An Era of Remarkable Growth May Be on Our Way
The spring is loaded while almost everyone is flat-footed debating other topics
Dire predictions abound about the end of the world as we know it. There is no doubt that incalculable damage has been done to people’s lives and the economy, and that the second-order and third-order implications of these issues loom over the future. Things certainly could get as bad as what the pessimists are saying. Yet, when this era eventually recedes in the rearview mirror in the coming decade, it could be remembered radically differently than how it is being chronicled today.
At the heart of progress is the human desire to improve their lives. Under all conditions, including the most difficult ones — times of war, plagues, and crises — there are always people building towards a better future. For example, Zoom, which has served as a lifeline for human connection and business communnication during this time of physical isolation, was founded near the end of the last financial crisis by Eric Yuan. Similarly, Reid Hoffman founded Linkedin in 2002 during the depths of the market collapse after the dot com bubble and 9/11. You can be sure that people in the trenches are building or starting things today that will become the household names of tomorrow. Innovation and human endeavor are always the enduring features of economic progress.
It should also be noted that three factors in particular distinguish the current environment as a set-up for a return to strong growth over the next decade. First, the amount of liquidity injected into the financial system by the Federal Reserve during the past few weeks is nothing short of gargantuan. On March 16, 2020, the Federal Reserve took the dramatic step to cut the federal fund rate, used as a benchmark for short-term lending as well as the rate to which most consumer rates are pegged, effectively to zero percent. The Fed also initiated a new round of Quantitative Easing: unprecedented broad-based asset purchases by the central bank, including the buying of government bonds and other long-term securities, in order to restore confidence and liquidity in the market. The size of the program was announced to be at least $700 billion over the coming months with no limit. Since then, the Fed has kept its foot on the gas pedal in various forms, including announcing on April 9, 2020, that it will provide up to $2.3 trillion in loans to support the economy. The sheer scope of support by the Fed, which includes loans for small businesses, as well as the government’s $2 trillion Cares Act stimulus package (and possibly a subsequent stimulus bill), sets the table for a decade of expansion that is unlike any era including the 1930s or the period after the 2008 financial system collapse.
Second, the economy is positioned to reboot at some point from the closest point we have ever been to a global standstill. Given that the economy would be restarting from a low base, the rate of change of economic growth is set up to be high. Having been constrained to its most essential components during the current era, the economy is spring-loaded for a return to growth — especially in growth-intensive sectors such as technology and healthcare — while many remain flat-footed focused on the news of the day. As economies around the world begin coming back on line eventually — unevenly in the near-term given all the structural irregularies present today — the momentum over the long-haul is poised to be self-feeding, compounded by the interconnected nature of the global economy.
Third, a price war among producers has contributed to a freefall in oil prices. After Saudi Arabia announced unexpected price discounts of $6 to $8 per barrel on March 6, 2020, the Brent crude oil price dropped by 30% — the biggest downward move since the Gulf War. The near-term economic effects on the energy industry notwithstanding, the low energy prices — levels unseen in decades — are beneficial to consumers and businesses and could add fuel to the fire of economic growth as it resumes.
Growth opportunities today are more systematically discounted than at any time in my career. The power of compounding portends more growth the further out you look, and yet in today’s fearful environment, most people are shortening, not lengthening, their horizons. At this particular moment in history, there is a belief that the future of the world is more uncertain today than ever. In reality, the future has always been uncertain, but the perception of uncertainty is what is greater today.
Meanwhile, the certainties we do know about today are low interest rates and low energy prices; unprecedented infusion of liquidity and economic stimuli; low starting point for the economy and spring-loaded economic forces. Add to that the powerful driving forces of innovation and humans wanting a better life, the set-up today suggests that the future may very well head where it may be least apparent during these dark times — a return to growth.