More Economists Weigh in on Why Global GDP Growth Cannot Accelerate

Tom Cleveland

Another month has passed, and still we wait in anticipation for that secret formula to appear that will jumpstart the global economy into a much higher gear. This week will be jam packed with data releases, culminating in the all important Non-farm Payroll report, but economists, at least the ones that take their time to discern the prevailing tea leaves, are not convinced that anything can really provide the rocket boost that we all would love to see. Trump and his cohorts may sing a happy tune, but time is running out on their political diatribe, as well. Fundamental market forces and data will dictate the future.

Yes, these times are different in many ways, but there are basic truths that cannot be ignored, when the fickle market finger of fate writes upon the wall and moves on. What are these incontrovertible basics that must be taken into account? The developed countries of the world, whether they like it or not, are reaching constraints in labor productivity and labor force growth. Why is this a problem? Japan endured this problem for decades while other nations remained in denial. Surely the issues in Japan were of its own making. Yes, they were, but the same trends are washing up on the shores of every other developed nation on the planet.

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The latest cry is that technology and productivity will save us, as it has done in the past, but this dream comes with a few nightmares, as well. First, investment must precede productivity gains, but historical trends have shifted with momentum (See below):

Net domestic investment share of GDP
These figures may be related to the United States alone, but we could have included data for Europe, Canada, and Japan, and the result would have been the same. The greatest redistribution of wealth from developed countries to their developing brethren has been a monumental natural phenomenon. China may have kick-started the flow in the eighties, but market forces behind the scene, aided by new technology, were reshaping the world. The advent of the Internet may have provided a nice bump back, but the reversal soon dissolved. If anything, the slope became steeper.


Why has capital gone overseas rather that stay at home to create much needed job growth? The answer is basic math that even a fourth grader can understand. Do you want to invest your money for a measly one or two percent return, if that, or take a little more risk and invest in developing markets where returns could reach 25% or more? The answer is obvious, and central bankers have made it even more so by keeping returns at rock bottom levels, forcing everyone to take more risk. In fact, risk has not been adequately priced into these decisions, since central bankers have not allowed true market forces to do their thing. At some point, there will be a judgment day, but when?


Will increased government stimulus do the trick?

The IMF and the World Bank have been preaching from their respective soapboxes for years that government infrastructure spending is necessary in a big way to get things rolling again. Politicians, however, have had to turn a blind eye. It is never easy to raise taxes in order to increase government spending, but national debt versus GDP ratios continue to ascend into the heavens without even a modicum of success. Unfortunately, central banks have already loaded up on their balance sheets, as this graphic portends:

Central Banks balance sheet

If the Fed was the Pied Piper, then the other rats have surely followed. There is no more room for further central bank balance sheet appreciation. The “Great Experiment”, if you will, that was supposed to bring us back from the depths of the Great Recession, has, if anything, kept us from falling into the black hole, but it now is working against us. The shear weight of this global binge in the debt cycle may pull us back, after all. Despite the best economic advice from the experts of our time, we have seen little in the way of returning the world to a time of greater prosperity.


Where will the government funding come from to finance infrastructure projects and generate jobs in the near term? If current thinking is to drive the equation, then cuts in social spending and healthcare will be the vehicles, rather than debt. Consumer spending will drop as a result that will have to be made up somewhere else, but where? Tax cuts to the wealthy and tax investment incentives for corporations are the standard Republican answers, despite the fact that Reagan-esque “trickle-down economics” has never been shown to benefit anyone but the wealthy. Allowing corporations to repatriate foreign-based profits has always proved to be another red herring. Companies have typically increased dividends, bought back shares or other companies, or paid out large bonuses to their executive teams, anything but invest in America.


The outcome is very predictable – more concentration of the wealth in the upper tiers, as has been the trend for decades. The following diagram tells the story:

Wealth inequality growth
If developed economies are ever to grow again on an accelerated basis, then the masses must lead the way for their respective consumer-driven economies. Populist movements may scream and shout, but this basic economic truth cannot be ignored. What if technology suddenly bursts at the seams with new innovations? Would that be enough of a spark?


