last 20 years. Japan has simply run out of fiscal space to support its economy and respectively its stock market. Japan has been in secular stagnation of deflation and low growth for more than 20 years now.
Basically, US and Western Europe are nearing a point where they will use up all of their fiscal resources. Once the government cannot borrow to save the economy, every economic crisis will be deeper and every bear market in stocks will be deeper and longer. If what happened in Japan is any lesson, we can expect lower stock market returns in the next 20 years, visible stifling of innovation and ultimately lower economic growth and weaker prosperity in the near future.
The way out of this is less government regulation, so business can do its creative destruction, innovate and ultimately bring resources in with which to decrease the government debt/GDP of developed economies. The animal spirits of the market have to be unleashed, yet again.
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Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.
Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!
Respectfully yours,
Petar Posledovich
Japan is a very good case for what we are currently undergoing, namely deflation.
ReplyDeleteHarry Dent suggests we have everything bubble - stocks, real estate, gold and advises to have only US government bonds and cash.
Well, bonds are the bubble of everything.
I was wondering how come that Japan has this deflation for so long? And how come that the Japanese Yen is so strong given all the money printing?
Then I read Rise of Robots by Martin Ford and then all became clear to me.
I believe we are going to a deflation caused by the structural changes in the world economy.
In the past people went from the village to the city, as the machines took over agriculture. In the factories there was enough repetitive work at relatively good wage. So the baby boomers had enough to retire.
Now the machines took over the factories, so that people went into the service economy, the repetitive jobs however, started to become scarce.
The gravity of singularity, a term used when machines start doing things better than humans, did not become obvious until recently. Why?
Because in the 80ties, as men were not able to earn enough, then women started entering the workforce. So that there was the illusion, that family income is still rising. The consumption continued to go further in the last decade of 2000 and 2010, because people were able to borrow a lot of money.
After each crisis, 2000, 2008, 2020, however, less and less full time high paying jobs were created, due to the disruptive force of technology, which actually made the entrepreneurs, shareholders and managers - the holders of capital, richer and the working class poorer.
Now we are at the end of the debt super cycle.
Can the individual take more debt - no, they are trying to get rid of the debt. Can governments borrow more money - they are already way overly levered almost everywhere.
Can central banks print money - then can, but printing money has also some limits.
At the same time almost each year the machine computing power gets doubled and jobs get decimated.
US, China and Europe are Japan now.
Could it be, that regardless of how much money the central banks print, stocks do not rise over the next few years?