Jeremy Grantham thinks we need to halve private debt speedily, or risk the United States falling into a Japan-like malaise.
Like Japan, “we can let the very long passage of time wear down debt levels as we save more and restore our consumer balance sheets,” Grantham writes in his most recent letter to investors.
Grantham is chairman and co-founder of the investment firm GMO.
But, he argues, we really need to halve the level of private debt as a fraction of the underlying asset values.
“We must write down perceived wealth or capital by almost precisely one and a half times GDP, worse than the Depression but happily much less than Japan. This implies that by hook or by crook, somewhere between $10 trillion and $15 trillion of debt will have to disappear.”
Already, stock and property value losses mean $20 trillion of perceived wealth is gone from a peak total of about $50 trillion, dramatically increasing our national debt-to-asset value ratio, Grantham notes.
Yet tighter credit standards have caused bankers to lower the percentage they are willing to lend, making avoiding additional write-downs much more difficult.
“As always, now that it’s raining, bankers want back the umbrellas they lent us,” Grantham writes.
Supporting Grantham’s figures, economists surveyed by Bloomberg forecast the economy contracted at a 5.3 percent annual pace in the fourth quarter of 2008, the largest contraction since 1982.
Clinton-era economist Nouriel Roubini, meanwhile, is predicting more gloom for investors, saying the equities markets will this year "head again toward new lows," marking the worst recession in the last 50 years.
"For a few weeks since late November, equity markets ignored the onslaught of much-worse-than-expected macro news — and all the news was really worse than awful — and had a nice 25 percent bear market 'sucker's rally,'" Roubini wrote in his weekly column in Forbes.com.
"But the drumbeat of worse-than-expected macro news — and earnings news, and financial news — has finally taken a toll on the delusional market belief that the worst was over for financial markets and for equity markets and that the U.S. and global economy would recover in the second half of 2009."
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