Sorry, I could not resist the title. Gary Shilling, an economist whose name I have heard over the years, has quite a body of work often revolving around Fed policy, GDP and deflation. The reason I looked into Mr. Shilling is an email from an NFTRH subscriber linking his thoughts on a coming boom…
The Boom is Coming, and Sooner Than You Think (July 18, 2014)
Okay, an economist and Bloomberg columnist thinks this is a boom (actually it is; we are after all in the age of Inflation onDemand © and a Boom/Bust cycle; currently in a cyclical boom concentrated in stocks). Let’s see what he thinks…
“Yes, huge federal government deficits and debt are a major drag. It’s also true that budget surpluses aren’t likely to materialize to shrink the $17 trillion-plus national debt, even if growth resumes.
Nevertheless, there is a strong possibility that government debt relative to gross domestic product will fall appreciably, as it did after World War II. Back then, deficits were relatively small, so GDP outran gross federal debt. The debt-to-GDP ratio dropped from 122 percent in 1946 to 43 percent 20 years later.”
Dear Mr. Shilling, were we or were we not a net creditor nation from 1946 to 1966? From Investopedia: “Creditor nations can sometimes lose their status and become debtor nations. This happened to the United States in 1988 when its balance of payments turned negative.”
Do you think there is any chance that this change in status might also invalidate an extrapolation of historical norms with respect to leveraging debt for growth?
“The ratio fell even further in the late 1960s and 1970s as inflation, caused by rapidly rising federal spending on Vietnam and Great Society programs, pushed taxpayers into higher tax brackets and filled government coffers. Higher corporate-tax revenues also resulted from under-depreciation and inventory profits.”
So that is a good thing? Simply inflate our way to prosperity? Well, they are trying; I’ll give them that. But the inflation is only rooting in the stock market so far. What do you have to say about that?
“The dot-com bubble lifted individual income-tax receipts at an 8 percent annual rate and corporate taxes by 8.3 percent a year.”
So your thesis for GDP growth not only allows for inflation and bubbles, but it actually depends on them. Great.
“The message is clear: Rapid economic growth pushes down the federal debt-to-GDP ratio directly as the denominator rises. Rapid growth indirectly affects government debt, too, as taxpayers get pushed into higher tax brackets, corporate profits grow faster than the economy, and tax cuts and government spending on social-welfare programs are curtailed.
Conversely, slow economic growth, as in the 2000-2012 period, pushes up the ratio directly. It climbs even more as the weak economy spawns tax cuts and counter-cyclical outlays.”
Yes, we get it. So all we need is rapid economic growth. Okay.
“So the resumption of rapid economic growth is the answer to the federal debt problem. Of course, the 800-pound gorilla in the room is the need for greater Social Security and Medicare outlays for retiring post-war babies. So far, Congress and the Barack Obama administration prefer gridlock to solving the looming entitlement-spending explosion. The more time passes, the more disruptive the solution must be. I believe, however, that Washington will do the necessary thing when there is no other choice.”
As is the wont of so many economists, politics enters the discussion. Getting a little sloppy I might add.
“As for the Reinhart-Rogoff argument — that high government debt depresses GDP — my view is that government debt doesn’t depress economic growth, as they contend, but the other way around. Slow growth depresses tax revenue and raises government social spending, causing deficits and debt levels to rise.”
Oh okay, so let’s just get us some more of this economic growth stuff. Who knew it could be so easy? Where will it come from? Well, debt, yes. You’ve made that abundantly clear. But there must be some other drivers.
“Robert Gordon, the Northwestern University economics professor I mentioned in yesterday’s column, isn’t the first to posit that everything worth inventing has been invented. In his 1843 report to Congress, Patent Office Commissioner Henry Ellsworth said: “The advancement of the arts, from year to year, taxes our credulity and seems to presage the arrival of that period when human ingenuity must end.”
I think economists should stick to economics and stay out of the arts. Just my opinion. An economist paints by numbers.
“I believe much of today’s new technology — the Internet, biotechnology, semiconductors, wireless devices, robotics and 3-D printers — is in its infancy. Collectively, they have the potential to rival the rapid growth and productivity-generating effect of the American industrial revolution and railroads in the late 1800s. Mass-produced autos and the electrification of factories and homes, which led to electric appliances and radio in the 1920s, offer yet more examples. Today, only a third of the world’s population is connected to the Internet but 90 percent live within range of a cellular network.”
