End of Golden Era for Investors Spells Troubles
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I don't know why people think the current levels of accumulation of debt are sustainable but there is a limit to what even the US can roll in term of debt. All developped nations are at around 100% debt to GDP, more than 200% if you include private debt, and growing at 3-5% per annum.
Now does anyone really think that sometime soon any developped country will start making public surplus and deleverage for 30 years? That's never going to happen.
I think one or both of two things will happen: 1. massive defaults of states and therefore of banks and insurance companies. 2. Long period of high inflation.
Either way savings from people now in their 30s will be wiped out. A little gift from the departing generation (baby boomers)...
The US government did not run surpluses and deleverage in the following decades. The economy grew, without hyperinflation, and the debt became irrelevant.
The solution to high levels of debt is sustainable economic growth, not deleveraging. Mass deleveraging would be an economic catastrophe.
Inflation sounds great, just default without technically defaulting, until you actually see what it does to the economy. The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state.
If you look throughout history, there has never been any nation or empire that has ever done this. The US will fail just as Rome and others before it.
True, $5 Trillion of the debt is held by the US Government in some form (around $2 Trillion is held by the Fed, another $3 is held by Social Security). So it'd be bad for them if the US Government defaulted. And that's why we need to pay back the debt, so that Social Security and the Fed can continue to function.
Social Security has lent trillions of dollars to the US Government. They deserve to get their money back.
The true reason we want to pay off our debt, is because we citizens of the US Government rely upon the debt to be repaid. (Pension funds, Social Security, Investors, and the Federal Reserve are the top lenders to the US Government. NOT China as some people have noted).
Indeed, if China became the chief banker, we'd just default and stick our middle finger across the Pacific Ocean. Station a few Aircraft carriers in the Pacific and tell them "Come get your money back, if you dare".
But since the debt plays a critical role in our economy (an investor wishes for 7% returns may yearn for 5%+ interest rates of the past), its important to consider the debt from both sides. Yes, the US Government arguably wishes to be debt free. But similarly, the US Public wishes for a safe location to store cash for years-and-years.
Long story short: the debt is only a problem if we the public decides its a problem. If that happens, we'd expect interest rates to go up. However, interest rates have only dropped, so that suggests that the market wishes for more debt to be created.
And there are many reason for the low rate of interest, but historically, USG securities have been the safest investments, so you have a lot of dollars chasing them. So the USG can set the interest rate low and yet it will be bought up.
Pretty bad for the US, but I don't think it'd be a catastrophic worldwide event. Interest rates will go up, and it will become even harder for the US to pay back the debts, and it will become much more difficult for the US to borrow money in the future.
Bad all around of course, not something to be trifled with. But its a relatively simple prediction to make.
This means the USG stops exerting political power. and even with all our military, money is more important. Look at Nazi Germany. They failed after exhausting their military because they couldn't keep influencing nations with money.
Let's pretend this is true. (I doubt it.)
Let's keep in mind that US debt is owed in bonds, redeemable in US dollars.
If I get a 30 year mortgage in 1945 and simply rollover the debt whenever it comes due, but my wealth has increased dramatically, my mortgage does not matter. If I take out a 100k mortgage and then go on to found Apple and become a multibillionaire, then yes, growth was the answer. My debt may not have changed, but it is completely and utterly irrelevant when considering my financial situation.
> Inflation sounds great, just default without technically defaulting, until you actually see what it does to the economy.
Which is why the 50s and 60s were known as horrific economic times, right?
Assuming by "inflation" you just mean an increase in the money supply - quintupling the money supply since 2009 doesn't seem to have led to the sky falling.
> The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state.
No, the real solution is to spend more money now, taking advantage of historically low interest rates that at times have been negative in real terms, to do whatever you can to kickstart economic growth, and let the debt inflate away 'naturally'. Preferably you do this by investing in infrastructure projects, education, and science, and other things that produce real benefit, but if you want to fill mines with hundred dollar bills and fill them in so others can mine them out, that's fine too. In this case there is no pain.
Spending less money now isn't accepting necessary pain, it's causing unnecessary pain.
