While the market was reaching new record territory during the late 90’s, our recent Newshour guest, Gary Shilling, went completely against the consensus by publishing the influential and timely book, “Deflation: How to survive and thrive in the coming wave of deflation (1999).”
Today, he tells listeners that the consensus has completely flipped. Now, instead of people thinking that the U.S. and U.S. stock market is on a never-ending boom, most people think that the U.S. is on the verge of a major decline, at best only able to see slow growth from here on out.
As in 1999, Shilling thinks that the consensus has it wrong...again.
“We have a number of advantages in this country not only in their own right but relative to the rest of the world that I think are going to be very important,” says Shilling. “First and foremost, I think that there’s no permanent slow growth in this country. We’ve got deleveraging. If history is any guide, we’ve got another four years to run, roughly. But when that’s over I see no reason we’re not going to resume normal growth and probably even faster on a catch-up basis.”
According to him, the U.S. has gone through a number of these cycles of taking on massive amounts of debt and then paying them back down. On average, this takes about ten years, upon which economic activity picks back up. But, Shilling says, we’re still not quite there yet.
“Banks right now are screaming for loans. I mean, they have so much in the way of deposits: their excess reserves at the Fed, money that they could be lending out…that measure is now $2.5 trillion. So, they’re flush with capital—with lendable money, I should say—but they don’t have enough credit worthy borrowers,” said Shilling.
Once borrowers have paid off their debts and restored their balance sheets, things start rolling all over again.
He also tells listeners that people get sidetracked by focusing on the size of debts, rather than on the size of the economy. Many people think that the U.S. is doomed because it has large debts. This, he points out, is only the case if you think the U.S.—or the rest of the world, for that matter—is going to experience permanently low growth.
“The point is not the size of government debt—it’s the government’s debt in relation to the economy. I mean we started off at 135% debt-to-GDP in World War II, but because the economy grew—and it’s the growth that’s important—we got down to 20% [debt-to-GDP]. It’s recently up to about 80%; but, again, when we resume normal growth I think that will come down. I’m no fan of big government debt…but, be that as it may, long-term I think with the resumption of growth that this will be less of a problem.”
When everyone was partying like it was 1999 and thought the good times were here to stay, Gary warned it was all about to end. Now, he’s telling investors the opposite: No, the world is not going to end and the world's largest economy is not in long-term decline. Eventually, the U.S. will see the light of day again. We’ve just got a few more years to go.
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