With deleveraging debt now the modus operandi of the U.S. economy, the “tailwind of economic growth has been taken away,” said Curtis V. Arledge, vice chairman and chief executive officer of investment management at BNY Mellon. But the picture isn't entirely bleak. The decline in growth is creating a “bull market in [financial] advice,” Arledge said.
Arledge was addressing Money Management Institute’s Fall Solutions Conference 2011 in New York this week in a keynote address.
“The ratio of total debt to the size of the U.S. economy was 2.3 times in the Great Depression, and it took 50 years for that level of debt to fall and go sideways to a ratio of 1.5,” Arledge said. “When the financial crisis hit, it was 3.5 times. We are now at 3.3 times. That leveraging up of our entire financial system is why asset class returns were double digits.”
In the past, any time the markets or the economy hit a speed bump, “the solution was to create some new form of leverage to add another tailwind to economic growth," Arledge continued.
Today, he said, "the world has incredibly shifted in terms of what this industry needs to do for clients. The world has become very aware of individual liability structures. The concept of 60/40 [equity to fixed income] is no longer applicable.”
Unlike the aftermath of the Great Depression, when U.S. debt took half a century to unwind—and the stagnation that Japan is still suffering from more than two decades after its market collapsed in 1990—Arledge expects American ingenuity will turn things around more quickly this time.
“Our economy is substantially more global and multinational than Japan’s,” the BNY Mellon vice chairman said. “We move resources around the world extremely efficiently, and U.S. companies respond to growth and changes very rapidly.”
The investment management industry, for instance, can fill the void created by the decline in investment banking activity by bringing capital to the markets, Arledge said.
“In 1980, the balance sheets of investment banks were 1% of GDP,” Arledge explaine
d. “By 2007, they were 22% of GDP. What were they doing? They were stepping in front of profit opportunities through investments instead of the private sector. Investors can replace that capital that will no longer be on the balance sheets of only a handful of players.”
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