The US will not become a failed state because of mild inflation. Hyperinflation will never be a problem in the US barring a world war or huge resource or natural catastrophe. People have been preaching the doom-and-gloom inflation story for probably a century now. Every year, it's just around the corner.
Well, it isn't. I can only speculate why the story is so popular. I can only assume that people have been taught to internalize all debt as a moral issue: less debt is Good, more debt is Bad, and there must therefore be dire consequences visited upon the guilty nations that don't treat debt as it must be treated. But the debt of sovereign, money-printing governments bears no resemblance to the debt of individuals, and there really are no consequences to a government being in debt forever. (Actually there's no consequences to individuals being in debt forever either - I am in perpetual debt to my credit card company, and spend the majority of my paycheck on it...but I pay it off every month.) It would in fact be a bad thing if there were no US bonds to purchase; you've suddenly eliminated a huge source of safe investment from the market.
I'm going to try to speculate too.
Inflation is the monster used to scare public opinion from public spending. Public spending is undesirable because two reason. First, it's redistributive: you are creating money and growing the economy but this grow goes mostly to everyone. Second, you are competing for labour with capital. That means labour becomes more scarce. More scarce labour means, expensive labour. Expensive labour is again redistributive.
So, if this (speculative) view is true, the reason is not very original.
In fact, it's the oldest history in the world since the start of the neolithic.
In 1983 the Federal Reserve chairman at the time (Volker) also likely found the change convenient because it gave him more room to raise rates in the face of crushing asset deflation while reigning in inflation from the 70's.
Also, US had negative inflation in 1955 and overall low rates from 1950-1969. It only spiked after that. 1974 to 1982 where generally bad. http://www.usinflationcalculator.com/inflation/historical-in...
One way: people and firms are expending more money that the economy can digest. If a government wanted to compensate this, could raise taxes or, ironically, retiring money from the system emitting debt.
The other way: the money that people is expending is the same but the economy, for some reason, shrink. That would be a supply shock. That is what happened in the 70's with the oil cartel.
For really high rates of inflation the only viable option is for the government to print money. EX: If your inflation rate is 18% the economy would have to be 1/5th the size in 10 years and 2.5% in 20 years which just flat does not happen.
If the demand for dollars is due to taxes, more taxes create more demand and it's not decided by the size of the economy but by the level of demanded taxes.
" Similarly, if the Government spends more than it takes in by "Printing Money" that also devalues its currency."
I suppose you mean, devalues its currency respect another currencies. This is not always the case, but if it is, that would imply that imports are expensive and export cheaper.
At the end of the day, what counts is the real economy. If in order to reduce debt you are downsizing the real economy you are not doing a good business.
I don't understand your last paragraph.
See http://mobile.nytimes.com/blogs/krugman/2014/04/21/the-econo...
I don't agree with everything Krugman writes, but it's pretty clear to me that treating an economy like a household is short sighted.
Are you familiar with the Reinhart-Rogoff controversy in economics from a few years ago?
But I fear each little piece will scream bloody murder if it's cheese gets cut off and it becomes feasibly impossible to do what needs to be done.
Said someone who's probably not going to feel much of that pain. The problem with a lot of these "cut spending" mantras is that they usually want to do it in a way that hurts those on the bottom of society most, which is extremely appalling. And many of those "cut spending" people actually want to increase military spending.
This sort of sounds like "just win the lottery again" type advice.
No, not really.
The US was not blown to bits, requiring a massive rebuild, nor did it particularly benefit from the blown-to-bits status of Europe; exports and imports were a small part of the economy.
http://graphics8.nytimes.com/images/2012/11/19/opinion/11191...
As you can see, other than a brief Marshall-plan spike in the 40s, exports and imports as a share of the US economy didn't return to pre-Depression levels until 1974. And right now, the US does a whole lot more trade than it did after World War II.
It makes intuitive sense our "starting position" wasn't that great, because poor, blown-up countries don't make great customers. The US economic success after World War II was domestic, not trade-based.
Second, %GDP just says how much money exchanged hands. The important number for wealth accumulation is value capture. Aka Profit not Revenue. China has a huge chunk of worldwide manufacturing, but its mostly low margin sales slowing their wealth accumulation.
