Bruce Greenwald on Structural Problems in the Economy and Unemployment

Bruce Greenwald

Bruce Greenwald is a recognized expert on value investing.  A professor of finance at Columbia University and Director of Research at First Eagle Funds, he is the author of the books “Value Investing: from Graham to Buffett and Beyond” and “Competition Demystified: A Radically Simplified Approach to Business Strategy.”  His latest book, “Globalization: The Irrational Fear that Someone in China will Take Your Job”  is available via the link below.

We spoke with Greenwald on November 4.  This installment of the interview covers his macroeconomic forecast, and next week’s will detail how he has positioned First Eagle’s portfolio.


I’d like to understand your economic forecast, and specifically I’d like to focus on the question of unemployment. At what point you believe it will stabilize?  I see a lot of attempts to forecast unemployment using a technical approach based on past statistical patterns, undertaken without regard to the structural problems in the economy.  What are the structural issues that will govern when unemployment will reach equilibrium?

To answer that, you must first understand why this situation has been so bad and so prolonged – and I think it’s going to be much more prolonged.  The first evidence that you have to think about is that while this is the first occurrence of problems this severe in the US, these problems have been around in Asia, Argentina, Mexico, Russia – and Japan, of course, most obviously – for many years.  This is not new. 

You want to go back and think about what is going on.  In a sense, you are seeing issues that are going to take a long time to fix and are similar to what happened in the Depression.  Basically, in the Depression a huge sector of the economy that everyone had always regarded as central, died.  And it dies for an almost virtuous reason. 

That sector of course is agriculture. 

Since about 1870, productivity growth had been 4% to 5% and demand growth had been 1% to 2%.  Agricultural prices had been up before and during the first World War, and then they were down.  But the inexorable trend had been down, with all this growth in productivity and limitations on demand, and sooner or later prices were going to collapse.  Approximately 35% of the US population was either in farming or in farm towns or were supporting a farming enterprise, and they were going to be marooned.

So when you look at the countries that suffered the worst as a result of the Depression, they are the big agricultural producers: the US, Australia, Canada, Germany, France, and most of Europe, but not the UK or other countries that were less agriculturally dependent.  Japan was very agriculturally dependent, and they suffered terribly and quickly in the early 1930s, but fortunately for them they started a war in China and entered the second World War right away.  The country that never recovers is Argentina. 

When the Depression happens, the challenge becomes how to get that portion of the population that is trapped – because their housing, jobs, and capital are in agriculture – to the manufacturing enterprises.  The answer is that is very hard to do.