posted by: Radnor Financial Advisors
We recently had the opportunity to attend Carlyle’s annual investor conference in Washington D.C.. One session featured David Rubenstein (Co-Founder and Co-Executive Chairman of Carlyle) discussing the global economy with former Fed Chair’s Dr. Janet Yellen and Dr. Ben Bernanke.
While the economy is now surpassing 110 consecutive months of economic growth, both were optimistic that expansion will continue near-term. Dr. Benanke suggested that economic expansions don’t die of old age, they get “murdered”, usually by the Fed increasing interest rates to fight inflation or by a financial imbalance. Currently, inflation is not a problem, banks are well capitalized, and households are in good shape. However, economic growth remains on a narrow path, and thus is vulnerable to unexpected events.
Regarding fiscal stimulus, they don’t see that leading to an overheated economy in the short-term. However, they did suggest that the fiscal stimulus was enacted at an odd time in the economic recovery cycle (mis-timing), and thus could push the economy beyond its capacity. Longer-term, their concern was more around the fiscal stimulus adding to the deficit.
They both indicated the deficit is a significant concern longer-term, and that we are on an unsustainable course. The US debt to GDP ratio is not frighteningly high, and at low interest rates the interest burden is not terrible. However, with an aging society, the deficit is likely to deteriorate over time, and payout on the debt will take up more of the budget. Eventually, we will need to address this and it will be painful, as it will take a combination of spending cuts and taxes/revenue enhancements, neither of which is politically attractive.