With the inherent weakness in US GDP and the rising probability of a recession (two weeks ago Bank of America modeled that the next recession would likely start roughly one year from now), Gluskin Sheff's David Rosenberg thinks that with monetary options exhausted it will take a fiscal boost in the trillions of dollars to kickstart the economy. These issues were discussed in an extended interview with Real Vision TV, where the chief economist and strategist at Gluskin Sheff proposed some radical policies to engineer the growth needed in nominal income.
His ideas, some of which can be seen here in a clip of the interview, include helicopter money attached to a $2 trillion perpetual bond, massive infrastructure spending and measures to tackle the $1 trillion student debt load that has seriously hamstrung the economy.
Here are some of the interview highlights:
Doing the Same Thing Over Again and Expecting a Different Outcome
Whether the US will in fact experience the technical definition of a recession is a matter of fervent debate, with the odds something like 20%-30%, according to Rosenberg (60% according to Deutsche Bank), but with growth averaging around 1%, there is no doubt the economy is weak.
“There are some people saying a recession is here right now,” Rosenberg says, “I don't think that we meet those conditions yet. But people say, well, look. Twelve months in a row of negative year on year industrial production, that's never happened outside recession, check. We've had now going into six quarters of profit contraction, year over year. That's only happened in the context of a recession, check. I mean, all that is true, but so much of this has been related to the oil shock that we had.”
Rosenberg’s problem with monetary policy, now in its 7th year of unorthodox experimentation, is that it has become a weak antidote to structural problems in the economy (even if it is still quite potent at boosting financial asets). Fiscal policy on the other hand, if constructed right, could be the answer due to its very powerful multiplier impact. “I can't say that I know for sure, but it's the old Einstein adage about the definition of insanity,” Rosenberg said. “And we're finding that we're really-- if we're not hitting the wall on monetary policy, we're certainly seeing classic economics 101 of the law of diminishing returns.”
In terms of infrastructure spending, he said that one lesson from recent history and the Great Recession is that you've got to have the credibility to convince people that this is going to be permanent and not temporary, in terms of the impact on the economy. “So it can't be transitory. It's got to be very big. With interest rates as low as they are, there's certainly the capacity. I mean, you've got a lot of governments around the world issuing 50 or 100-year bonds. So this is a once in a lifetime opportunity to borrow money.”
A Couple of Trillion Dollars of Helicopter Money
While companies have been taking advantage of these conditions to borrow money, the funds have not been invested in the real economy. Share buybacks have become more popular, while personal savings rates have increased amid the economic uncertainty. This all boils down to a big case for government spending, with monetary policy joining forces with fiscal policy in the form of helicopter money.
“What you do with helicopter money is you finance it off the central bank's balance sheet because we're talking doing something very dramatic to reflate the economy,” Rosenberg said. “It's not a few hundred billion dollars. It's a couple of trillion...I know I'll get accused of bailing out the sinners, but, my lord, we've already done that. I mean, nobody went to jail.”
One of the things holding the economy back is the $1 trillion student debt load, which he said has left 35% of males aged 18 to 34 living with mom and dad, not getting jobs and not becoming first time home buyers. Employment growth for the 65s and over is 7%, meanwhile, as the aging boomers have to work longer because they didn’t save enough for retirement.
“Helicopter money is QE plus where, say, the treasury issues a perpetual-- call it, like, a century bond, a $2 trillion bond on the Fed's balance sheet. And so when that bond matures, it's, like, we're all dead in the long run at that point. And then the Treasury can use that money to stimulate growth. "
The beauty of this idea, according to Rosenberg is that you don’t have to go through Congress, with such difficulty in achieving corporate or personal tax reform. “It would lead to a permanent increase in the monetary base. Inflation expectations would go up, which means that real interest rates would go negative. And the theory is that that would provide a bigger thrust towards getting what we all want, which is sustainable and accelerating nominal income growth.“
Real Risk of Fed Mistakes or Trump Trade War
Sustainable and accelerating nominal GDP is certainly what’s required while the risk persists that we could be shocked into recession, or the Fed could make a mistake in raising interest rates too aggressively.
“That's what happened in December of last year. They raised rates 25 basis points, but the overall financial tightening, in terms of what it meant for the dollar or in credit spreads and the stock market, it was really, like, 75 basis points of tightening. And the next thing you know, the economy slows to stall speed."
Another concern for investors is the prospect of a Trump presidency, bringing with it the potential start of a trade war. That could provide the sort of exogenous shock to cause the economy to go into recession, Rosenberg stated, noting that historically all the recessions in the post war period have been created by the Fed.
“The problem is that when you have the economy running on average 1% growth, or 1% plus, which is not a big cushion. And so, you know, it's a complicated question to try and handicap a recession on us right now. There's a lot of people out there that are convinced that a recession is coming.”
To watch the full interview with David Rosenberg, visit Real Vision TV. You can access this and many more interviews with a free trial.
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Oh, if Rosenberg's idea gets traction - and execution - which it will eventually, as we have said since our first days in 2009, buy lots and lots of gold.