For the entire OECD countries, general government debt as a share of GDP alone has ballooned from 73% when the recession started in 2007 and will climb to a record 104% next year. It took 15 years for this ratio to go from 63% to 73% and just four years from 73% to 103%. Total claims in the OECD at all levels of society just broke above 360% of GDP and that is clearly unstable. Suffice it to say that many of these debts will not be serviceable — identifying where the defaults and haircuts take place, across countries and sectors, will require a tremendous level of skill.
The reason why SIRP (safety and income at a reasonable price) works is because yield works in a deleveraging deflationary cycle. There is substantial excess capacity in the global economy, primarily in the U.S. where the “output gap” (the gap between aggregate supply and aggregate demand) is close to 6%. The more crucial real story, however, is the length of time it will take to absorb the excess capacity. It could easily take five years or longer, depending of course on how far down potential GDP growth goes in the intermediate term given reduced labour mobility, lack of capital deepening and higher future tax rates. This is important because what it means is that disinflationary, even deflationary, pressures will be dominant over the next several years. What this suggests is that the trend in high-quality bond yields will be down, not up, and that Gary Shilling may well be spot-on with his call that the 30-year bond yield moves down towards 3% over time.
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