Is the money game destined to become even tougher? If you look at historical trends and a growing body of research, the answer is yes. While economic growth slows, the correlations between asset classes are rising. Trying to get better returns without risk will be no picnic.

Yet the landscape implies investors will indeed be under greater pressure to embrace higher risk, because the status quo may mean lower returns.

Forecasts are always suspect, of course, but this is more than rank speculation from the usual suspects. Historical data suggests the pace of economic growth in U.S. GDP over recent decades is in fact slowing. And the greater correlation among major asset classes suggests diversification will make it harder for investors to keep a lid on risks. They face an awkward choice: suffer a lesser rate of return or add more parlous assets.

Historical Implications
Leading the dismal charge in growth forecasts is Robert Gordon, an economics professor at Northwestern University and a member of the Business Cycle Dating Committee at the National Bureau of Research. In a recently penned set of papers, he laid out what some say is a compelling, as well as disturbing, case for decelerating growth. In “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections,” he points at four key problems.

1. There will be fewer hours worked per capita because of demographic changes.

2. There will be stagnation in education “as the U.S. sinks lower in the world league tables of high school and college completion rates.”

3. There will be rising economic inequality.

4. And there will be a long-term increase in the ratio of debt to GDP, which will trigger higher taxes and slower growth in government spending on social programs, such as Social Security and Medicare.

His forecast may be controversial, but he isn’t alone in projecting slower growth due to structural factors, including the expected widening gap between the rich and not-so-rich. A study published in August by Standard & Poor’s also warns that increasing income inequality threatens to squeeze U.S. growth. “At extreme levels, income inequality can harm sustained economic growth over long periods,” S&P said. “The U.S. is approaching that threshold.”

Some economists argue that the sluggish recovery after the last recession shows the hobbled potential for expansion. “The U.S. recovery has been slow because its long-term capacity for growth has slowed,” declared economist Andrew Smithers in a recent essay in the Financial Times.

New technologies have traditionally been a key source of growth in the past. The rise of the railroads in the 19th century and the digital economy in recent decades are examples. Technological advances will surely continue, but their contribution to growth will decrease on the margins from here on out, say some economists.

It’s less about the loss of ideas than the limits of growth after a lengthy run of success. “The American economy has enjoyed lots of low-hanging fruit since at least the 17th century, whether it be free land, lots of immigrant labor or powerful new technologies,” writes Tyler Cowen of George Mason University in his 2011 book The Great Stagnation. “Yet during the last 40 years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think.”

Lots of people disagree, of course, and for good reason. Predictions that technological innovation has run its course have been proved wrong in the past. The head of the U.S. Office of Patents said in 1899 that “everything that can be invented has been invented.”

Yet U.S. GDP growth has undeniably been inching down in the post-World War II era since 1948 (Figure 1).

There are several ways to measure growth, of course, and you can spin the data to prove whatever you want. Some analysts emphasize that U.S. real per capita GDP has a long history of rising at 1.8% a year—since the late 1700s! The pace has recently ticked lower, but that’s not unprecedented. Nor is it when growth accelerates after a fallow period.

“I think we’ve had slow growth for long enough that a breakout to the upside is more likely than continued slow growth,” says Laurence Siegel, the director of research at the CFA Institute Research Foundation and the former director of research at the Ford Foundation.

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