Feb 27, 2009

Borrow your way to prosperity

Here's a cheerful graph from the asset managers at Hoisington, showing the total U.S. debt (government, consumer, and industry) as a percentage of GDP:

If you read the entire report, Hoisington makes Jeremy Grantham look bullish by comparison. Crazy bear market theorists are in fashion right now, but before you write these guys off, consider that their fund returned +37% in 2008 and +13% over the last 5 years. They bet big on long-term, zero coupon treasuries and it paid off.

Their big concern is debt deflation: assets are purchased using large amounts of debt during an economic over-expansion, but then fall in value when things slow down and are unable to generate enough income to make the debt service payments. The bank can no longer sell the asset for enough to cover the debt, leading to large writeoffs.

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