|
Friday, July 10, 2009 We are in the Midst of the Great Baby-Boomers Economic Stagnation of 2007-2017. "Banking
Establishments Are More Dangerous Than Standing Armies." Thomas Jefferson (1743-1826), 3rd US President "... a serious depression
seems improbable; [we expect] recovery of business next spring, with further
improvement in the fall." Harvard Economic Society (HES), November
10, 1929 "While the crash only took
place six months ago, I am convinced we have now passed through the worst --
and with continued unity of effort we shall rapidly recover. There has been
no significant bank or industrial failure. That danger, too, is safely behind
us." President Herbert Hoover, May 1, 1930
"Under a paper money system, a
determined government can always generate higher spending and hence positive
inflation." Fed Chairman Ben Bernanke, in 2002 Many observers think that “prosperity is around the
corner” and that this recession, like others since World War II, will
end as soon as the stock market, as a leading indicator, recovers and people
start spending again. This is a myopic view of the current economic big
picture. In fact, since the peak of the housing bubble
(in the U.S.) in 2005,
the onslaught of the subprime financial crisis
in August 2007 and the
beginning of the recession
in December 2007, the U.
S. economy, and to a certain extent, the world economy, have entered a period
of protracted adjustments. For sure, there will be some quarters of positive
economic growth ahead and the recession may be declared officially over in
the coming months, but the radical economic reorganization that is taking
place will go on for years to come. Why is this so? Essentially, because we are at the very end of the
60-year inflation-disinflation-deflation Kondratieff cycle
that began in 1949 when war-frozen prices were liberalized; and that powerful
long cycle is ending now. The post 1980s era, i.e. the Reagan era, is over,
but the excesses and bubbles of the last few decades have to be corrected, at
a time when large population shifts are about to take place. Such adjustments
will take years to unfold and this will entail a lot of efforts and a lot of
changes. Indeed, the era of excessive spending and of
excessive debt is over. The era of excessive government economic
disengagement and of financial deregulation is over. The era of irresponsible
Ponzi-scheme finance is over. The era of unregulated derivatives is over. The
era of greed as an ideology is over. The era of wild and predatory capitalism
is over. The era of cheap oil, of cheap transportation, of cheap commodities
and of cheap food is over. The era of excessive concentration of wealth and
income is also over. However, the age of political corruption, of incompetent
politicians and of destructive wars of aggression is not over. What has
arrived is the age of
hyperstagflation. The central driving force behind most of these
developments, besides the collapse of the financial sector, the debt pyramid
and the derivative products structure, and irresponsible talk
of larger wars by loose cannon
politicians (as if there were not enough
problems!) is going to be demographic.
Indeed, we have entered a period during which the largest demographic cohort
in the history of mankind, the post Word War II baby-boomer
generation, has passed its spending peak. This is not
something that can be reversed overnight. This is going to be a decade-long
process of adjustment, of less spending, of more saving, and above all, of
paying off excessive debt loads. Let's keep in mind that consumer spending
represents 70 percent of GDP. The economic consequences are going to be profound
and will affect all sectors of the economy. We only have to consider how the
automobile industry, once a major engine of economic growth, is presently
going through a fundamental reorganization and downsizing. Even
computer-based industries have matured and cannot anymore be considered fast
growing industries. The only growth sectors left in the U.S. seem to be the
health services industry, as the population is aging, and the war-related
industries, as the U.S.
military-industrial complex keeps on expanding. But even those
sectors will have to slow down; lest they bankrupt the entire economy. That's why I think these industrial and demographic
trends herald a period of slower economic growth that could last many years.
