Jeremy Grantham: Summer Essays

Jeremy Grantham’s latest missive is out, and as always, its well worth a read: The 2Q Letter is a collection of six essays on topics ranging from “Finance Goes Rogue (But Volcker Wins a Round,” to “The Fearful Speculative Market,” to “Everything You Need to Know About Global Warming in 5 Minutes.”

I particularly liked this part:

“In 1965, 3% of GDP that was made up of financial services [and that] was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a
remarkable 7.5%.

This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down. This, in turn, should eventually reduce the growth rate of the non-financial sector, which it indeed did: from 3.5% a year before 1965, this growth rate slowed to 2.4% between 1980 and 2007, even before the crisis.”

Yes, the bottom line is that we over-extended on leverage, driving the finacial sector to be an outside chunk of the economy. The deleveraging process should take that back down, if not to 3%, well then certainly towards 5%.


Summer Essays
Jeremy Grantham
GMO, July 1010

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