Keith R. McCullough
Fortune
August 12, 2010

  • A d v e r t i s e m e n t
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The Great Depression. Wall Street in 1987. Japan in 1997. Points of economic collapse are generally crystal clear in the rear-view mirror. Professional politicians in Japan have been telling stories for 20 years as to why they can prevent economic stagnation. In the US, the storytelling started in 2007. All the while, stock market and real-estate prices have repeatedly rallied to lower-highs, then collapsed again, to lower-lows.

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Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm — debt as a percentage of GDP. Now that the US can’t cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing — buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It’s a point from which it’s almost impossible to return.

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