Jeremy Grantham Is Not Optimistic

I’m about to go read the whole thing as I get a bit of exercise in advance of tomorrow’s annual day of gorging, commonly referred to as Thanksgiving, but here are the highlights of just the summary section of Jeremy Grantham’s latest letter(.pdf) to investors, the first two items, surprisingly, being somewhat consistent with the thoughts of Fed Chief Ben Bernanke expressed yesterday (as detailed here) about what expectations we should set for ourselves regarding economic growth in the future.

• The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.

• Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.

• Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.

• The price rise might even accelerate as cheap resources diminish. If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system. It would take just 11 years before the economic system would be in reverse!

• Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal. Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!

Maybe Bernanke read Grantham’s letter before he gave his speech yesterday because the Fed chief clearly acknowledged that something is different about economic growth in this post-financial crisis world.


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