For the past few years, I have been writing about how the global economy is poised for a very long period of slower growth. Early this year on MarketWatch, I dubbed what was going on as "slow growth forever." While I know that people want to believe that the global and U.S. economies can grow faster, the reality is that slower growth is structural in nature.
"Slow Growth Forever" Primers
Please know that I'm not the only one to discuss the idea of slow economic growth being persistent. I'm not on an island here. And, if I am on an island, it's starting to become a pretty well populated island.
Harry Dent and William Strauss, well-known demographers (as much as demographers can be well known), have hit on the aging demographics issues for a long-time. Former U.S. Secretary of the Treasury Larry Summers has penned several articles about secular stagnation. Bill Gross, "the Bond King" has discussed the topic in his monthly letters for years. Jeremy Grantham, who has called the last two crashes, has discussed it in his quarterly letters at GMO. It's actually a relatively long list of smart people who are starting to talk about long-term slow economic growth and its impact.
One of the most recent to talk about why slow economic growth is happening is the new Minneapolis Federal Reserve Bank President Neel Kashkari, who wrote an essay titled: Nonmonetary Problems: Diagnosing and Treating the Slow Recovery. I know that sounds dry, but it's a very good read and will help anybody wrap their head around what economic reality is. Kashkari I believe is in line to be Fed Chairman in 2018.
Here are several of my MarketWatch articles on the topic of a "slow growth forever" economy:
- Global growth will never be the same again
- Markets are adjusting to 'slow growth forever'
- What 'slow growth forever' means for the market right now
- Brexit is a result of 'slow growth forever'
- The Fed finally accepts 'slow growth forever'
Understanding Slow Growth Forever
The idea of long-term slow economic growth is not original. However, it is not widely understood or accepted either. That will change over the next decade.
The classic economic formula for economic growth is population growth + productivity growth = economic growth.
Population growth, as I analyze it, refers to both absolute population growth and the number of people moving into the middle class. As we progress further into the 21st century, we are seeing constraints on both population growth and productivity growth, so it is natural that economic growth would be slow.
There are also the complicating factors beyond the core formula for growth. We are seeing that:
- The population of the planet is getting older, which results in less consumer spending as a percentage of the population.
- Technology has disrupted the labor force in a way that has not added productivity.
- Global debt is massive, which is constraining new investment in the economy.
Of those three factors, only the impact of technology can be changed in any significant way.
The average age of the population is rising globally as the birth rate slows and people live longer. This impedes the economic growth rate due to the way that people spend money throughout life. People spend the most during their household formation years when they buy houses, second, cars and raise children. As they get older, they spend less on goods and services, other than healthcare.
There is no way to change global aging demographics in any short time frame. To make the planet younger, we would need to have a lot more babies. Even with China abandoning the one child policy, it is virtually impossible to significantly change the existing trends.
The reality is we don't really want to increase the birthrate anyway. We already have sustainability issues, as we are on track for 9 billion people by 2050, even with a slowing pace of population growth. Increasing the amount of people any faster than we are would add even more dangerous environmental and resource problems.
The chart above shows the huge transition going on with aging demographics. At the same time that we are living longer, we are also having less children per person.
Consider how we will pay for social programs for the retired going forward with fewer younger employed people to help pay for those programs. The challenges are massive. All government economic decisions must consider this reality we face. The solutions are not simple or painless, and will not come from blind ideology.
The amount of global debt has risen far past the levels of 2007.
The massive surge of debt after the financial crisis was used to fill the hole that the "great recession" left. We can see that after 2011, the debt started to rise again and continues to rise today. While there is likely some room left for debt expansion, as the rise in life expectancy allows for that, there is not much room. We need to see the curve flatten soon and then hold for decades even as the population ages, which will be no small task.
Over the long term, the only real way to reduce debt is to have a combination of growth, inflation and nearly balanced budgets. Eventually, the percentage of older people in the population will flatten, projected around 2050 by the World Bank and others, and then we can whittle away at the debt over a generation or two.
To solve the debt problem quicker would require massive defaults which would cause a depression or a major rebalancing of the international debt and currency markets. In the meantime, what central banks and national treasuries are doing instead is stretching out the debt at low interest rates so it is more manageable.
Remember, governments need interest rates to remain low for a very long time in order to service their debts, so expect interest rates to stay relatively low for a very long time. Former Federal Reserve Bank Chief Ben Bernanke a few years ago told a luncheon of hedge fund managers that he "didn't expect interest rates to normalize" in his lifetime. He's only 62.
Governments also need more inflation in order to devalue the debt, so expect higher inflation too. Federal Reserve Chair Janet Yellen has already talked about allowing the economy to "run hot" in order to create more inflation.
I talked about the weird world of low interest rates and a strong dollar on MarketWatch. It is unusual to have both a strong currency and low interest rates, however, that is what is happening. If the dollar gets too strong however, then the United States, which is the largest exporter in the world, will run itself into a recession.
The fear I have is that a series of events could return an old bogeyman. Stagflation is a very real possibility at some point. In fact, I believe it is a near certainty if we do not simply accept a GDP growth rate of 2-3%, play nice with other countries (especially China), and find ways to approach a balanced federal budget.
