Although we’ve been writing about the economy’s sluggish recovery since 2012, it’s actually been sluggish since summer 2007, just before the Global Financial Crisis started in earnest in 2008. Since that time governments of all political persuasions around the world have overspent with abandon and the electorate has continued to support this by voting for those politicians that promise to overspend, and the government COVID shutdown from 2020 through 2022 only exacerbated the problem of overspending. This is simply a fact.

The graph below shows what the effect of this debt driven overspending has been, as government debt has crowded out more efficient private investment. The blue line shows economic growth since 2008 at a rate of 2.2%, versus the pre-2008 trend of 3.1%, when debts were more prudent. This slower growth has resulted in an output gap between where we find ourselves and where we could be if the growth trend of 3.1% had continued.

 

 

So what is the good news?

The economy is still growing, albeit slowly, and if spending can just grow at a percentage less than this sluggish growth rate, debts will get more manageable. As we have written before, governments historically spend more than they take in through taxes until they are forced to stop, either when the voter or the bond market say “no more”. This is exactly what happened in Canada when the 70s Liberal government that put our balance sheet in the red for that decade put it back in the black in the mid-90s when they were forced to be prudent due to the bond market downgrading our debt.

In the world of business management, companies continue to innovate, adapt and cut costs using technology in incredible ways that is difficult, if not impossible, to forecast accurately. What we can say with some certainty is that we always underestimate how much better things will be in the very long-term. Example A: The average teenager has more computing power in their hand courtesy of their cell phone than NASA had in the late 1960s. Not only is this a modern miracle that impacts us all every day but, more importantly, not a single person forecast this future reality in the 1960s! Compound this inability of people to anticipate revolutionary innovations with the current wave of AI and we can safely assume that most of us cannot even begin to fathom how its problem-solving and decision-making capabilities will ripple through industries ranging from logistics to financial services and how it might provide another productivity revolution.

That is why, long-term optimism is the only realism.

Randy and Ian