Tags: Shilling | economy | time | heal

Shilling: Only Time Will Heal the US Economy

Wednesday, 15 Aug 2012 10:34 AM

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The only thing that will heal the U.S. economy is time, as the country won’t be able to pay off its debts overnight, said A. Gary Shilling, author and president of economic research and forecasting firm A. Gary Shilling & Co.

Policy tools such as monetary stimulus measures from the Federal Reserve won’t bring lasting growth — they aren’t even designed to do as such.

“The only thing that’s likely to revive the U.S. economy is time, the 5 to 7 years of it needed for deleveraging to be completed, especially in the global financial sector and among U.S. households,” Shilling told Business Insider.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

“Meanwhile, slow real growth of about 2 percent per year and more frequent recessions are to be expected. Ongoing economic weakness, despite massive monetary and fiscal stimuli, measures the huge power of private sector deleveraging.”

The U.S. economy grew 1.5 percent in the second quarter, according to preliminary government estimates, down from 2 percent in the first quarter.

Since the country slid into recession more than four years ago, the Federal Reserve has cut interest rates to near zero and has rolled out unorthodox stimulus measures including two rounds of quantitative easing (QE), under which the Fed buys Treasury holdings and mortgage-backed securities from banks, pumping the economy full of liquidity in the process to spur hiring and recovery.

Such tools won’t work until businesses and households pay down their debts and then start demanding goods and services.

“There are no silver monetary or fiscal bullets to fix the economy, as witnessed by the tremendous efforts so far that have failed to restore meaningful growth,” Shilling said.

“They are overwhelmed by deleveraging in the private sector.”

Fed stimulus tools tend to push up stock prices, and investors are expecting the Fed to intervene soon with a third round of QE, as evidenced by climbing stock indices.

However, other experts agree that not only will stimulus tools fail to prop up the economy, they may fail to stave off recession

“Investors remain so addicted to the temporary high of monetary intervention that they continue to ignore very real downturn in global economic indicators, to an extent that we have not seen since the 2007-2009 recession. This is particularly evident in the deterioration of new orders and order backlogs, which are short-leading indicators of production, which in turn is a short-leading indicator of employment,” economist and fund manager John Hussman wrote in a letter to investors.

“Wall Street is scared to death of being out of the market when the perceived salvation of QE3 is announced, and at the same time is increasingly encouraged by negative economic data in the belief that this will accelerate delivery,” Hussman added, referring to a recent trend that sees stock prices rising when disappointing data hits the wire, as investors buy on the notion that bad news ups the chances of Fed intervention.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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