Compounding the problem is the debt sustainability issue. Ever-expanding debt levels are being built into the equation and, like expansionary monetary policy, each round of debt increases proves itself more impotent in jump-starting the economy than the last round. “The [Congressional Budget Office] sees it growing at $1 trillion a year for the next decade,” Hunt continued.
If that weren’t enough, it’s the wrong type of debt to finance daily living needs, in his view. The good news is that the U.S. will outperform China, Japan and the euro zone, partly because it has less debt.
Hunt and Rosenberg concurred that corporate capital allocation policies were doing nothing to help growth. Capital investment has been the biggest drag on the economy, and it is retrenching again, Rosenberg said.
Business debt is about 70% of where it was in 2007, but the problem is what companies are doing with their capital. “Companies buying back shares does nothing to improve the aggregate growth of the economy,” Hunt argued.
All the economists agreed with the conference host, John Mauldin, that excessive reliance on traditional monetary policy options was becoming an act in futility. It is “asymmetric, creates distortions and transfers wealth to the rich,” Hunt said, adding that a so-called “helicopter drop,” or a move to negative interest rates, discussed by some could require a rewrite of the Federal Reserve Act.
David Zervos, chief market strategist at Jefferies, had a more radical solution. “I don’t know why we’re doomed,” he said. “We’ll monetize the debt.”
Schemes to monetize are suddenly entering the conversation, however outlandish they may sound. One goes like this: There are about 320 million Americans and the Fed has, say, about $4.8 trillion in Treasury securities. So why can’t it send every citizen a check for $15,000 and eliminate a huge amount of government debt?
Many think it would establish a terrible precedent for future irresponsibility and moral hazard, while serious scholars like Hunt suspect it is illegal. Then again, the legality of TARP and other aspects of the various bailouts during the Great Recession have been questioned.
When the topic switched to fiscal policy, opinions diverged. Rosenberg suggested that the upcoming presidential election might mean more federal government stimulus in infrastructure, which he viewed as necessary. Both presidential candidates, Donald Trump and Hillary Clinton, have called for it.
Rosenberg was highly critical of President Obama’s first chief economic advisor, Larry Summers, and his advice to “play small ball” with the stimulus in 2009. “We haven’t achieved escape velocity like Summers said in 2010,” he said. Indeed, three years later, Summers went on a tour to discuss his theory of secular stagnation.
For his part, Hunt was as skeptical of fiscal policy as he was about central bank gimmickry. “Fiscal policy options don’t exist because there is no way to pay for them,” he declared.
In graduate school, Hunt was taught that the multiplier for government spending was 5, or $5 of GDP growth for every $1 spent. His own research decades later concludes it is more 0.1, or minus 10 cents for every dollar spent. Since this current seven-year economic expansion began, the national standard of living is down 4%, he added. Over the same seven years, Japan has suffered four recessions.
Come the next recession, Shilling agreed with Rosenberg that there would be loads of fiscal stimulus. What form might it take?
Rosenberg pronounced trickle-down economics a “big failure” and said there should be a redirection of taxes, cutting them for people with a 90% marginal propensity to consume (MPC) and raising them for super-wealthy folks with a 30% MPC. Given the state of the middle class and their need to save more, it’s hardly a certainty that they wouldn’t save funds from a tax cut, or at least pay off their debt.
Moving to a negative interest rate regime, the way Japan and many euro zone nations have done, was roundly condemned by the group as a potentially destructive option. “Negative interest rates would put money market funds out of business,” predicted Hunt, adding that the unfunded liabilities of banks and credit unions would also soar right through the roof.
Aside from their deleterious impact on savers, negative interest rates are also a tax on bank reserves. Given that their principal reason to exist is to create credit, charging depositors acts as a serious deterrent to lending.
Policymakers in governments and central banks are running out of options, but were they ever the answer? “Prosperity is achieved by creativity and hard work,” Hunt said.
And are things as bad as the clueless dismal scientists think or is the hangover from the Great Recession still lingering? The total number of Americans collecting unemployment benefits stands at 2.1 million, down 7.5% from a year ago and at its lowest level since 2000.
That only serves as a reminder that 2000 seems far more distant than a mere 16 years. Unlike that era when euphoria was pervasive and high-earning dentists were quitting their jobs to become day traders, there are few excesses in the global economy. In a normal world, that would mean any conceivable recession in the near term would be very mild.
Perhaps the most positive indicator is the number of job openings, which the Bureau of Labor Statistics estimates at 5.3 million, an all-time high. Furthermore, the twin demographic forces of retiring baby boomers and a dramatic falloff in post-millennial Generation Z numbers are likely to produce a labor shortage over the next decade. That, in turn, could finally trigger a turnaround in workers’ incomes and standard of living.
That’s one reason business activity might actually improve before it gets worse. When the next recession does arrive, “the economy will be much better,” Rosenberg said. “There will be an excess demand environment.”