Conference Presentation, Panel
Disequilibrium in Global Debt
Milken InstituteFelix Salmon, Peter Budko, Damian Lillicrab, Nouriel Roubini, Gene Sperling, Andrew Whittaker
- Several experts predict that the current global economic path, sustained by 20 years of stimulus and "juicing," is becoming unsustainable, with expectations of "Stimulus Wars" potentially devaluing currencies and forcing other economies into quantitative easing to compete.
- Predictions regarding Japan suggest the central bank may own 40% of debt within a specific pattern, resulting in 100% of GDP in zero-interest liabilities where interest and principal repayment are never required.
- There is a consensus that normalizing policy rates or seeing long rates rise significantly will trigger financial distress, including increased default rates and volatility, particularly when the economy faces falling earnings where rate cuts may no longer be an option.
- Concerns are raised that deferring infrastructure maintenance and the absence of major fiscal reforms will fail to generate fiscal credit, placing an enormous burden on central banks and potentially requiring a shift in their mandates.
- A significant structural shift is anticipated in corporate behavior and capital allocation, with 95% of S&P 500 net income reportedly used for stock buybacks and dividends, while revenues remain flat and earnings growth is driven by efficiency and downsizing rather than sales expansion.
- Corporate efficiency gains have pushed wages as a percentage of revenues to 80-to-90-year lows, creating a dynamic where companies have "pretty much out of dry powder" to drive up values despite "earnings doing OK."
- Experts foresee a redistribution of income from savers and creditors to debtors via the movement of private pension funds from defined benefits to defined contributions, a process described by some as necessary to allow people to spend again.
- Nouriel Roubini predicts a "super taper tantrum" will not occur due to telegraphed signals and global liquidity gluts, yet warns that long rates remaining too low or too long could fuel a new cycle of re-leveraging leading to a boom, bubble, bust, and crash around 2016 or 2017.
- Specific emerging market economies including Russia, Ukraine, Brazil, Argentina, Venezuela, and Turkey are predicted to face financial distress due to their own economic policies rather than Fed normalization, whereas countries with better macroeconomic policy will adjust more easily.
- Fiscal policy expectations indicate that deficit and debt issues in the US and Europe remain unresolved without a political compact to balance stimulation with long-term debt management, leading to a situation where central banks act as "saviors" despite stimulus fatigue.
- Economic distress is expected in scenarios where safety nets are bare if earnings do not materialize, and debt monetization is viewed as the "path of least resistance" compared to alternatives like default, expropriation, or wealth taxation.
- In the banking sector, earnings are predicted to focus increasingly on trading revenues rather than lending, with banks holding over a trillion dollars in government securities on balance sheets rather than deploying them for productive purposes.
- Involuntary unemployment is currently estimated at 6.7 million, with predictions that further reduction may hit a structural wall, prompting hawkish policy noises and potential delays in rate hikes due to dollar strength and consumer uncertainty.