PS: Foxconn employs 1.3 million people and has 4.106 billion in profit. Apple has more than 10x the profit with less than 1/10th the number of workers.
The Marshal plan was 1948-1953 and the Korean War was 1949-1953.
Given that there is no good solution, I feel policy makers are much more prone to making massive mistakes that cause asset misallocation which will force deleveraging in private markets when that pops.
You're generating more cash for the same amount of debt, reducing your leverage multiple or percentage.
The question is how to get there when the global economy is not doing well and China debt/official numbers can't be trusted.
Consequently thinking your thoughts ahead will inevitably results in either WWIII or massive poverty coming all over us the moment the first asks value for money and demands his money back. In fact we are already there as we are relying on fiat money rather than backing by "real" goods.
I'd suggest we need to revisit the macro models that predict it, especially considering that common attitudes towards 'work ethic' and 'family budget' really bias people in terms of expecting more badness out of the debt situation than we seem to be seeing.
A country that have debt in its sovereign currency have not need to default.
Inflation is not precisely the problem now, is it?
Inflation happens when there is more demand from the economy that economy can satisfy or when there are too much strong demand of imported goods.
What it is a fiction is public debt in monetary sovereign governments: http://bilbo.economicoutlook.net/blog/?p=31715
If there is any doubt here is in the words of Alan Greespan: "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" http://www.cnbc.com/id/44051683
Can we agree also that inflation is not a problem at the moment?
If the government practices effective default over a period of 50 years most people don't really get it. If the government practices effective default over 3-6 months, everyone will understand and it could be very destructive. It would definitely cause a lot of social unrest.
Why not we worry about this?
As your income grows slower than inflation -- and for many people it does -- your variable expenses grow and you have to start giving things up. You can't give up housing and you can't give up food so you have to buy cheaper food, cheaper clothing, etc.
Of course, infrastructure spending is totally dwarfed by wars/military budget, so it's kind of disingenuous to suggest that in order to spend on infrastructure, public education or public health that debt must be accumulated. Cut the military budget by half and you can go hog wild, while still balancing the budget.
"Cut the military budget by half "
You will not hear me complain about that.
As for governments defaults, history is full of governments defaulting even on debt in their own currencies, particularly in time of political instability. I am not sure what gives you the confidence that now things are different and that this will not happen.
If you promise gold or another country currency in exchange of yours, you can be in a position where you can't pay.
If the only thing you promise is to accept your currency back as tax payment, you are never in a position where you can't pay.
That inflation is low now is relevant because it invalidate the quantity of money view of inflation. We are in the middle of a huge "quantitative easing" and we don't see inflation. In fact we see the opposite. For instance, the ECB is injecting (if I remember properly, I didn't check) 80000 millions every month.
So, the "common sense" view of inflation have been proved wrong again and again but, we continue hearing the same thing again and again.
How did that work out for Argentina?
Also, a lot of their public and private debt was denominated in foreign currency. Again, not so sovereign.
Why is that?
I think the problem in this discussions is that every side come from a different conception about what is and where money comes from.
A sovereign govern with a floating currency don't need financing from private sources in its own money. That's a simple fact about how money is really created. If we don't agree in this first, all posterior discussion is pointless.
As far as debt levels, talking about debt/gdp ratios by itself is not meaningful. What is important is how expensive is debt servicing, and the current rates are about as low as they have ever been.
As far as inflation goes, look at TIPS spreads: they predict having very small inflation for many years. To expect high inflation is to think one is far better than the market at predicting the future: If you are the one person in the world that can really do that, riches await you.
And finally, savings won't be wiped out, even in that scenario you describe. There are plenty of ways to keep wealth safe to every risk you mention, if you really believe in it, in exchange of far worse performance if the fears are imagined. If they become more likely, we'll see a shift in assets. We'd need a world war, a zombie apocalypse or an alien invasion to wipe out the wealth accumulated by a generation.
There's any number of "black swan"-type events that could prove this to be incorrect.
