@Heather

I agree with you about demography being the ultimate cause of our financial crisis.

It seems to my primitive reptilian economic mind that we are perpetually balancing between two perils: inflation and deflation.

We baby boomers are like a goat passing through a python. When we demanded homes, prices increased. Now that we have pretty much achieved our economic goals we have what we need and demand for homes is falling. (Look at the run on mcmansions the last few years …)

This trend towards deflation is structural because of the demographics. The Bush administration has been trying to square the circle – increasing spending and encouraging consumer spending (go out and shop!) as it attempts to control inflation. Spiraling energy prices complicated the juggling act.

The entire western world is caught in this unprecedented position of maintaining prosperity with declining populations. Japan has been in recession for a decade now …