Photo: Bloomberg Television
The current domestic and global investing environment is dominated by deleveraging, according to Gary Shilling. In other words, households and institutions are slashing the debt on their balance sheets.
And according to Shilling, we still have some way to go:
“The deleveraging process for both these sectors has commenced, but it has a long way to go to return to the long run flat trends and we are strong believers in reversions to well-established trend. If we simply extend the downward slopes, it will take the Financial sector 9.5 more years to return to trend as bank assets continue to be dumped and capital raised, and 8.3 more years for the Household sector as debts are repaid or written off and assets are rebuilt through a rising saving rate
…We continue to suggest about five more years of deleveraging, however, since adding that to the 2008-2012 initial span would bring the total to about 10 years. That’s the normal length of deleveraging after major financial bubbles, according to Carmen Reinhardt and Kenneth Rogoff’s book, This Time Is Different: Eight Centuries of Financial Folly.”
During this period of deleveraging and because of nine other factors weighing on growth, average GDP growth in the U.S. will be 2 per cent. What’s more the GDP growth rate will be much lower than than the 3.3 per cent needed to keep the unemployment rate steady.
“A 2% real GDP growth indicates that the unemployment rate will rise, chronically, a little over one percentage point per year.
…This implies that the 7.8% rate in December would be about 8.8% in December 2013, 9.9% in December 2014, 11.0% in December 2015, etc. No government left, right or centre can endure high and chronically-rising unemployment so the pressure to create jobs will remain for the duration of deleveraging. And so will the huge federal deficits that result from the leap in federal spending and weakness in tax collections.”
And the power of deleveraging according to Shilling is “gigantic”, because it is offsetting tremendous amounts of stimulus:
“Witness the fact that despite all the fiscal and monetary stimuli here and abroad since 2008, economic growth remains slow at best.
Federal deficits have been running $1 trillion-plus, the result of weak tax collections, tax cuts and government spending surges with the resulting leap in federal borrowing. …But these huge deficits and more to come as the postwar babies retire and draw Social Security and Medicare benefits have brought fiscal policy in Washington to a standstill.
…with frozen fiscal policies here and a number of foreign lands, responsibility to do something to aid the economy has shifted to central banks. Earlier, they pushed the short-term rates they control to close to zero with little effect. Then they turned to quantitative easing, which pumped up financial assets but did little to promote employment, its stated goal.”
The silver lining? Once this is done, the U.S. should to return to a long-term trend growth of 3.5 per cent per year.