Improving productivity is possible, although it has stalled out in recent years. In fact, we have seen NO productivity improvement in over a year now. While it is not unusual to have a down quarter or two, a full year of no productivity improvement is rare.
If productivity growth doesn't improve significantly soon, then we have a real problem. If productivity doesn't follow the recent hiring up, and instead the lines decouple, that would potentially lead to a flat or shrinking economy (recession).
In my opinion, a few things could lead to that decoupling of the lines above.
The "biz-techies" as I have been calling them lately seem too focused on skimming wealth from the low-end of the economy. They are focused on self-driving cabs and trucks, self-checkout at the store, robot cooks and any other way of cutting out labor that will drive money to them. That doesn't add productivity to the economy when it creates massive unemployment. All it does is divert more money to fewer people.
I for one refuse to use self-checkout, will never be a passenger in a self-driving cab and want my chefs to be human.
What the biz-techies should be doing is focusing on helping doctors perform better surgeries, engineers build everything on the planet better, skilled trades provide better solutions and professionals bring their work weeks from 60 hours down to 45 hours. I recently told a group of "biz-techies" that message at a local tech event. They didn't like their work ethic or ethics being challenged. I haven't been invited back.
Another complication is that businesses are not investing much (except for stock buybacks and executive pay which continue to set records). That is bad for productivity improvements as well.
Without companies investing in new employees, research and development to improve their processes, and other new projects, business stagnates. If businesses stagnate, then the economy stagnates. If the economy stagnates, then people's standard of living deteriorates.
Finally, recent corporate merger activity has been very high. This is usually a sign that employment will turn over and the unfilled jobs will no longer be available. As you can see, we have a very small window right now to avoid a near-term recession.
Perceptions and Reality
Most people don't want to hear that economic growth is going to be slow for a very long time. It is not comfortable to consider because it implies that getting ahead will be harder. Folks want to believe that things can go back to the way they were. That would be easier.
We can't go back though, at least not to the WWII to early 2000s growth rates. It won't happen no matter what some politicians promise, so think logically about what gets promised and what is realistic. We do not want to repeat the errors of the past as there is less and less safety net for recovering from a significant economic setback.
You should know that economic growth has been around 2% for at least the past few centuries, excluding the post WWII rebuild that flowed into the technology era. 2% is not an abnormal growth rate. Unfortunately, we often only relate to the most recent history. That is a part of our psychology. We need to take a longer-term view.
Political Solutions to Slow Economic Growth
There is no solution to long-term slow economic growth. What politicians and central bankers can do however is pull growth forward. What does that mean? It means they can enact policies, usually deficit spending and tax breaks, in order to pull growth that would occur in the future to today.
There are three massive problems with pulling growth forward. First, it leaves a hole in tomorrow's growth. That's not terribly fair to younger people, even if there are fewer of them as a percentage of the population. Another is that ballooning debt saps the personal and national financial flexibility which is necessary when the next inevitable economic slowdown occurs. Finally, pulling growth forward with various stimulus measures almost always creates asset price bubbles. We have seen what an asset price bubble looks like twice in the past 20 years; we should try to avoid creating another.
Some politicians are finally waking up to the growing frustration in the world that slow growth is creating. The emerging populism is taking a nationalist tilt right now. Historically that has never worked out well, ask Germany. We need to think very logically and control our emotions.
As politicians, new and old, offer solutions, we, the people need to be careful not to fall for old ideas that failed in the first place. The proposals and policies we vote for and support should be along these lines (this is a quick list, each topic could be a book):
- Lower deficits - which might preclude much in the way of tax cuts short-term
- Tweaking the global corporate financial system to benefit more people rather than flowing wealth to fewer people
- Better education and jobs training programs as those are among the only programs that yield real returns on investment
- Permanent tax breaks for research and development (expire periodically now) which help spur productivity
- Redevelopment of energy policy - including building a smart grid - which helps provide energy security
- Healthcare policy that reduces the ability of the profit motivated to gouge
- Significant infrastructure investment that doesn't build "bridges to nowhere" but rather takes care of some of the decades of deferred maintenance
That's just an "off the top of my head" list. And again, even those won't actually "cure" slow economic growth, but policies like those will mitigate the long-term impact.
There will be trade-offs of course. We will have to continue being very prudent about being the world's police as we can't afford to be everywhere. Full Social Security retirement age for the millennials needs to be raised a year or two. Babies born today probably shouldn't collect full Social Security until age 70. Social programs for able-bodied people need better ways to wean people off of public assistance.
There's more of course, but that's all the politics I have for you. What is more important to understand is that central banks and governments are going to engage in various actions to combat "slow growth forever." There is opportunity in that. If we pay attention and set ideology aside, then we can make money by understanding what those institutions are doing and why.
So, remember, always look at the bright side of life. There are ways to live and invest with slower economic growth if we manage our expectations and plan for what is coming.
Part II of my third-quarter quarterly letter - Investing in the "Slow Growth Forever" Global Economy - follows this weekend.