Most analysis of lower expected returns in long term is not based on recent past or any kind of trend spotting. Its based on looking how the expected marginal product of capital and growth in economy are expected to change.
1. Expected marginal product of capital. For the past 30 years financial depth (the ratio of assets to GDP) has been increasing. There is more capital relative to other factors of production than there was before.
2. Economic growth. In most growth models (Solow standard growth model is good enough for this discussion) the most important parameters are capital, labor and technological progress. The amount of labor in industrialized countries is not growing anymore and there is plenty of capital. In the long run, growth is achieved only through technological progress. Only rapidly industrializing countries can expect rapid growth. China is good example how growth will gradually slow down as it catches up with others and population growth slows down.
summary: capital/millenial > capital/baby-boomer + law supply and demand.
Post industrial economies get less growth from investments in human capital than developing economies because they are already almost there.
Globally there is still lots of room for grwith but the rate of growth will be not the same as before. If Africa and Middle east follow the path of Asia (I very much dobut that) we might have decade or two.
But I think productivity growth and our ability to redistribute the fruits of that productivity growth are the big unknowns for the next 20 years. The current step change in our AI capabilities could throw a spanner in all attempts at making any reliable predictions.
On the other hand, vastly improved AI capabilities could mean that future prediction systems are more reliable.
At some point in the future, all further predictions may become roughly accurate. Maybe these AI sytems are clever enough in make only predictions which are self-fulfilling prophecies. In other words, that they are able to calculate their own influence to the world into their predictions, which is especially important for economic predictions made by influential institutes.
Our current AI systems are pretty good at identifying patterns of past behavior. But the extent to which past behavior contains information about future behavior may be limited. Information that isn't there cannot be found irrespective of how clever any predictor may be.
> "A coming collapse in investment returns"
Also note that they didn't say you should expect a negative return from investing in the stock market. In fact, they said that you should expect a 4-6% return over the next 20 years, rather than the 7-8% return that has been experienced over the previous 30 years.
(Conversely, this makes it a great time to be an entrepreneur if you have a good idea, but part of the article's point is that most of the low-hanging productivity gains have already been picked, and so it's becoming increasingly more difficult to have a good idea.)
Basically, it could be summed up with the old Dennis Leary song, "Life's Gonna Suck When You Grow Up."
I'm not sure I buy into that in the slightest, alternative asset classes exist for the very purpose of allowing diversity when market returns are poor. Some of them are rough to access as an individual, but others are not.
The real kicker is that the absolute size of a retirement pot is utterly meaningless without reference to the interest and inflation rates during retirement. Let alone what the mortality tables look like when you get there.
You're going to live longer, and so you're going to need to retire later with more money than your predecessors. That means saving towards it from the moment you start work, and ensuring that you access as many different return drivers as possible - even at the cost of some fees. Yes I'm a walking talking believer in DGFs.
Whether or not its thrust is correct is hard to say, but that appears to be their thesis.
Honestly, this is a PR/opinion piece designed to get coverage - and that's fine. I'll bet you good money that there are opposing views on the 20 year outlook from different investment experts though.
P/E ratios will continue to climb into the stratosphere, continuing to chase smaller and smaller yields.
There's a lot of money sitting in the world, looking to be invested. If it doesn't get invested at all, it will shrink- and no investor wants that.
By large I mean either a world war or a big regional one - and large wars have a habit of resetting economies, technology and societies. Most likely flashpoints: Russia and/or South East Asia.
Best investment - I am guessing either a New Zealand or a South American passport...
However, Russia, and even more so, SE Asia are powder kegs. China is on the move, Japan and SK are starting to make counter moves. An arms race is on, and I really really hope it doesn't end badly. Past history however doesnt give much hope...
Wouldn't that imply that their predicted returns are much lower than they'll most likely be? Assuming that majority of growth over the next X years will come from emerging markets, if they're leaving emerging markets out of the calculation then their estimates are going to be low.
Now that all the third worlds have been exploited into the ground, and the cannibals have no new prey, they are turning inward on their own populations, and are already in the process of extracting wealth from the first world countries.
