GMO on the causes of secular stagnation

GMO / James Montier hit on a lot of the themes near to my heart with a recent piece on secular stagnation and the rise of populism:

The rise of populism has been one of the broad themes to emerge over the last few years. This has left many within the establishment scratching their heads as to the cause of their fall from grace. From our perspective, the rise of populism has its roots in the same sources that have given rise to socalled “secular stagnation.” That is, a broken system of economic governance. This system – which we will hereafter refer to as “neoliberalism” – arose in the mid-1970s and was characterised by four significant economic policies: the abandonment of full employment as a desirable policy goal and its replacement with inflation targeting; an increase in the globalisation of the flows of people, capital, and trade; a focus at a firm level on shareholder value maximisation rather than reinvestment and growth; and the pursuit of flexible labour markets and the disruption of trade unions and workers’ organisations.

Charts showing low business investment, rising inequality and low labour share

see here for full report

The long-term themes are very similar to my “6 mega-trends” and have rising inequality at the heart of the lack of demand.

Rapid increases in debt hide the lack of demand for years at a time – and a debt-funded Trump boom will be no different. But the underlying weak demand trend re-emerges after each boom and I expect if the proposed Trump tax cuts and infrastructure spend go through that the US economy will boom, but that it will also bust leaving it in a worse position with the trend in tact.

So, I agree with most of the diagnosis.

The GMO solutions? Not so much.

Inflation Targeting and the NAIRU: Policymakers have been telling central bankers to steer the economy using monetary policy while always keeping an eye open for the non-existent NAIRU in order to shirk responsibility for maintaining full employment. This is no longer acceptable. Fiscal policy is a far more effective tool to maintain full employment…  …The government offers a fixed wage for any labour that is forthcoming. This wage acts as the de facto minimum wage, below which no labour will be forthcoming to private sector employers. When unemployment is high, workers will flow into the government scheme, and when the economy starts to grow, private employers “hire off the top” of the scheme by offering a wage above the NAIBER wage. The workers can be outsourced to private charity groups to do any number of jobs that are currently not done. They might clean rivers, help the disabled, care for the elderly, clean up graffiti, plant public gardens… the list of potential useful things these people might do is boundless.

Globalisation and Trade: The best way to deal with this problem is for governments to run a beefed-up policy of import substitution. Import substitution works by governments identifying the products that are currently imported from abroad that could easily be produced domestically. So, for example, cheap Chinese toasters are probably substitutable, while foreign diamonds are probably not. The government then offers significant direct subsidies to companies that are willing to produce these goods. The subsidy is then passed through to the consumer as a lower price, which will render the product competitive with the cheaper foreign good.

Shareholder Value Maximisation (SVM): SVM is not the result of a policy choice. It is the result of a shift in how corporations govern themselves – a corporate choice, not a government one, if you will. It can easily be stopped if corporations take it upon themselves to stop engaging in it. As we have seen above, doing so will probably render them more profitable and more competitive. Beyond that, we would simply say that while we do not think of SVM as a policy choice, a government in the future may begin to think of it in these terms if corporations do not get their own houses in order. If they value their independence they might heed this warning now before it is too late. Populists have policies too, you know.

Flexible Labour Markets: The NAIBER policy mentioned above will give workers a far stronger bargaining position as they will no longer be as fearful of unemployment. It will also implement a de facto minimum wage that will be impossible for unscrupulous employers to evade. In addition to this, a serious import substitution and industrial policy will help return high-wage, (often) unionised jobs to developed countries. But none of this is a substitution for governments promoting reasonable, equitable policies to allow for unionisation.

Unfortunately mostly a suggestion to return to the 1960s/70s.

None of these are unlikely to see the light of day without a crisis: ending inflation targeting, government intervention in the labour markets to re-target full employment, adding a variant of trade protectionism, ending shareholder value maximisation (I suspect this one is up there with “World Peace” in terms of likelihood), increasing unionisation.

The full employment suggestion is the most interesting of their propositions to me – especially as increasing automation in manufacturing, logistics and transport is going to see a big increase in unemployment over the next 20 years.

There are any number of ways to reverse the building inequality, some of the GMO suggestions should be in the mix. However, the bigger issue is that no one is seriously trying anything to reduce inequality at the moment. In fact, the opposite is happening.

Sadly, we will need a major crisis before the 99% resume protesting and governments pay lip service to addressing the issue while really making things worse seriously consider the issue. Until then, your Asset Allocation should reflect an eventual return to secular stagnation.


Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):

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The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.