If we are at such a “tipping point”, the futurists believe that AI, short for Artificial Intelligence, could reshape today’s dynamics, but even these types of change take time. These newer technologies also come at a high price. In fact, groundbreaking studies at MIT and elsewhere have confirmed that, for the past two decades, modern technology has been destroying old jobs at a much faster pace than it is creating new ones, a conundrum that has economists baffled. Technology has always been viewed as a positive force from their purview, but the newer jobs are fewer in number and require more exacting skill sets. Technological innovations can often be a mixed blessing.


And what about the week ahead?


The first week in the month is always overloaded with key economic data releases, and June will be a shortened workweek to heighten the suspense. Quite a few analysts are beginning to believe that good news will actually be bad news, i.e., what the market gives, the Fed will remove by increasing interest rates. A sudden boost in volatility has been long overdue, and the potential for rough weather may be just around the corner, if the following VIX forecast for the future is accurate:

Volatility update

The “half-full” optimists are still hanging on for productivity gains: “Fed Chair Yellen recognizes that some supply-side reforms can boost growth potential. However, in the long run, growth is a function of hours worked and productivity. Slower growth of the pool of available workers and weak productivity growth limit the growth potential of the economy. There appears to be little thought given to boosting productivity, though the right kind of infrastructure investment can help.”


But the “half-empty” pessimists cannot take their eyes off debt issues and the end of cheap-money days: “We’ve been playing two games to mask insolvency: one is to pay the costs of rampant debt today by borrowing even more from future earnings, and the second is to create wealth out of thin air via asset bubbles. The two games are connected: asset bubbles require leverage and credit. Prices for homes, stocks, bonds, bat guano futures, etc., can only be pushed to the stratosphere if buyers have access to credit and can borrow to buy more of the bubbling assets. If credit dries up, asset bubbles pop: no expansion of debt, no asset bubble.”


As you might expect, currencies are ranging this week, as tight spread boundaries take hold. The USD has weakened of late, but the euphoria in Europe over French elections may soon weigh down the Euro. Another key Fed date is fast approaching, which cannot be ignored, but we have seen this dance before and know how it is played.


That brings us back to the question of GDP growth. Can the U.S. economy drag the rest of the world to prosperity? One analyst is not so sure: “There was much debate in the primaries a year ago about how fast the US economy can grow. Trump has talked about 5% and sometimes 4%. The budget presented assumes 3% growth. The Federal Reserve estimates that trend growth in the US is a little below 2.0%. Obama was the first president since the end of WWII that did not record a single year of growth above 3.0%. The last year that such growth was reported was 2005, and the last four-quarter period that averaged at least 3% was mid-2006.”


What do central bankers think? Their belief is that we are in for a very long, drawn-out process, if only because the “Gordian Knot” of massive balance sheet expansions and near-zero to negative interest rates cannot be unwound quickly or it may snap like a giant spring. On the one side, you have the stoic bankers, and on the other, frivolous politicians, who have yet to feel the wrath of the voting public. At some point, basic fundamentals will realign market forces, regardless of the short-term outcomes. In the meantime, we wait to see who moves first and second and third. The deck chairs are fewer this time around, and no one knows when the song will end, but only that it will end badly.


Concluding Remarks


The Bulls are still in control of this market, but their optimism is being tested daily. The fact that accelerated GDP growth may not be in the cards for the foreseeable future can be disheartening to even the most strident investor. One analyst summed it up as follows: “These games look like a Perpetual Motion Money Machine. There is no cost, it seems, to expanding debt and assets bubbles; if future income doesn’t rise enough to service the growing mountain of debt, we either print more money, lower the interest rate or create “wealth” with even grander asset bubbles.”


Perpetual Motion Money Machines, however, must, sooner rather than later, succumb to the “friction” provided by market constraints. When everything does come to a crunching halt, the picture will not be pretty, but, for now, no one is ready to play a funeral dirge. It may be mid-year and there may be no more clarity than there was at the beginning of the year, but the underpinnings of the economy are strong, even if dramatic growth may be a pipe dream.

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Tom Cleveland
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