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MortgagePoint ยป Your Trusted Source for Mortgage Banking and Servicing News 34 May 2023 F E A T U R E DEBT AS DIVERSIFICATION Nonperforming loans and real estate owned (REO) assets as alternative asset anchors. B y L O U I S A M A Y A A lthough debt can be a useful tool to solve pressing problems, it often has serious long-term con- sequences that can last for years or even decades. The global history of government debt run amok runs as long as the institutions have existed, but let's focus a bit closer in time for context. In World War II, when Brit- ain was fighting against the Axis powers, the monarchy needed a ton of capital to finance the war efforts. To meet this need, Parlia- ment borrowed extensively from Canada and the United States. Conventional fiscal theory usually agrees that a country's economy begins to slow down once its debt-to-GDP ratio exceeds 77%, which Britain blew past during and after the war; they eventually accrued nearly $10 billion in debt by 1945 and hit a stagger- ing 200% debt-to-GDP ratio. Debt that's twice a country's entire an- nual output is definitively not a good thing, particularly when you have infrastructure to rebuild and industry to restart. For about a decade after the war, Britain's economy was severely hampered due to its outstanding debt. Ultimately, state privilege meant that British taxpayers bore the brunt of the debt costs, paying hefty taxes annually in service of the country's wartime debt. In fact, it took until 2006 for Britain to make its final pay- ment. Although Britain eventually rebounded from its debt burden, many countries with high debt-to-GDP ratios struggle for decades before rebounding. For example, Argentina defaulted on over $100 billion in debt in 2001 when its debt-to-GDP ratio reached 156% and an eventual $100 billion default. Other coun- tries like Greece, Zimbabwe, and Venezuela have also stared down the barrel of a series of serious economic challenges induced by debt. Emerging markets aren't the only ones impacted by hefty debt, as we saw with Britain in World War II, but the truism re- mains in the present day. Here in the United States, our economy has historically been on enough of a solid footing, being large and constantly growing, that taking on tens of billions of dollars in debt hasn't had a signifi- cant impact. In 2005, despite ongoing war efforts, the United States' national debt-to-GDP ratio stood at a stable 60%. However, during the 2006 financial crisis, the country had to take on trillions of dollars in debt to boost the economy, which resulted in a debt-to-GDP ratio of 106%. More recently, the COVID-19 pandemic has had a significant impact on the U.S. economy, further increasing the debt-to-GDP ratio. As the pandemic peaked in Q2 2020, our ratio also peaked at around 134% before settling to the comparatively modest (but still high) 120%. Economic Overview I t goes without saying that the COVID-19 pandemic had a major effect on U.S. government debt. To offset the economic im- pact, the government put into effect stimulus measures including the Coronavirus Aid, Relief, and Economic Security (CARES) Act which, provided cash infusions for individuals, businesses, and state and local governments. These actions led to a big rise in government spending and a concurrently significant increase in government debt. As of 2022, the U.S. national debt was over $30 trillion and is still increasing. Even though it's improbable that the United States will default on its loans, the high debt ratios are likely to cause lower economic growth, higher taxes, reduced funding for programs, L O U I S A M A Y A is Co-Founder and CEO of PEMCO Capital Management, which provides an institutional platform for investors to gain exposure in niche sectors within the distressed residential mortgage and real estate markets. Over the firm's history, PEMCO has supported the acquisition and management efforts for prominent commingled and single-investor family offices, hedge funds, institutional investors, and private equity funds. PEMCO is now launching a Reg D fund to allow retail investors to participate in the fund's institutional platform. Amaya is also the Founder and Host of "Capital Markets Today," a podcast focusing on real estate and mortgage capital markets.