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  1. Agree DK. Why the negativity around the word “populism”? This is just the will of the people, who do not want serfdom. It should be celebrated. The elites/establishment/media are the ones trying to denigrate this democratic concept. Inequality is always going to fuel populism

    • Because another word for a populist leader is demagogue. And history is replete with examples of the danger posed by such leaders.

      • Bullshit Lachlan.

        Different Mark Here.

        It is a straight up nod to listen to your leaders not each other.

        The vast, the overwhelmingly VAST majority, as in almost ALL of the demagogues, tyrants, dictators and brutal totalitarians are not from populist peoples choices – absurdity in the extreme – they are overwhelmingly the anointed lacky of the dominant power structure within the vassal states.

        From the Sha of Iran to Pinochet to Sadam Hussein.

        Occasionally we see a populist movement led by a popular leader, occasionally – they are generally very quickly subdued and brought back within the hegemony and hermetic power vacuum such as Xanana Gusmão.

        There are no doubt some very rare and occasional transgressions to these such as Pol Pot – however rare they are indeed.

      • Original Mark here. So only the elites// can be “trusted” to provide rational decisions? Give me the will of the people every time, I’m sure 98% of people will agree.

    • FiftiesFibroShack

      There is currently a growing number of people coming out saying the earth is flat. If there were enough flat earthers in one electorate a populist would campaign on the earth being flat and exposing this “truth”. Populism is the embrace of ignorance for political gain.

      • I have not heard anyone recently say that the world is flat. I have heard a few climate change deniers though.

  2. Agree with Mark. Democracy is a popular vote. Democracy is populism. populism is democracy. Those who complain about populism are really fighting against democracy.

    • Different Mark.

      But Lachlan told us that people who are popular amongst the people are tyrants, and history teaches us that – while those foisted upon us by the traditional structures of power and control are benign. You know – like Xanana Gusmão was an evil do gooder, while CIA’s man Sadam was a misunderstood holy man before his time who will one day be seen as the kind benevolent man of the people he really was.


    • So true. Especially given much of the dissatisfaction is around policies that are authoritarian, borderline communist, or globalist (anti-nation).
      QE – backdoor wealth redistribution and massive government intervention in production.
      EU – taking moving power from local democratic constituents to beaureaucrats in Brussels.
      Council amalgamations and changes to development laws – removing powers from local council/communities and giving power to state governments, so locals have no control over development in their community
      Bank bailouts – no explanation needed
      Crony-capitalist taxation policies and government decision making.

    • rob barrattMEMBER

      The people who you hear complaining the loudest about populism are generally the “progressive” left, who, of course, know far better than we do what’s best for us. Whatever I might privately think about Trump, I couldn’t help but laugh at the outrage in deprived areas like Back Bay Boston when he got voted in. I suppose the effects of globalization must be rather rarified when you’re sitting in a plush mansion bought by generations of old money. As for whether populist leaders are tyrants, let’s wait to see what that scion of liberated values Erdogan does in Turkey when he finally crushes the remaining resistance. I’m told he’s very popular, just like Vladimir…. I’m just sure he’ll be right up there with Nelson Mandela.
      There’s a world of difference between an Islamist populist, a kleptocratic* populist and the more traditional homespun variety. In fact, there’s a lot more to defining the word “populist” than initially meets the eye……

      * Yes, he steals national assets and murders his opponents, but he’s a lovable rogue.

  3. “a focus at a firm level on shareholder value maximisation rather than reinvestment and growth”

    This is the nub of it, but what is is the cause of this?

    We have ageing populations expecting to live much longer post-retirement lives. They need to save much more than ever before to be able to fund themselves at a decent level of comfort into the future which may be 30-40 years without employment. At the same time we have financial repression by central banks suppressing yields on safe investments to below the rate of inflation. So people have no choice but to bid up any income producing assets, and as they do so yields on them drop further, meaning they need to save even more. So then shareholders pressure companies to increase payouts ahead of investing in growth. And as debt is artificially cheap, that is what they do.

    So here we are – ultra-low interest rates, high asset prices, high debt, low inflation, low growth. You might think it was by design. Low interest rates may even be the cause of low growth, not vice versa.

  4. DK

    Nice of you to share GMO’s free research and present some of your views.

    For me, I would have liked you to have included a very important rider about economic growth and investment returns.

    Refer: ” But does economic growth benefit stockholders? This article argues on both theoretical and empirical grounds that the answer is no ” in :

    With the former, you would have immeasurably lifted the significance, interactive potential and quality of your actual output.

    Constructive approach from a reader, that’s all – Cheers