Normally, the more severe a recession, the more robust the recovery that follows in its wake. That was the pattern until 2008, when the worst economic crisis since the Great Depression hit.
“That massive decline should have led to an awesome recovery,” Burt White, chief investment officer of LPL Financial, told a Denver audience gathered for Vectra Bank’s 24th Annual Economic Forecast Tuesday morning.
Instead, U.S. economic growth, adjusted for inflation, has averaged around 2 percent a year the past eight years, a growth rate that didn’t keep pace with the 50-year average of 3.5 percent GDP, much less the acceleration seen in previous recoveries.
White estimates the U.S. economy is generating $385 billion a year below its potential. That amount would be equivalent to the federal government handing Minnesota over to Canada as reparations for the 2008 financial crisis.
As to blame, White points the finger at the Federal Reserve and a monetary policy that has kept rates too low for too long.
“We are no longer sick. We need to have the Fed to normalize rates,” White said.
Between a recession and the one that follows, the Fed has typically raised interest rates 16 times. Eight years into this recovery, it has bumped them up only twice.
That matters, because people make twice as much money from interest payments in the U.S. as they pay in interest. As the largest generation in U.S. history continues to sail off into retirement, they have limited options for funding it.
Assume a retiree needs to safely generate $100,000 a year from investments to live on. Back in 1980, that would have required investing $763,395 in bonds.
By 2000, interest rates had fallen to the point that investor needed to invest $1.9 million, a still manageable sum for someone who got an early start. Today, that worker would need to set aside $14 million to generate the required interest payments, White said.
Rather than fostering spending and discouraging savings, low yields have had the opposite effect. Baby boomers found themselves having to save much more and take on greater risk, he said. They also have had to work much longer, limiting employment opportunities for the millennials entering the workforce.
While the Trump administration may not get the full infrastructure package or tax cuts that it wants, White said it should get enough to push the economy closer to a 3-percent growth rate.
And that should be enough to start making a difference in the lives of workers, who have seen median pay rise just $13 a year since 1990, he said.
