"From 1955 to 2000, $1.70 of debt, on average, had resulted in the generation of $1 of GDP growth in the United States. However, in 2000, the debt-to-GDP ratio had reached detrimental levels. Now it takes approximately $3.30 of debt to achieve $1 of GDP growth...."
From FT Alphaville:
The liquidity trap, when monetary policy becomes ineffective at very low or zero interest rates, may be old news but the global dimension of the problem is a new and worrying phenomenon — not least because it’s starting to undermine the usefulness of the global monetary reserve balance, which is mostly debt financed.
And here’s the rub: so engrained is the notion saving is always thrifty and good that it’s become extremely hard to articulate why this state of affairs is so disastrous for the global economy.
On Monday, however, Citi’s rates team does an excellent job of summing up the problem. It goes like this (our highlight):
Long-term rates are making new yield lows on a daily basis but a true historical diagnosis would recognize that this is the continuation of a near four-decade trend that has also seen a sharp acceleration in debt (Figure 1).
The debt has not funded new investment/repayment capacity but is largely funding existing assets in housing or consumption. The end-game is that recessions that have motivated real rates being cut to encourage leverage, which in turn brings forward consumption/investment, have created a problem given that the capacity to cut real rates is much more exhausted.
This idea is closely related to the secular stagnation thesis where our estimates of a global neutral rate correlate with the unconnected calculation of core real rates in linker markets (Figure 2). The inference is that, while rates look optically low, the depressed level of the neutral rate means that they are far less simulative than previous perceptions....