Economist Shilling gets back to more traditional territory, getting all wide eyed about .com’s, optical networks, B2B and content management software… errr, that is the internet, biotech, WiFi, robots and drones (I assume) and most hilarious of all, last year’s miracle technology, 3D Printing. I have gone to great pains as a guy from the manufacturing sector to explain why that last one (additive manufacturing, ha ha ha) is going to be a commoditized space before too long. Another Wall Street tout that even an economist should know better about.
But hey, it fits the thesis so just toss it in there I guess. Just like Mary Meeker and Henry Blodget used to do so famously in the run up to the 2000 bubble blow out.
“Sure, productivity (output per hour worked) grew by only 1.5 percent from 2009 to 2012, but that’s normal after a severe recession. I expect it to return to a 2.5 percent annual growth rate — or more — after deleveraging is completed in another four years or so. Even in the 1930s, productivity averaged 2.4 percent a year, higher than in the Roaring ’20s. In the 1930s, much of the new technology from the 1920s — electrification and mass production — was adopted despite the Great Depression.
Rapid productivity growth offsets slower labor force advances. The decline in the labor-force participation rate is likely to slow in coming years once normal economic growth resumes. The rate has fallen as baby boomers retire and discouraged workers drop out of the labor market or stay in college.”
Yes, all we have to do is get this deleveraging thing over with. Hey, no problem. Deleverage by transferring leverage. Then we just grow our way out with increasing productivity from the great technological revolution ongoing. I get it, and I mean that without sarcasm. I have a soft spot for technology and progress since I used to make my living by leveraging not so much debt, as productivity through automation, efficiency and continuing improvement in all areas… as hokey as that sounds.
But back to your deleveraging. You don’t just deleverage an economy. The debits have to go somewhere. Where are they going? There is a debit on savings and there is a surplus of mal-investment in financial instruments in a different flavor to the 2004-2006 period.
“Solutions to the crisis in higher education may also promote productivity. The poor job market for debt-laden college graduates is forcing Americans to realize that smart people go to college, yet college doesn’t make them smart. They now know that just any college degree won’t guarantee a well-paid job.
In this environment, top institutions will continue to attract the best and brightest. Many of their students will go on to graduate and professional schools, often in other fields. These schools will continue to be well-financed.”
Okay, now he’s just riffing along. I’ll tell you what is attracting the best and brightest (today’s young Henry Blodgets); it is the money centers. These are the same money centers set up to benefit at the expense of Main Street and savers in general by official policy supposedly in place to deleverage the financial system. Think man. Don’t just put out your contracted quota of articles at Bloomberg. Think!
Shilling then goes on some more about colleges and education in a mind numbing roll out of more tired pap. Then the conclusion…
“Once private-sector deleveraging is completed, real GDP growth will probably return to its long-run trend of about 3.5 percent, and perhaps more. Productivity improvements and labor-force growth will likely resume. And the slow-growth-forever crowd will need to find a new theory.”
We must deleverage a private sector that voluntarily gorged on the excesses provided by the last Fed inflation cycle under Greenspan. We must deleverage the mal investments and crooked entities so that the whole bloated thing can start anew? We must never allow a system to purge its bloat and its excess, mustn’t we Gary? Not in America; we do not do failure. We just off load it somewhere else.
The debt is there and it is on the Fed’s balance sheet and it is in the US Treasury department. That department is ultimately owned by the people. But ever the economist, you only see GDP, growth and the dots below each number in this painting.
Gary Shilling seems to be all over the map. While the website your are reading at this very moment, home of what some like to call a perma bear, has been positive on the economy since January of 2013 and dismissed the weak Q1 GDP as a straw being grasped at by the bears, it appears that Shilling got cold feet on his rosy outlook just 3 days ago, saying that the 3% Growth Crowd would be disappointed. Ehhhh, how about 4% G man?
Gary Shilling: Wall Street’s Herd Will be Disappointed (July 28, 2014)
“A low second quarter real GDP number will kill the conviction that the first quarter drop was only an anomaly and it will spawn agonizing reappraisals for the rest of the year. It could put the Fed on hold at least into 2016 and be great for Treasury bonds. But for stocks, look out below!”
WTF man? Why not see the big picture, form a thesis and stick to it as long as it holds its parameters? I know, that may not be what the MSM wants, but you are a respected economist (I guess). Don’t you have a responsibility of some sort to accurately portray distinct views based on the sum of your ongoing analysis or did 3D Printing and robots just come on your radar last year and easily lend themselves to lazy analysis?