Where are they extracting it from? The upper-middle-class wannabe wealthy. When all the "rich" people in your neighbourhood are actually upside down in everything because they jumped into the debt based system, they only seem wealthy. When the banks start calling dues, stuff will start collapsing (as can be seen in my area of the Texas oil boom.) When stuff collapses, it's the perfect opportunity for the big players to buy up assets for pennies on the dollar.
As for investing, it's the same thing. You have huge players who have the ability to do things like spike/brown LIBOR and other super-shady backroom stuff that manipulates the market, all the while increases in cyber-security of the trading platforms is going to muscle out all the hungry investor startups trying to do the same thing. The entire stock market system is a huge ponzi scheme, but instead of crashing down, the crashes are created and used as huge pivot points to profit for those in the know.
I've said it before, and I'll say it again:
Bankers are the true terrorists.
If, on the other hand, you have information, analysis or insight that's not broadly known, that's valuable.
Edit: I suppose the question now is, what can we do about it?
Your statement above about millennials being left with the bill, meanwhile gen x feels the baby boomers did them in like another comment here states, the baby boomers is mad at the generation before them (silent generation) about sending them to the disasters that was the vietnam and korean wars, and they in turn is mad about WW1 and WW2 and the great depression that they had to endure because their parents were living it up in the swinging 1910's and 20s.
Some gen x and millennials are being left considerable wealth. Some even multi-generational wealth.
I do not have the figures but in these 'little wars' there has been a lot of silver spent on munitions. The whole process is just a lot more efficient so we are not at total war on the domestic front, just paying our taxes so the military can buy vastly more effective killing machines. Things may have gone away from the unguided bombs of times gone past, war zones may be in different places, but otherwise, there is a lot to compare today's wars with WW1/WW2 when it comes to $$$ spend and devastation caused.
If I may ask, how do you get to your statement? Is there some metric one can look at to determine it?
I'm not saying that there isn't localized violence, just that global level is down. Stephen Pinker's The Better Angels of our Nature is one source to support this idea.
Yes it's an old debate whether the US should have gotten involved in all these conflicts, but back to your original point:
That the US national debt has increased dramatically in peace time.
My point is that it is not peace time, and that a substantial part of that debt stems from the US's military industrial complex. It is after all not nothing that (famous tv saying) "the US spends more on defense than the next 26 countries combined" or something like that.
I mean, the canonical example is the German student protests in the 1960s ( https://en.wikipedia.org/wiki/German_student_movement ), which led to things like the Red Army Faction ( https://en.wikipedia.org/wiki/Red_Army_Faction ). These were people whose parents were literally Nazis....
technology and economy do change. The changes can't be stopped. The question is how you adapt to them. When many people suddenly lost their job as soldiers 70 years ago there was in particular GI bill created to help manage the transition. What was done to manage the specific transition of domestic manufacturing jobs disappearing and overall transition to globalization and "information" economy? Nothing. Education and safety net are the main missing pieces which would support the transition. Yet, the country during last several decades has been either electing or seriously consider to elect a Republican :) Just think about couple trillions buried in the sands of Iraq and Afghanistan - that was basically total squandering of the humongous peace benefit of ending Cold War. It could have been a humongous improvement in education and medical systems and country infrastructure which would help tremendously to the transitioning GenX-ers as well as to the graduating and entering workforce Millenials... yet the country in 2000 decided that "lower taxes" outweigh it all. Well, you get what you pay for.
Blaming all those issues onto the third world countries for using the chance to improve their life just a bit, to stop being hungry every day - well, lets say that blaming is pointless whining at best and pretty heartless at least.
Concepts like exponential change and globalization certainly weren't mainstream in the 80s when I was a child. In fact, I'd bet that most adults at the time still worked at the same company, in the same town, for most of their adult life. Companies at the time were still providing pensions and health care and middle class salaries, and employees (owners, bosses, and workers) generally all still worked in the same place.
It is silly in hindsight, yes. We were quite naive. But, I think you're being overly harsh (or maybe I'm just too sensitive). Many of us assumed that changes would happen linearly, not exponentially, and that we would live out our lives differently, but mostly similar to our parents.
