Conference Presentation, Panel
When Past Performance Is a Guide: Using History to Make Sense of the Post-Crisis World
Milken InstituteDaniel Arbess, Ben Funnell, Mitchell Julis, Peter Thiel, Niall Ferguson, Mitch Julis
- Peter Thiel argues that the current era lacks the "technological tailwind" present in the 1930s, which allowed for massive money printing without inflation; he suggests the 1930s saw breakthroughs in secondary oil recovery, plastics, aerospace, and appliances that fueled growth.
- Thiel posits a binary outcome for the current recovery: if fracking proves as transformative as 1930s oil recovery, the current monetary experiment will succeed, but if it is an exaggeration, the U.S. faces a third bubble in three decades.
- He notes that oil prices remaining above 2003 levels ($100/barrel vs. $25) and natural gas prices ($5 vs. $2) are counter-intuitive indicators of true technological progress in efficiency.
- Mitch Julis applies a framework of "complexity economics" to history, emphasizing feedback loops, tipping points, and non-linear wealth creation rather than neoclassical equilibrium models.
- Julis identifies three drivers for historical wealth explosions: advances in biological technology (longevity via germ theory), social technology (women's entry into the workforce post-WWII), and productivity-enhancing technologies.
- He attributes the cohesion of the Eurozone to the "ghosts of the past," specifically Germany's historical trauma and collective memory of WWII atrocities, which creates a political imperative to maintain the currency union despite economic costs.
- Ben Funnell connects historical German trauma to investment strategy, asserting that the Euro is permanent due to 65% German public approval and the national psyche's focus on preventing war.
- Funnell forecasts a reversal of 2000s dynamics: Germany will face higher inflation than its bond yields, leading to negative real bond yields and a subsequent inflation of German real assets (specifically real estate).
- Dan Arbus observes that while the Federal Reserve successfully avoided a Great Depression repeat through lessons learned (specifically by Bernanke), the current recovery remains fragile due to policy imbalances.
- Arbus highlights a "balance sheet recession" characterized by a deep labor drawdown, excess capacity, and a demand deficit, noting that fiscal policy has acted as a headwind rather than a tailwind due to premature austerity debates.
- He points out that Quantitative Easing (QE) has replaced approximately $12 trillion of lost wealth, but $10 trillion was in equities and only $2 trillion in housing, resulting in 93% of recovery wealth accruing to the top 1%.
- Arbus introduces "overt monetary finance" (helicopter money) as a potential mechanism to fuse fiscal and monetary policy without creating new interest-bearing debt, provided strict inflation targets are maintained.
- Peter Thiel counters Arbus's monetary proposals by citing regulatory bottlenecks that prevent capital deployment in the real economy.
- Thiel compares the 1930s, where the Empire State Building took 15 months to build, to modern projects like the Pelosi Access Road, which take eight years at significantly higher inflation-adjusted costs, suggesting regulations stifle growth.
- He identifies the real interest rate market (currently at -0.6%) as the single most mispriced asset globally, signaling that "Einsteinian" compounding is structurally broken.
- Consensus on Structural Headwinds: The panel identifies a divergence from the 1930s recovery model due to a slowdown in non-IT technological innovation and adverse demographic shifts.
- Thiel notes a significant decline in FDA drug approvals (1/3 of 20 years ago), a failure of the agricultural green revolution, and a general stagnation in productivity growth outside of the IT sector.
- Thiel cites economist Bob Gordon's projection that demographics alone could reduce U.S. GDP growth from 2% to 0.8%, independent of technological performance.
- Thiel questions whether the U.S. has reached a "stationary state" akin to the Malthusian traps or the Japanese predicament, driven by regulatory restraints and the exhaustion of Keynesian/Friedmanite policy tools.
- Geopolitical Trends: The group highlights the "Great Reconvergence" of global wealth since 1978, where the per capita GDP gap between the U.S. and China has narrowed from 22:1 to 5:1, with projections to fall below 2:1 by mid-century.
- Dan Arbus remains a long-term bullish on China but warns of massive economic rebalancing challenges that will temper immediate global growth contributions.
- Arbus views the U.S. energy innovation and housing market recovery as dynamic counter-trends to global stagnation, whereas Europe faces structural political incoherence.
- Investment and Social Concerns: The panelists converge on structural risks regarding the mismatch between investment horizons and capital constraints, as well as income inequality.
- Dan Arbus identifies a critical duration mismatch where long-term capital creation processes are underfunded by short-duration capital requirements.
- Ben Funnell and others note that income inequality was a genesis of the crisis, with debt loads disproportionately falling on the bottom two income quintiles, leading to political polarization.
- Peter Thiel expresses the deepest concern regarding the "disappearance of the future" as an animating idea, citing that 80% of Americans believe the next generation will be worse off, risking a shift from work to leisure similar to Europe's trajectory.
- Mitch Julis offers a counter-optimistic view based on the potential for legacy capital deployment by Baby Boomers into innovation clusters (e.g., NYC's new innovation centers), suggesting a potential catalyst for discontinuous wealth creation.