Monday, December 2, 2013

Gary Shilling: Dont Worry, Be Happy

Whenever an abnormal economic condition persists, theories are concocted to explain why it will last forever. And why not? The theory-spinners have very receptive audiences who enhance their credibility.

Real GDP growth in the last six years has averaged 0.8% by my estimate, anemic compared with 3.4% in the previous, post-World War II years. So, right on schedule, theories have come out of the woodwork predicting sluggish economic performance forever.

Until their data were corrected by a graduate student, Carmen Reinhart and Kenneth Rogoff convinced many that when government debt exceeds 90% of GDP (the U.S. is now almost at 100%), the economy contracts 1% annually. Columbia Business School’s Glenn Hubbard and Tim Kane see “the storm clouds of history” gathering on America’s horizon due to political inertia, antigrowth policies, eroding economic vigor and excess government spending.

Niall Ferguson, who teaches at Harvard, believes ever encroaching government is strangling private initiative and threatens representative government, free markets and the civil society. Robert J. Gordon of Northwestern thinks all the large growth-driving technologies are fully exploited and sees nothing ahead to equal the automobile, telephone, radio or jet plane. The icing was Barron’s Oct. 28 cover, which screamed: “The Snail Economy.”

Sure, the economy is five years into deleveraging–about halfway through this gauntlet. But in about four years it will probably resume normal gains, even with a catch-up bonus. Productivity-rich technologies like computing, the Internet, robotics, biotech, telecom and additive manufacturing are far from fully developed. The Industrial Revolution started in England and New England in the late 1700s. It grew like Topsy, but it was only after the Civil War that it was big enough in the U.S. to turbocharge growth and productivity.

No doubt, the Baby Boomers are aging. But their lack of retirement savings is forcing many to keep working. Unlike Europe, which historically exports people, the U.S. is a land of immigrants, legal and illegal. They will keep the labor force growing. Japan, by contrast, has the longest G-7 life expectancy, no immigration and low fertility. So it has a leaping pool of seniors to feed and a declining population. Europe will follow soon. With the one child per couple policy in China, the number of new labor-force entrants ages 15 to 24 is falling. In fact China is the only country that will get old before it gets rich.

Don’t underestimate this nation’s indomitable entrepreneurial spirit. Consider the explosion of mobile communications and social media. In Japan and parts of Europe there is cultural antipathy toward entrepreneurs.

The $400 billion annual U.S. current account deficit measures the extent to which foreigners recycle dollars to finance the federal deficit and other shortfalls. It’s dropped from an $800 billion rate before the Great Recession, and it will fall further as consumers continue their shift from a 30-year borrowing-and-spending binge to a saving spree, reducing demand for imports.

Also, the shale oil boom means the U.S. is moving toward energy independence. This will reduce our geopolitical vulnerability in the Middle East.

I expect that the dollar will reverse its long slide. My study of currencies since Roman times reveals that the buck will continue to prevail as a global reserve currency. The U.S. is the world’s largest economy, and second-place China is slowing as it shifts from being export-driven to domestically led.

We have the globe’s deepest, broadest and freest financial markets. Our greenback is involved in 87% of international currency transactions. Despite the downgrade, foreigners continue to plow money into Treasurys.

Sure, the U.S. has its problems. But dire forecasts of slow growth forever are just another case of theory built upon faulty facts.