We're Trapped In A Low Growth Economy And There's No Way Out

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by: Jeremy Robson


US growth is slowing and will remain slow.

Recession in the next 9 months is a distinct probability.

I cannot see a way out of the low growth environment.

The latest growth reading from the Atlanta Fed is showing growth of .4% for the 1st quarter 2016. The last read on 4th quarter 2015 U.S. growth from the BEA came in at 1.4%. These are slow growth readings.

I recently read this article by Frances Coppola. The article sums up a large swathe of present thinking on the economy and the best solutions to the problems of low growth. It is well articulated and offers a solution (which is more than I am doing in this post). The problem is that the evidence that we have from other economies is that it will create much greater problems in the future. The solution suggested is Central Bank monetization of budget deficits - helicopter money in one form or another.

So you ask - why does this article lead me to believe that we are trapped in a low growth environment with no way out?

The answer comes in 3 main thrusts.

1. The first problem with the article (and all of the ideas that it represents) is that it does not, in any shape or form, address why we are in a low growth environment. A lack of aggregate demand is the most widely argued reason. Why do we have a lack of aggregate demand? It could be:

a) Demographics.

b) Private debt levels too high.

c) Lack of wage growth due to new technology taking away manufacturing jobs, leaving only lower paid service jobs.

d) Income inequality. Too much of gross domestic income is going to the richest 5% of our population. They tend to save it and not spend it.

e) Relative wages and tax systems across the globe leading to tax inversions and outsourcing of labor.

f) A combination of all of the above (which is probably most likely).

The solutions to each of the 6 problems above is different. There is not one shoe size that fits all. Apparently helicopter money pulls off the wonderful trick of resolving all of the problems above. I don't know about you, but I was trained to analyze a problem before I looked for the solution. We seem to have missed a step here. I have not seen any article or paper that tries to analyze which causes are responsible for the low growth of demand. Any of the government agencies with large budgets could come to a reasoned analysis of the percentage loss of GDP for each of the 6 reasons stated above. No one is doing this work. The nearest is the Rogoff/Reinhart analysis of Debt/GDP but that only covers debt.

2. The evidence from economies that have tried monetizing fiscal deficits is not good. Japan has been monetizing it's fiscal deficits for several years. Here is a link to an article by Adair Turner (one of the loudest proponents of monetization as our economic salvation). The article highlights the fact that the BOJ is on course to reduce the public debt held outside the government to 65% by 2017. I have no problem with this, if growth in Japan was on a tear. Let's have a look:

Click to enlarge Obviously not on a tear! The most common argument used to defend this growth record is the counter factual. It is a very widely used argument for the lack of Japanese growth. I think that the argument that the BOJ is not monetizing enough debt is now no longer valid. Monetizing more than the 7-8% of GDP fiscal deficits to reduce the debt held outside the government, cannot be viewed by any sane person as not doing enough. The counter factual argument cannot be defended however. There is no way of knowing what would have happened in the alternative world. All we know is that this is not success as visualized when the monetization started (and certainly not success by any reasonable yardstick). Maybe, just maybe the Japanese missed a step (i.e. the analysis of the problem).

Argentina has also been increasing money supply at a substantial rate by increasing government fiscal deficits and monetizing them in various different ways (link to one such way). Argentina has run fiscal deficits of 5% or more and has not had access to capital markets for many years (link to summary article). They have resorted to a raft of different monetization methods to finance these deficits. In Argentina, this has resulted in inflation annually of over 25% and growth as shown below.

Click to enlarge Another oops! Hey, let's not look at the facts, it gets in the way of a poor idea.

3. We are not considering any other alternative plans of action to combat low growth. Austrian economists advocate leaving the market to settle interest rates and reducing the percentage of an economy that is controlled by the government. The problem with this approach is that it will entail a period of adjustment that is likely to be very painful. It may well be the long term answer, but there needs to be a way of getting to the end product over time, without the nasty depression in between. Presently there is no sign from Austrian economists of how this can be achieved (probably because it is unachievable) and so it is redundant as an economic solution. There is not a politician or central banker alive that would introduce policies that would induce a depression, as a solution to our present malaise. Monetarists are presently engaged in a debate on the efficacy of negative interest rates and more money supply growth. We will probably get both. As QE and ZIRP have not produced results so far, more of the same is unlikely to produce higher growth. Some form of helicopter money is on the way. I hold little hope that it will be any more successful than in Argentina or Japan (and I am not at all interested in the counter factual).

So we are stuck. There is no new thinking, just various forms of Keynesian policies in the hierarchy that controls policy at government level. The results of the Keynesian experiment have so far been very unsuccessful and I see no reason for that to change. Monetization of fiscal deficits has not worked in modern economies.

In our future, I see a recession in the U.S. in the next 12 months, which will be accompanied by helicopter money. This will pull us out of recession, as despite all the crazy policies that will be enacted, the economic cycle will once again exert its influence. The growth rate will be slower throughout the next cycle than it was in this one.

My only hope for change is that eventually someone will analyze the problem into its component parts of demographics, debt, income inequality, tax regimes and pay scales, or a combination of all of these. There is presently no sign that any policy maker is anywhere near this approach. It is also not at all clear yet what the best solutions would be. However, solutions often become clearer once the problem is better understood. I cannot therefore see an end to slow growth in the U.S.. It is possible that we will come to view 2% growth as fast!

For my part, I will keep arguing that we are on the wrong path. It will do no more good than give me an outlet to vent my frustrations. That is at least something.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.