Governments better wake up to the challenges that such a slow growth
environment entails. Very few people are prepared for such a prolonged period
of economic stagnation that will be accompanied by forced debt liquidation,
in a deflationary environment. This is particularly true of private pension
plans that will have trouble paying pensions to recipients in the coming
years. This is also true for employment that will expand at a slower pace
than the working population, at least for a while, resulting in a rise in the
level of unemployment. Baby-boomers
are those individuals who were born between 1946 and 1966. Because of its
sheer size (more than 70 million people in the U.S.), this generation has
been dominant in all spheres of life for the last fifty years. But now, it has
passed its spending peak. This occurred in 2005-06, at the very top of the
housing bubble. The average age of the baby-boomer demographic cohort was
then 50, which is the age of top spending. At that time, the U.S. personal
savings rate fell to a whopping minus 2.5 percent per year. As a comparison,
it was 12.5 percent during the 1981-82 recession and it has now rebounded a
phenomenal 5.7 percent in April 2009, and it's climbing fast. Indeed, the end of the housing bubble, the financial
crisis, and the economic recession altogether have sent a clear signal to
Baby Boomers. You'd better begin saving soon, or your retirement will have to
be postponed. And saving means consuming and spending less, while paying up
debts, in order to boost net current personal assets to a level that could
sustain retirement needs. But if the largest cohort of consumers cuts down on its spending and
borrowing, what does it mean for aggregate spending and economic growth? It
can only mean slower overall economic growth and some painful economic
adjustments. Therefore, there is a high probability that this recession will
be a super one that may linger on for years, being interrupted by short-run
upside bursts, but soon being followed by a return of stagnant conditions. In
Japan, in the nineteen-nineties, a similar financially and demographically
induced recession lingered on for an entire decade. And even after twenty years, it cannot be
said that Japan is out of the woods yet. In the short run, in order to counteract the effects
of the financial crisis and to fight the current recession that began
officially in December 2007 (according to the National Bureau of Economic
Research- NBER), the Obama administration has devised a three-quarter billion
dollar stimulus plan and has let the fiscal deficit explode to more than two
trillion dollars a year because of its bail-out of the troubled banks.
Similarly, the Fed has lowered short-term rates to zero and has purchased
billions of dollars in long-term Treasury securities, in government agency
securities, and even in mortgage-backed securities, in a desperate effort to
save large financial institutions such as AIG, Fannie and Freddie, and other
American financial institutions from imploding. But now bond investors,
especially international investors, are selling Treasury bonds and are
pushing long-term interest rates up and the U.S. dollar down as inflation
fears increase, even though paradoxically the collapse of the pyramid of
debts creates a deflationary environment for the entire economy. The danger here is that bond investors will be
selling Treasury bonds faster than the Fed can buy them. In which case, there
will be a downward spiral in bond prices as inflation and solvency fears are
exacerbated. In a word, if the Fed does not tone down its current policy of
excessive monetizing of public and private debts and its obvious 'benign
neglect' policy toward the dollar, high inflation and possibly even
hyperinflation become a possibility down the road. This has happened
elsewhere in the past and there is no reason why it could not happen again,
especially if the U.S. keeps getting involved in costly wars abroad, paying
those adventures with money it does not have. For now, a quick resurgence of inflation is only a
remote possibility. This is nevertheless a possibility, considering that
central banks have a tendency to overdo the printing of fiat money.
In fact, if governements attempt to print their way out of the coming structural
demographic problem, they will end up generating an hyperstagflation. In a
nutshell, this is what the huge international dollar-denominated bond market
sees and fears, at a time when it has to absorb a huge supply of new bond
issues. In reality, the bond market will always win against any central bank,
any time. The solvency woes and the likely default of the state
of California on its outstanding debt will only add to the
anxiety. A few weeks ago, I warned against the risk of future long term interest
rates hikes and future U.S. dollar depreciation following the decisions by
the U.S. Treasury and by the Fed to flood the markets with trillions of
dollars of new Treasury bond issues and with newly printed money. The
undertow is coming even faster than I thought. Only when the markets expect
relative economic stagnation and a lasting deflationary environment will long
term interest rates taper off. Brace yourself and hold on to your britches. There is a
rough economic decade ahead. _______________________________________________________ Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached
at He is the author of the book 'The
New American Empire'. Visit his blog site at www.thenewamericanempire.com/blog.
Author's Website: http://www.thenewamericanempire.com/
Check out Dr. Tremblay's coming book
"The Code for Global Ethics" at: http://www.TheCodeForGlobalEthics.com/ *****The French version of the book is now available. See: http://www.lecodepouruneethiqueglobale.com/ Or on Amazon
Ca. Posted, Friday July 10,
2009, at 5:30
am Email this article
to a friend. Send contact, comments or commercial reproduction
requests (in English or in French) to: N.B.: Messages may be published in our
weblog, unless you request otherwise. Please register to receive free emails on new
postings of articles. Send an email with the word "subscribe"
to: bigpictureworld@yahoo.com To unregister, send an email with the word "unsubscribe"
to: bigpictureworld@yahoo.com The above is presented for educational
purposes only. © 2009 by Big Picture World
Syndicate, Inc. (Home: TheNewAmericanEmpire.com) |