“Theory follows fact.” That was the theme (and title) of the presentation made by famed economist Dr. A. Gary Shilling at the 2014 Altergis SIC Conference. The idea is a simple one: it’s easy to assume what’s happening right now is going to keep happening.
This is especially true in economics, where trends can stretch out over years or decades. It’s hard to seriously fault someone for assuming that a trend might stick close to ten years in, but the reality is that this is often a mistake.
It was highlighting that mistake that first allowed Shilling to begin building his reputation. In the late 1970s, many had already begun to assume that the double-digit inflation that had dogged the American economy since the late 1960s was simply the new norm.
“Excess government spending on the Vietnam War and Great Society programs touched off severe inflation in the 1960s, and after a decade of this, theories that double digit inflation would last forever,” he told attendees at the SIC conference on Wednesday. “Wage-price spirals, the maintained, were endemic in an economy with strong labor unions and employers who felt duty-bound to keep their employees at least abreast of rising prices.”
However, it’s certainly clear now that this was wrong. The double-digit inflation of the late 1970s disappeared in the early 1980s and, since that point, inflation over 5 percent has been the exception, not the rule.
More importantly, Shilling knew that thinking was wrong at the time and, in spring of 1983, McGraw-Hill (MHFI) published his book Is Inflation Ending? Are You Ready? The answer, for most people, was no. And for those folks who listened to Shilling and bought into the astronomically high rates on US 20-year and 30-year T-bills, they got an incredibly low-risk investment that has outperformed the S&P 500 ever since.
A similar blind-spot led to many people predicting a doomsday future of overpopulation in the midst of the post-World War II baby boom.
But why talk about this now? The current zeitgeist maintains that the current low growth economy will continue ad infinitum.
“With the persistence of slow growth, however – only 2.3 percent at annual rates in this recovery – theories now are coming out of the woodwork telling us that it will persist forever,” he said on Wednesday.
However, this may still be premature. Shilling cited the subject of his 2010 book – The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation – as the reason for the current low-growth state.
“With…caveats, we disagree with the growing legion of long-term pessimists who, in the Age of Deleveraging and persistent slow growth, find their messages increasingly accepted,” he said.
Shilling observes that, while the current state of US debt-to-GDP ratios are troubling, they would be relieved by a return to annual GDP growth rates between 3.5 and 4 percent. What’s more, the idea that innovation may have plateaued is probably incorrect.
“To say that the Internet is fully exploited is like yelling ‘Get a horse!’ in the early 1900s at a Model T Ford driver whose car had broken down,” Shilling said. “Among today’s new technologies are the Internet, biotechnology, semiconductors and computers, wireless devices, robotics and additive manufacturing, and 3-D printers.”
So when can we expect this return to the growing economies that were once considered normal? Shilling predicted that the current deleveraging would likely last for a total of a decade, as in past episodes.
“Once private sector deleveraging is completed in another four years or so, real GDP growth will probably return to its long-run trend of about 3.5 percent, and may be higher on a catch-up basis – a big jump from the 2.3 percent growth in the recovery so far,” Shilling concluded. “The headwinds of deleveraging will have calmed and more rapid productivity and labor force growth will likely return. And the slow-growth-forever crowd will need to find new theories to promote!”