Sunday, November 15, 2009

Bruce Greenwald and Structural Problems of the World Economy

Good interview with Bruce Greenwald. He is maybe the most famous value investing professor in the world. He teaches at Columbia and is involved (may even be in charge of) Columbia's MBA value investing program. He is also a person value investing gurus go to when they need advice and opinions.

Anyway he talks about the structural issues world wide and a possible solution (which I put at low odds of working. There just isn't a viable solution).

Here the interview.

Some excerpts:

To answer that, you must first understand why this situation has been so bad and so prolonged – and I think it’s going to be much more prolonged. The first evidence that you have to think about is that while this is the first occurrence of problems this severe in the US, these problems have been around in Asia, Argentina, Mexico, Russia – and Japan, of course, most obviously – for many years. This is not new.

You want to go back and think about what is going on. In a sense, you are seeing issues that are going to take a long time to fix and are similar to what happened in the Depression. Basically, in the Depression a huge sector of the economy that everyone had always regarded as central, died. And it dies for an almost virtuous reason.

That sector of course is agriculture.


The comparable thing that is going on today is that manufacturing is dying, and it is dying for exactly the same reason, which is productivity growth is 5% to 6% a year and demand growth is 2% to 3% a year.

a possible solution

So the actual way we could relieve the pressure is to have the IMF just print money and give it to Korea and the other countries so that they could buy Chinese and the other exporting countries’ goods without having to incur foreign debt. That is the Stiglitz plan and that’s the plan that the Chinese are talking about.

I think this is way optimistic

There is this huge structural problem taking place. The governments can offset it to some extent. I think what you are going to see in the US is what you saw in Japan for years, which is stagnant demand. We will grow a little bit, imports will flood in, purchasing power will go out of the US economy, and we will stop growing, and then the government will do something and the dollar will fall a little. All these things will happen sequentially, but ultimately you are going to have slow growth.

on unemployment

Imagine that you’ve got basically 1% or 0% GDP growth and productivity growth of 2% to 3% per year. Employment is going to be decreasing by 2% to 3% per year. That means unemployment is going from 10%, where it is now, to 12% to 14%. I don’t think there’s a natural stopping place for that much below 15%.

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