21 July 2010

Jeremy Grantham: Summer Essays

Jeremy Grantham quarterly letter is always enjoyable thanks to the deep analysis it contains. The July one is a must read. Many times, Jeremy expressed his deep disbelief about the size the banking industry reached in the West and the lack of benefit for the economy as a whole but the few taking advantage of it via insane bonuses. His mea culpa is just a few words but worth their weigh.
Here is an excerpt:
"My previous argument in the Economist debate* was that the 3% of GDP that was made up of financial services in 1965 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."

GMO: Summer Essays