The Search for What Ails the Economy
WHY YOU SHOULD CARE
Because everyone needs a firm grip on the economic difficulties that lie ahead.
By Steven Butler
Back in the day, it was actually a pleasant job to have, advising people on how to make money. But, as Chuck Roberts, a financial adviser who heads Freedom Financial Planners in Richmond, Virginia, will tell you, it’s not so easy these days. The smartest move he gave his flock of followers was to warn them to lower their expectations ahead of the recent stock market meltdown. The Federal Reserve, with its low interest rates, Roberts says, has “declared war on savers.”
His advice? Save more, try to earn more and spend less. And people pay to hear this. With the steady stream of financial disruptions, he says, “It is making our jobs as advisers extremely difficult.”
It’s not new, of course, to hear financial pros are shelling out bad news. But a series of events over the past year has created a world where a bleak view of the future of financial markets is gaining a worrisome, even sizable, traction. Bond king and famous portfolio manager Bill Gross, for one, recently warned that investors “are not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive.” And it’s not hard to see why experts are drawing such conclusions. Start with the fact that stock and bond prices were at such historic highs that the odds of going higher seem remote. Then add in a host of intractable trends that economists and policymakers are struggling to understand and combat, like lower productivity growth, an aging population and a soaring debt (almost everywhere). “The world does not have an engine of growth now,” says Lacy Hunt, executive vice president at Austin-based advisory firm Hoisington Investment Management.
The issue of debt, which has risen to astronomical levels, is associated with default or hyperinflation almost everywhere.
One of the biggest worries is resurrecting dismal productivity rates. The amount that workers produce in an hour is a great long-run predictor of growth and income. And while we might all feel that we live in a world of fast-paced technical change and innovation, the fact remains that productivity growth slowed sharply 10 years ago — by half compared with a decade earlier. Even worse: In the past five years, productivity has inched forward just 0.8 percent. Part of the problem, as Robert Gordon, an economist and productivity expert at Northwestern University, has been saying for years, is that recent innovations such as smartphones just can’t measure up to the revolutionary impact of railroads, electricity, electric lights, automobiles, running water and sewers, or, for that matter, landline telephones.
Meanwhile, as populations overall get older in the U.S., Europe and Japan, people tend to save more and spend less. It’s a similar story in China, which is facing a scary aging problem as a result of efforts to keep its birth rate down. “It’s a global phenomenon,” says Joseph Gagnon, senior fellow at the Peterson Institute for International Economics. But while China is also now the world’s largest market for many products, its weak social security system has helped keep a lid on consumer spending, at just 36 percent of the economy, compared with 68 percent in the U.S. The result is lower growth.
Then there’s the issue of debt, which has risen to astronomical levels and is associated with default or hyperinflation, well, almost everywhere. Hunt fingers this as the No. 1 culprit, as debt payments suck money from elsewhere in the economy. Historically, he points out, economies get into trouble when total debt passes 250 percent of economic output — in the U.S., it has hit 335 percent of the gross domestic product. In China, debt quadrupled between 2007 and the middle of 2014, says the McKinsey Global Institute. Meanwhile, Europe keeps borrowing to address a crisis touched off by too much debt, and Japan’s debt is off the charts. “This is the reason we’ve had this start-and-stop economy,” says Hunt.
Did central banks with their easy money policies cause these problems? That’s one theory coming out of the Bank for International Settlements, the Basel, Switzerland–based clearinghouse for central banks. Their idea is that easy money sparks bubbles and misallocation of resources, which, when popped, create financial crises that force even lower rates, more misallocated resources that lead then to low productivity. Naturally, not everyone agrees with the theory.
And there may be a way out. Bone-jarring austerity to reduce debt is one way, says Hunt, though that seems highly unlikely. Gagnon sees some hope in big infrastructure investments slated for Asia and elsewhere that could stimulate growth, even though many of those economies are suffering today. Similar investments in the U.S. or Europe might also help, though they’re off the political agenda right now.
Truth is, no one has a great answer. It took 10 years — and a world war — to climb out of the Great Depression. And, in the 1970s, even patient investors lost money, after accounting for inflation. Of course, today’s circumstances are different, but it’s worth remembering that financial markets don’t owe anyone anything.