Secular Stagnation: Consumer Debt Binge Still Hasn't HealedFriday August 14, 2015 12:52
Secular stagnation is a term that is bandied around in the financial media quite a bit. While there are several different economic interpretations and definitions of the phrase at its core it simply means a long, extended period of below historically normal growth. By that definition, the U.S. economy is mired in secular stagnation.
Moody's Analytics if forecasting a 2.4% overall gross domestic product (GDP) rate for the U.S. in 2015. Since the U.S. economy climbed out of the depths of the Great Recession in 2009, annualized GDP rates have shown a "2" handle for the last five years.
US annualized GDP rates:
Source: World Bank data
A three handle is normal. Sure the economy has been growing, but it's been the "half-speed" recovery that still hasn't gotten to full cruising speed, and well below historical "trend" growth rates. Bill O'Grady, chief market strategist at Confluence Investment Management, studied the numbers and found going back to 1900, the trend growth rate for the U.S. economy stands at 3.5%. There are only two periods in history in which the U.S. economy has shown well below trend growth —during the 1930's and now, he says.
It's all about the debt. O'Grady points to private sector debt as the major problem holding the economy back from full cruising speed right now. Consumers are saddled with mortgage, credit card and student loan debt, which is weighing on the economy currently. Debt was also the problem back in the 1930's. Private sector debt topped out at 128.5% of GDP in June 1932, but then fell to 33.1% by January 1945, O'Grady says. That compares to U.S. private sector debt that hit 176.1% of GDP in April 2009, and has since fallen to 151% of GDP as of the first quarter 2015.
"When you compare debt liquidation from 1932-1945 compared to what we've liquidated now, we are not even close," O'Grady says.
The main reason is the different approach by policymakers then and now. Back in the 1930's, the central bank tightened interest rate policy and the policymakers forced liquidations and bankruptcies. This time around, the central bank took the opposite tack and flooded the economy with liquidity and low interest rates. Now, "we are liquidating debt at a very slow pace," he notes.
The economic recovery is still in process. While the U.S. economy is showing growth and recently the labor market has shown significant improvement, the hangover from the Great Recession and the spending and debt binge leading up to that time still has not healed. "Until we see this debt situation fixed, we will get really slow growth. We are probably looking at growth rates in the 2 to 2.5% region as far as the eye can see," says O'Grady.
What does this mean for gold? The long-term implications remain positive for gold and precious metals, as an alternative asset and safe haven investment. The Federal Reserve is attempting to begin a policy normalization process, but the main policy tool remains stuck at zero to 0.25 percent.
Ryan Sweet, director of real time economics at Moody's Analytics, says by their calculations a fully normalized fed funds rate stands at 3.75%. The Fed is a long way away from that level right now. The Federal Reserve now faces the challenge of ramping up the funds rate to a more normal historical level before the economy turns back into recession. All expansions eventually turn into recessions, it is the normal business cycle.
"If they aren't able to fully normalize before the next recession hits, then we will be right back at zero bound," warns Sweet. If the Fed isn't able to ratchet up the funds rate back to a more normal level "they will have less gun powder to help with the next recession and they will have to dust off unconventional monetary policy again, which isn't ideal," Sweet adds.
Is the Fed in a race against time? Maybe. The Fed wants to tighten policy, but the economy isn't fully cooperating. Many analysts think they will finally pull the trigger at the September meeting. But, again it is all data dependent. Even with one or two .25 basis point rate hikes this year, they are still a long ways off from a 3.75% rate. And, then if they can't normalize before the next recession hits? Gold will continue to stand strong as an alternative investment in a world of accommodative monetary policy environment that may not be going away any time soon.