The Secret Debt Bomb

03/05/2013 8:30 am EST

Focus: MARKETS

Harry Dent

Author, The Demographic Cliff

The recent awareness of the West's public debt problem doesn't address the even more alarming levels of private debt, says Harry Dent.

I am talking about debt today with Harry Dent. Harry, thanks for joining me. Now we have all heard about public debt and we all know that we are up the kazoo with debt. We hear about the Federal government, we hear about all the government problems in Spain, Portugal, and the PIIGS, but there is also private debt that no one really addresses, correct?

Yes. In most countries, private debt is three times the public debt. Now that can vary. Japan has the most debt of any country in the world and they have 235% GDP—twice our public debt. But private debt is something people do not look at.

Most people think that the Federal Reserve creates money. They do not create money. They make it easy to create money or not. Private banks create money and the government creates money. Any time we borrow—government, personal, or business—that is creating money.

What people do not realize is from 1983 through 2008, private debt grew 2.7 times as fast as the economy. Twenty-five years. That is why we are in a mess. Government debt grew almost that fast.

We have, if you total it all up, $58 trillion or $59 trillion in total debt—four times our GDP. Just to give you a comparison, before the debt bubble in the roaring 20s peaked, we had 1.9 times GDP in total public and private debt—and I am not counting entitlements, unfunded entitlements for Social Security and health care, which are estimated to be $66 trillion.

But that hits over decades. It's just the immediate government and private debt that is $59 trillion. What happens normally in downturns like the 1930s is that this debt gets deleveraged. It gets written off and businesses fail and banks fail, but government...

We have seen some of that.

Yeah, but a little bit...$4 trillion in private debt, but government debt went up $6 trillion. Governments are saying we will not let this happen this time. This is bad.

Japan has been doing this—saving the banks, quantitative easing—and they only delivered a little bit of corporate debt, no consumer debt, no financial sector debt, where most of the debt is. Their government debt has gone from 60% to 250% of GDP, they are more in debt than ever, and this is why they are not coming out of their crisis.

They had an echo boom generation already come along and should be spending again, but they have such a weight of debt on their back that it slows your economy down. Ken Rogoff showed in his studies that when government debt gets around 90%, it can take 1% off of GDP. What happens when you have private and public debt four to five times GDP? You are running around with a 400-pound weight on your back.

What are the implications for us, then? What is going to happen with that if we do not do something with this debt? Are we just going to wholesale start writing it off?

Well, you know my advice: the government is printing so much money, so I am saying, why be chicken about it? Just print $16 trillion and pay off the debt, buy off all our debt. It has no consequences.

There are two things that can happen here. One is that we end up having a crisis. The government tries to push this off and eventually things—the demographic trends, the debt trends—are so heavy that you finally have a crisis and this gets washed out. That would be the best thing.

The worst thing is what is happening in Japan. If the US, Europe, and other countries can do what Japan has done now for 20 years and keep easing—throwing money in the banks and keep them limping along—then you just end up in infinite mediocrity, what I call a coma economy.

Japan’s economy? Look at it: zero inflation for 16 years since their demographics peaked. Zero GDP growth for 16 years. They are in a coma economy, on life support from quantitative easing.

You never come out of this. The old people slowly die; the young people never get the jobs and entitlements. In Japan, 40% of young men do not want to get married, date, or have sex because they cannot afford a woman or a kid.

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