Hopefully, those under 30 today have been better trained to be highly adaptive. However, at a certain point, even the most well-trained Human will reach an adaptive limit.
when it happened to apes, humans emerged, and the same way new species of humans will emerge too :)
But they didn't had that chance to begin with. The predictions were as bad back then than they are now; back in the 80s the collapse of the market economy was predicted for shortly after 2000, and in the 90s, it was pushed back to as early as 2020 and as late as 2040. Last I have checked western countries are still on course to default by the mid to late 21st century.
I find this generation view short sighted and you should look at the different strate of the society instead to see who in that generation has managed to get ahead of the game and get a confortable situation for themselves. Those are the one that conformed to the rules and custom of the previous generation.
I am sorry to say this, but if you want to see a change you will have to get out of your way and make that change happens.
Allowing the dollar to weaken, and digging out the entrenched interests in US health care would fix everything. It's just that a weak dollar and lower health care spend is a problem for the rich, and the petty bourgeoisie have thus far mindlessly supported them. (Because racists.)
http://www.tradingeconomics.com/united-states/balance-of-tra...
Worth noting that the GFC was one of the best times in history to buy stocks. I'd be in a terrible situation right now if it wasn't for the GFC: I bought some brand name stocks (supermarkets, mining, banking) at huge discounts. One of them more than tripled in price in 5 years and is still throwing off a 20% cash dividend every year.
Don't give up. You never know when a Black Swan event might swing things in a way that benefits you. And Millennials have so much online access to education about stock market trading, E-Trade, online banking, and new things like crowdfunding that just weren't around before. It's not easy for Millennials, but there's a lot of amazing opportunities that other generations would be jealous of.
You consider statistics to be pointless? What do you propose instead?
I'd say it's nice for developed countries to help out like that - but we all know the real winners are the businessmen behind your politicians bankrolling this stuff.
But those aren't "already wealthy capitalists". They're "newly wealthy capitalists". End of the day it's the same thing - a few wealthy capitalists - but it's still more wealth in developing countries than before.
I'd argue that there is zero historical precedent for wealth not to be concentrated though. It's just the nature of wealth - wealth creates wealth, debt creates debt. And that's more of a universal truth than a capitalistic one, and more accurately described as 'value creates value', 'obligation creates obligation'.
If you sell fish, and do really well at selling fish, you'll acquire wealth. That wealth will let you build bigger boats than someone without wealth. Same seems to apply to everything. Even little apps on the app store. If you make a successful app, you get a large following of users. This will give you a springboard of users when launching your next app, and having all those users on your old app gives you valuable data on how to build the next one.
Do you see where I'm coming from about the nature of wealth?
The long run is incredibly hard to predict, with all the cool tech around the corner and scientific advances that may be available in 30-50 years, the stock market may simply not be a big factor in most people's lives.
Maybe that is the worst fear of a company like Bloomberg that exists to be the ESPN of financial randomness.
The unfortunate fact is that markets are all about leverage based on future returns, and the estimates for future returns have been massively inflated for decades. In 2008 this started to become apparent, so central banks everywhere have been printing and loaning trillions while buying up everything in sight to try to hide the fact that the assumptions that markets would grow 7% a year forever are totally false. The fact is that the bill is coming due very soon, and all the printing and suspension of accounting rules("mark to market") and jawboning won't do a thing about it.
Me, I'm making time and running a business while waiting for the system of the world to collapse. It's hard to take this life too seriously when you know you're just playing the loading screen prelude to a survival horror game. Pensions? Don't make me laugh.
Think about the market opportunity for companies that achieve a winner-take-all success on a global scale, it's hard to underestimate.
sort of.
Taxation is the real shame in all of this. We need better laws on deferred accounts (non taxed accounts). We should be able to keep money invested for x years (where x can be <10) and not paying any taxes until the end of this period. Paying taxes every year kills the compound effects of YoY capital appeciation (a 40% on a P2P lending interest rate of 8% means you net 4.8% instead).
A bold claim stated as fact.
Claims report by X.
given that these predictions are always wrong i'm going to say some big revolution in technology comes our way and we see higher than previous growth and everythings going to be great.
put that in a headline.