Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a704993
The Federal Reserve's 405% dilemma
by Robert St George on Sep 24, 2013 at 12:30
Jan Dehn, head of research at Ashmore, has lamented the lack of attention paid to the debt mountain building in the US.
Total US debt has now reached 405% of GDP, double its level in 1980. The US government’s debt now stands above 100% of GDP, which the International Monetary Fund (IMF) described as ‘unsustainable’ in a report this summer.
The IMF nevertheless still forecast that GDP growth would hit 2.7% next year, and 3.5% and 3.6% in 2015 and 2016 respectively. The Federal Reserve, despite a downgrade last week, has still predicted growth of at least 2.9% for 2014.
Dehn challenged this optimism, although he acknowledged there were grounds for hope based on a resurgent manufacturing sector and the strong balance sheets of corporates and banks.
‘Growth is, and will likely continue to be, anaemic because the economy is drowning in debt,’ Dehn argued. ‘If interest rates rise, the debt burden could move from tolerable to unbearable.’
Dehn supposed that this had been neglected by market analysts because ‘almost everyone with a direct stake in developed fixed-income markets has strong incentives to ignore or belittle the problem’.
For example, Dehn contended that the Federal Reserve would do so because, if it did have to discuss debt, it would have to propose a plan for dealing with it. ‘The only feasible solution is inflation,’ Dehn reckoned, ‘but inflation would conflict with its mandate as a central bank.’
Similarly, he claimed that the US government had sidelined the issue because it is ‘impotent’ to resolve it, that the banks were silent ‘because long-term problems like debt do not generate daily trading volume’, and that central banks in emerging markets had no choice but to continue buying US debt because of the liquidity it provided.
The implications for investors, Dehn concluded, were higher inflation and a weaker US dollar.
News sponsored by:
Today's top headlines
More about this:
On the road
by James Phillipps on Dec 09, 2013 at 07:52