Jeremy Grantham (GMO) gave Patrick O’Shaughnessy a spectacular interview this week for Patrick’s Invest Like the Best podcast. I highly recommend you find an hour for the whole thing. But in the meantime, I found this exchange amusing – here’s Grantham’s take on fueling economic growth with borrowed money, which has essentially been the game for as long as I’ve been alive…
So that’s a pretty noble experiment. You take the richest country in the world, the biggest economy in the world, you take a big chunk of time, 35 years. You triple your experiment, your ratio, debt to GDP. What happens? Capex steadily declines as a ratio of anything. There is utterly no evidence that it increases capital spending. Therefore, not surprisingly, if Capex has been dwindling productivity would dwindle, which it has. Productivity dwindles that entire 35 years, not regularly, there was a four or five year bump for internet, but it declines. The net effect, of course, since we know population has been neutral in that period, you have a diminishing GDP growth.
So what an experiment, you triple debt on the back of lower and lower interest rates… And let me just point out that in ’82, the 30 year bond was 16. It comes down from 16 to 12 you get a bull market, from 12 to eight you got a bull market, from eight to four you get a bull market. And from four finally to a half, now one and a half if you’ve played that game. And what happened? Growth slowed. My argument here is if you look at the meta level which I love to do, there is absolutely no proof of that low interest rate to stimulate the economy, that debt stimulates the economy. There is no association between those two.
If you wanted to be mean, you would say there was a negative association for the reasons I just outlined.
You can listen to the whole thing below or get it on your favorite podcast app.