America’s Lost Decade, and the One to Come?

gvictoria_Economy© CAN STOCK PHOTO / gvictoria

There is no one certain future, you know. That’s why I so often present my readers with opposing views on trends (with the understanding that all present cogent arguments with persuasive evidence). Such is the case in my post here.

John Michaelson writes that after ten lousy years the US economy looks poised once again to grow (due to improving productivity, based on technological innovation). Lance Roberts, on the other hand, writes that no, there will be no economic boom, due to outsized debt and deficits.

Who’s right? Both, or neither? I confess I tend to accentuate optimistic views in my speaking engagements, but indulge in pessimistic assessments in my private moments! Here are excerpts from these two excellent sources:

John Michaelson:

Don’t let heady stock prices, record corporate profits, and low unemployment fool you. America is only now emerging from a lost decade. Instead of renewal, the last ten years were blighted by slow growth, stagnant productivity, limited social mobility, long-term unemployment and underemployment, and despair. . . .

Yet positive change seems to be arriving at last. In Washington, the Trump administration is pushing to dismantle costly regulations that affect business. The ­ideological tide regarding antitrust interventions is shifting, even at the University of Chicago. Corporate taxes are being slashed, perhaps leading to repatriation of offshore funds. The state and local tax (SALT) deduction, which largely benefits the rich (and public employees) in places like New York, is being reduced or eliminated.

Despite the effects of counterproductive policies, the U.S. economy looks poised once again to embark on an innovation surge of historic proportions, one that will disrupt established players, generate substantial returns for investors, and improve the lives of working Americans. The technological foundation for historic change is already in place. . . .

The conditions for growth – innovative new companies with viable business models, customers fed up with paying economic rent to entrenched vendors, and young entrepreneurial workers – have existed for years without coming to full fruition. But now, new institutions have at last emerged to provide finance for growing small and medium-size businesses. Family offices that manage the assets of rich private individuals are investing directly in promising companies. Private-debt funds are a growing presence in the economy. These investors are helping fill the place of the smaller banks. . . .

(t)he next big boom seems about to burst forth. Americans remain the world’s best creative destructionists.

Lance Roberts:

Don’t dismiss the importance of $25-30 trillion in U.S. debt. It is larger than the debts of every other nation in the world – combined. . . .

Deficits, and deficit spending, are HIGHLY destructive to economic growth as it directly impacts gross receipts and saved capital equally. Like cancer – running deficits, along with continued deficit spending, continues to destroy saved capital and damages capital formation.

Debt is, by its very nature, a cancer on economic growth. As debt levels rise it consumes more capital by diverting it from productive investments into debt service. As debt levels spread through the system they consume greater amounts of capital until they eventually kill the host. . . .

The reality is that the majority of the aggregate growth in the economy since 1980 has been financed by deficit spending, credit creation and a reduction in savings. This reduced productive investment in the economy and the output of the economy slowed. As the economy slowed and wages fell, the consumer was forced to take on more leverage to maintain their standard of living, which in turn decreased savings. As a result of the increased leverage more of their income was needed to service the debt – and with that, the “debt cancer” engulfed the system. . . .

The problem that is not yet recognized by the current administration and mainstream economists is that the excessive deficits and exponential credit creation can no longer be sustained. The process of a “credit contraction” will eventually occur over a long period of time as consumers and governments are ultimately forced to deal with the deficits.

The good news is the process of “clearing” the market will eventually allow resources to be reallocated back towards more efficient uses and the economy will begin to grow again at more sustainable and organic rates.

Today, however, expectations of a return to economic growth rates of the past are most likely just a fairy tale. The past 9 years of stock market returns have been fueled by trillions of dollars of support and direct injections into the financial system – that support is not sustainable in the long run. While the injections have kept the economy from falling into a depression in the short term – the unwinding of that support will suppress economic growth for many years to come.

There is no way to achieve the necessary goals “pain-free.”  The time to implement austerity measures is when the economy is running a budget surplus and is close to full employment. That time was two administrations ago when the economy would have slowed but could have absorbed and adjusted to the restrictive measures. However, when things are good, no one wants to “fix what isn’t broken.” The problem today is that with a high dependency on government support, high levels of underemployment and rising budget deficits, the implementation of austerity measures will only deter future economic growth, which is dependent on the very things that need to be “fixed.”

The processes that fueled the economic growth over the last 30 years are now beginning to run in reverse, and when combined with the demographic shifts in the U.S., the impact could be far more immediate and prolonged than the media, economists, and analysts are currently expecting. Sacrifices will have to be made, the economy will drag on at subpar rates of growth, individuals will be working far longer into their retirement years and the next generation of Americans will lead a far different life than what the currently retiring generation enjoyed.

It is simply a function of the math.