At Pinnacle Trust, we’ve been talking about the debt problem way before talking about the debt problem was cool. Since the early 80s, when the last great secular bull market began for stocks, we have piled up a lot of debt. This chart shows our Total Credit Market Debt as a % of GDP.
As I’ve often said, the biggest problem with debt is that it is a drag to growth. Borrowing often represents consumption today at the expense of future growth (debt service). When you have to spend a big part of your paycheck to service debt, there is less to spend on things that cause the economy to grow. It’s no different for businesses or governments – debt service drains our ability to invest elsewhere. The red line on the chart indicates when debt has been especially high, defined here as when our debt to GDP ratio has been above 270%. During those times, the economy has grown at an average rate of only 3.9% per year. Compare to when debt has been below 160% of GDP (green line) and the economy has grown at an average rate of 7.6% per year. When debt loads get well above the norm, growth rates fall well below average. Our biggest new concern is the massive increase in government debt. We’ll look at private, business and government debt in upcoming posts.
In order for a new secular bull market to begin, the debt structure has to be deflated. For now, we remain mildly bullish, but momentum is waning. – Stacey Wall