Paul Brodsky, principal at Macro Allocation Inc., doesn’t just follow the mainstream opinion. His analysis of the global economy and financial system goes deeper than anybody else’s and yet he managed to express the complex problem in just three pages.
The problem is too much debt and leverage : “For median households, debt levels continue to rise more than wage growth; for governments, obligations are rising more than tax revenues; for publicly-owned businesses, debt is rising faster than revenues; and for investors, debt could easily grow more than income and asset appreciation, suddenly and without warning should markets stall or fall,” writes Brodsky in the first part of his MAI View Series.
This is not necessarily new, but Brodsky analyzes the factors driving the debt and concludes it is driving nominal growth while at the same time choking real growth.
He argues that it simply takes too much debt to create real capital formation and production (i.e. growth), which ultimately drives prices higher without actually adding value, whether in quantity or quality.
“The global economy seems to be suffering from a late-stage paradox in the financial leveraging cycle in which nominal output growth has become countercyclical to real output growth. The more commerce and trade rely on credit growth and asset appreciation, the more the ultimate benefit of growing economies is diminished,” he writes.
On the contrary, an economy driven by savings, innovation and production would naturally increase the quantity of goods and services, while reducing the price: a type of positive deflation.
However, in order to keep the debt driven economy stable, the assets behind the debt cannot fall. If they do, the debt would have to be written off and new money or credit creation would turn negative, a case of harmful deflation.
Although policy makers don’t want to see this, Brodsky thinks there will only one type of outcome: “It seems clear that output growth in the future must be negative in real terms, and, ultimately, that there will have to be some kind of leverage reconciliation.”