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
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%.
GMO, July 1010