Sometimes a single statement can be so loaded with import that it just stops you. That happened recently when I interviewed economist David Ranson. A consulting economist for H.C. Wainwright, a research firm serving investment managers, Mr. Ranson has spent years examining how markets tell us things— if we only listen. I’ve learned to take his anticipation of our economic future very seriously.
I asked him three questions. His answer to the third question opens the door to possibilities few are prepared to think about, let alone discuss.
What kind of economic recovery will we have? “I can see double digit GDP growth and I strongly believe the recovery will be V-shaped. We’ll have positive growth but weak employment,” he said.
“That’s not the conventional wisdom, which is often shaped by mood. Recent growth figures, for instance, were greeted with worry by journalists and many economists. But I think we’ll get even higher growth figures in the next two quarters.”
“Unfortunately, that doesn’t mean employers will hire new workers. Productivity is rising but much of it may be because employers aren’t hiring. This is very bad socially.”
“You see, employers have choices. They can choose a large work force of average workers. Or they can choose a smaller work force of above-average workers. An employer who sees employment as a losing game— more government regulation, more taxes, and more hassles— isn’t going to be eager to hire. I think that’s what’s happening now.”
That sounds like an increasingly Winner-Take-All economy, I said.
“Yes, that’s the way we’re going. The economy will recover lost output. But it will sputter out. We’ll go back to sub-average growth as the government takes up more of our economy. That’s the message of history. We had our best growth after demobilization following World War II. But government was smaller then. In the future we’ll have a larger government and perhaps growth of only one percent (a year), down from two percent. Unemployment will stabilize at a pretty high rate”
What will happen to the dollar? “Throughout history currencies have gone down as governments have become indebted. Measured against gold, the dollar is a lot lower today than it was in 1970. The markets have their own credit agency. It’s not Standard and Poor’s. It’s not Moody’s. It’s the market price. It’s telling us the credit score for the dollar is down.”
“Markets can anticipate the deterioration of credit worthiness well before the agencies can downgrade.”
“History shows that as long as the increase of government debt doesn’t outpace the growth of national income, things are stable. When the increase in debt is less than 3 percent, the dollar has risen. But when the increase is greater than 6 percent of GDP, the dollar has fallen,” he said.
In 2009 the increase in federal debt was 10 percent of GDP, with similar increases to come this year and further into the future.
The worry here is that we have entered a period where government debt becomes uncontrollable. One sign: Social Security will need to redeem some of Trust fund obligations to pay benefits this year, an event that wasn’t supposed to happen until 2016. Employment taxes, which have provided extra spending money for Washington since 1983, are no longer adequate to cover retirement benefits. To pay them, our government will have to borrow even more money, or print more money. Either way, the value of the dollar is likely to fall.
How can people protect themselves? “In recent history we’ve depended on stocks and bonds to securitize wealth. But those are both vulnerable. So now we’re at sea. David Swensen’s answer is tangible assets. (Swensen is the highly regarded manager of the Yale University endowment.) We can now see capital flowing to the real— to productive assets rather than paper assets,” he said.
The important thing to remember here, he noted, is that human beings have relied on other stores of value at other times— things like gold, silver, commodities, and real estate. After relying on paper assets for more than a century, he suggests, we may be revising our notions of safe ways to store wealth.
If he’s right, we’re heading for what some will call an “asset quake.”