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On Economy, ‘Japanese Experience Is Our Template’

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“To start, I’m going to take you back to the economics classroom.”

With that, economist Dr. Lacy Hunt, executive vice president with Hoisington Investment Management in Austin, Texas, launched into his presentation, “Excessive Indebtedness: A Global Problem,” Thursday afternoon at the 2012 Strategic Investment Conference jointly hosted by alternative investment firm Altegris and Millennium Wave Investments in Carlsbad, Calif.

“Economics professors drilled it into their students’ heads that of the two basic economic theories, equilibrium and transition, equilibrium is dominant,” he said.

Using the airplane as an example, he said the plane is in equilibrium when it is refueling and taking on passengers. It is then in transition when climbing to its cruising altitude, back in equilibrium when at the cruising altitude and once again in transition when landing.

In today’s volatile environment, he explained, transition is now dominant; a short time is spent in equilibrium before it quickly moves on, something he says applies to the ongoing debt and deficit debate.

“We are looking to solve our indebtedness problem by taking on more debt,” Hunt added. “This debt is less and less productive and eventually becomes counterproductive. In order for debt to be productive it must produce an income stream.”

He then went into a history of debt in this country, and specifically noted periods similar to the one we are now experiencing.

In 1820, Hunt noted, a significant amount of public debt was used to build the canals and turnpikes. As a result, tensions rose because of the poor performance of the economy and were in part responsible for, and not resolved until, the Civil War.

In the 1870s, the country experienced railroad overexpansion.

“All of the transcontinental railroads that failed were government financed,” he noted. “The only one that didn’t fail was privately financed. The government-financed railroads were restructured and refinanced a number of times but it didn’t matter; they failed anyway and it took decades to work the debt out.”

In 1920, he said, there was too much credit that the government failed to rein in.

“Sound familiar?” he rhetorically asked. “How are we solving the problem currently? We’re actually encouraging private household debt to be used for daily consumption and increasing our public debt, which has a zero multiplier effect.”

The “Japanese experience,” that country’s lost decade of stagnant GDP growth, “is the template for where we are headed,” he said. They too thought they could solve their debt crisis by taking on more debt. It didn’t work.”

In conclusion, Hunt explained that GDP growth is not an effective measure of prosperity; income is a better indicator.

“We can inflate GDP in a transitionary period by taking on more debt, which has nothing to do with increasing prosperity,” he said. “We have policies now in place that do not create prosperity, rather, they actually suppress prosperity.”


See complete coverage of the 2012 Strategic Investment Conference on AdvisorOne.