By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) — Near zero economic growth by 2050? Yes, America’s economy is collapsing. Fast. Yes, the “most depressing forecast ever,” says InvestmentNews, trusted source for 90,000 professional financial advisers across America.
Actually it’s worse than depressing if you read the details in “On Road to Zero Growth,” the latest Quarterly Letter from Jeremy Grantham, founder and chief investment strategist for the $100 billion GMO money managers.
Yes, today’s fiscal-cliff drama is just a warm-up for what’s coming. America’s economic future is a disaster. We are going over a bigger game-changing economic cliff, into a long-term chasm. And it’s unavoidable.
Why? Because our myopic Congressional leaders and Fed chairman are focused on short-term fixes, piling on more monetary-stimulus debt, while avoiding America’s systemic long-term problems. Yes, we are our own worst enemy and nothing will keep us from driving down the road to zero growth and into painful austerity, just like the 1930s.
Listen closely: here’s Grantham’s overview of America’s economy from the late 1900s through 2050: “The trend for U.S. GDP growth up until about 1980 was remarkable: 3.4% a year for a full hundred years.” That powered the great American Dream. “But after 1980 the trend began to slip.” And unfortunately the economy is “not going back to the glory days of the U.S. GDP growth.”
Get it? A century of high-growth prosperity, then our GDP growth dropped “by over 1.5% from its peak in the 1960s and nearly 1% from the average of the last 30 years.”
America’s high growth and prosperity is gone forever
What’s ahead? InvestmentNews’s Dan Jamieson sums up Grantham’s “most depressing forecast ever:” America’s long-term 3.4% annual GDP growth is ancient history. Grantham is blunt: “The U.S. GDP growth rate that we have become accustomed to for over a hundred years … is not just hiding behind temporary setbacks. It is gone forever.”
Unfortunately, we’re in denial, accelerating the decline. Just the opposite: “Most business people (and the Fed) assume that economic growth will recover to its old rates.” Wrong: “Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”
Listen closely: The American economy is on a long decline. By 2050 our GDP will be under 1% growth. We are in a downhill road race headed to zero growth while Washington, Wall Street, CEO’s and billionaires play myopic games, feigning optimism, while making matters worse.
So investors, voters, taxpayers are left alone, forced to adjust their long-term retirement plan accordingly, because this trend is certain to raise havoc in the financial markets, in consumer spending and in the job market, as we descend into zero growth hell.
20 leading financial minds warned of 2008 bank crash for 8 long years
Back in mid-2008, months before the Wall Street disastrous pre-election meltdown, we wrote a column reporting on eight years of warnings made by financial leaders, beginning in 2000 till the 2008 meltdown. The list was impressive: two Fed governors, an SEC chairman, five respected economists, four billionaires, five big money managers, two financial historians, etc. Warnings kept coming for eight years.
But not only were their warnings ignored, Treasury Secretary Paulson was out there telling Fortune, “this is far and away the strongest global economy I’ve seen in my business lifetime.” Fed Chairman Bernanke was telling us the subprime crisis was “contained.”
Later, after 18 years running America’s monetary system, former Fed Chair Alan Greenspan finally admitted to Congress, “I really didn’t get it until very late.”
But Jeremy Grantham and many others did “get it.” Got it early. He’s one of the world’s most respected money managers, “a capitalist who co-founded two firms that today employ about 600 people in total.” Investors should listen to his new warnings.
Trust Grantham’s forecast: great track record, lots of great company
Back then Grantham was building on a mid-2005 special report in the Economist magazine, “The Biggest Bubble in History,” warning that in the five short years after the 2000 dot-com crash, property prices had risen worldwide by an unprecedented 75%. Yes, real estate mania had replaced the dot-com mania.
In his April 2007 quarterly newsletter, Grantham described a trip around the world. His finding were headlined: “The First Truly Global Bubble, impacting all countries, all assets worldwide. From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time. … Everyone, everywhere is reinforcing one another. … Bursting of the bubble will be across all countries and all assets … no similar global event has occurred before.””
Then in his midyear 2007 letter, a deeply concerned Grantham warned that watching the global economy was like “watching a very slow-motion train wreck.” In his October letter, Grantham said the “train hits end of track at full speed.”
A year later, on schedule, Wall Street’s slow-motion credit train did in fact hit a solid wall, leaving Wall Street banks, America’s monetary system and the world’s credit markets essentially bankrupt, a catastrophe that was predicted years in advanced, and ignored.
No lessons learned from 2008 crash, blowing bigger bubble, disaster
Today we still haven’t learned any lessons: In his early 2012 newsletter Grantham saw a bigger global train accelerating. Focusing on the “common good, it became quickly apparent that capitalism in general has no sense of ethics or conscience.” In fact, capitalism’s “greatest weakness is its absolute inability to process the finiteness of resources and the mathematical impossibility of maintaining rapid growth in physical output.”
The biggest culprit: Wall Street bankers. Their collective myopic brain is incapable of seeing beyond their millisecond trades, beyond today’s closing prices, beyond quarterly earnings, and never beyond their annual bonuses.
All public costs, especially long-term environmental losses, are discounted to zero, someone else’s problems.
America’s delusional leaders on the road to zero growth
Flash froward to Grantham’s latest quarterly newsletter: “On the Road to Zero Growth.” Will his warnings be listened to this time? Any more than those 20 other warnings in the years prior to the 2008 Wall Street crash? Unlikely, certainly not by Wall Street, not by Congress nor by the White House — at least not in time to avoid another, and this time bigger, meltdown than in 2008. They’ll keep misreading history with their faux optimism.
Grantham even has a special warning about the disastrous job Greenspan’s successor Bernanke is doing, favoring Wall Street’s too-greedy-to-fail banks while piling trillions of new debt on the backs of future taxpayers with endless bond buybacks.
Grantham warns “investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal. Remember, the Fed is led by a guy who couldn’t see a 1-in-1,200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait.”
So if Washington and Wall Street don’t get it, Main Street investors have no choice: Take control of your money and adjust your retirement portfolios for the coming decline.
Black Swan: next crash, bigger, longer than 2000 and 2008 combined
Grantham is a realist, understands human nature, personally, nationally, globally. It will probably take a global catastrophe — pandemic, famine, WWIII or a monetary system crash bigger than 2000 and 2008 combined — to awaken America: “Attitudes are sticky. We cling to the idea of the good old days with enthusiasm. When offered unpleasant ideas (or even unpleasant facts) we jump around looking for more palatable alternatives.”
Why? Americans are dreaming, in denial, trapped in a delusion: The return to 3%+ GDP growth. Politicians are even biggest dreamers: “The tech boom and bust and the following housing boom and housing and financial busts helped camouflage the recent unpleasant economic development lying below the surface: the steady and important drop in long-term U.S. growth,” warns Grantham.
Global GDP will drop, too, but far outperform America. The “bottom line for U.S. real growth,” says Grantham, “is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.”
The recent century-long 3.4% GDP growth is dead, never to return. Never. Accept it, bite the bullet, plan ahead, downshift retirement plans, do it now.