Let the Good Times Roll (Downhill)
What keeps the US economy afloat in these troubled waters? Robert Samuelson says it’s easy credit and aging Boomers:
To some extent the life cycle defeated the economic cycle, Sterne says. Families wanted bigger homes. Their children, flooding high schools and colleges, demanded computers, CDs and cars. From March 2001 to March 2003, says Sterne, several dozen product categories experienced “remarkable” double-digit increases, including cell phones, motorcycles, toys, jewelry and hardware.
One reason Americans could spend freely is that they went deeper into debt. Indeed, the democratization of debt is a great story of the late 20th century. In 1946, just after World War II, consumer debt amounted to 22 percent of household after-tax income, reports the Federal Reserve. (That is, for every $10,000 of income, there was $2,200 of debt.) Now debt is almost 110 percent of income. More families borrow, and debtors have more debt in relation to income.
But like any debt binge, it has to end someday:
The bad news is that all the good news won’t last forever. Spending demographics will deteriorate slightly in the next decade, says Sterne. Younger households — relatively poorer — will grow rapidly. An aging baby boom will slowly lose purchasing power. The larger and iffier issue involves the inevitable, though undetermined, end of America’s 60-year credit binge. Interest rates have risen from recent lows, and greater threats loom.
Household debt can’t permanently grow faster than household income, though it has for decades. Sooner or later families will decide they’ve borrowed enough, or too much. Sooner or later baby boomers will pay down lifetime debts. Sooner or later lenders will exhaust good credit risks. Indeed, whether the aggressive lending of recent years has gone too far remains unsettled. Higher delinquency and personal bankruptcy rates are causes for concern.
Then there’s another factor Samuelson leaves out, one that might be a cause for even greater concern.
The Baby Boomers will start to retire in 2011. And what do retirees do? They begin to sell their equities to pay for their retirements. My generation, the so-called Gen X, has too few people to keep stock prices up at the levels where boomer investments kept them. And Gen Y will still be too young (and therefore poor) to make up the rest of the difference.
The economic boom of the ’90s (and the economy’s resilience during the Current Mess) was more due to a happy confluence of events than it was to any policy from Washington. That’s not to say that our balanced budgets didn’t help, but they were less a cause than they were an effect.
Depressed equities markets, increased Social Security and Medicare payouts, higher interest rates, and tougher credit are all in store for us just a little down the road.
Hope you didn’t get too used to the good times.
Sounds reasonable, but what about:
1. Inheritance, financial help, and other wealth transfers from Boomers to Gen X?
2. Foreign appetite for (more stable) US investment instruments?
3. The idea that the earlier low debt %age resulted from what was largely a ‘moral’ issue and that higher %ages now reflect a more sophisticated attitude. Is this indeed a ‘credit binge’ or just a different way of doing things.
4. The idea that boomers will retain purchasing power but will be switching it to healthcare issues.
I have lost count of the times I have heard, been shown, been convinced, and sometimes acted on the ‘certainty’ that the US economy was headed for the big one–soon. Missed some brass rings thereby. Bah.
This is all France’s fault. Their mistreatment of Germany at the end of WWI led to the rise of Hitler, World War II in Europe, America sending millions of troops overseas, and the resultant nookie that took place when they got home. Sixty years later we’re all paying the price.
I say we send them a bill.
Seriously, seniors may sell stock when they retire, but it will be to maintain their lifestyle. Most of that money will go right back into the economy in the form of cars, houses, vacations, and leisure items. There might be a lot of churn in the markets, but consumption ought to remain solid. I don’t see the scenario being quite that bleak.
This idea that retiring boomers will depress stocks is quickly becoming conventional wisdom, but it is far from proven. But assuming it is true that boomers will follow this script, there should be some opportunities. For instance, investing in bonds could be a winner, although they certainly look like crap just now. Additionally, if prices are artificially lowered by stock sales, companies and younger investors will have some great opportunities, as companies can buy back stock or we Gen X-ers can load up on cheap quality stocks through years of dollar cost averaging.
Another thing this analysis ignores is that people who are near retirement usually have more conservative investments, including a healthy mix of bonds (usually 50% or more). Thus, they shouldn’t be killing the NASDAQ while taking monthly distributions.
In any case, I’m skeptical that anyone really knows what will happen.
One thing’s for sure, the future won’t be dull.
I don’t remember who said that, but I found it profoundly, empirically true:
“If somebody tells that he/she know what the economy is going to do in 6 months (12 months, 2 years, 5 years, 10 years etc.) smile politely and leave the room.”
I lived through enough doomsday scenarios to treat them all with suspicion. Do you remember how Japan was supposed to leave us in the dust? Then it was China, then it was EU…
It is simple. If we only do not allow to tax and regulate ourselves out of existence, if we preserve and extend the favorable climate for business creation we will be OK. However, if we follow the example of central command economies of Japan, EU and China we will follow their decline. Boomers may be a factor, but they are just that- a factor and not so huge at that.
PS I don’t belive the economic numbers that China reports – I know exactly how they are generated, having lived under socialist rule myself. They are most likely on a very thin ice now and may collapse any time. I HOPE I am wrong, but any central command economy feeds on itself and eventually must collapse.
I don’t think the US will be in great trouble in the future. The continent with the real problem is Europe, which is ageing faster (their equivalent of Generation X is not small like in America, it’s almost non-existent), has no alternative for public financed retirements and faces a nasty immigration problem (while immigration is America’s first nature).
Generation X may be too small to replace the boomers, but I think that there’s going to be a final emigration wave from Europe.
What are non-muslim Europeans under the age of 35 going to do ? Give up to 80 % of their income to the tax man to pay for the retirement of their parents and grandparents (many of whom will live to be a 100 after having retired at the early age of 52 or 53), while islamofascist extremists gradually take over the place ? I don’t think so and I suppose that considerable number of younger Europeans will think likewise. And it won’t be the poor or uneducated to jump ship.
They won’t all go to the US, of course (Australia, New Zealand and Canada will be attractive alternatives), but I believe the US will be the destination of quite a lot of them.
Peter, if our immigration laws were more favorable to educated, skilled labor we would be experiencing that wave right now. There lots of Europeans desperate to get out and start new lives in our Land of the Free (relatively speaking). For political reasons, however, we prefer our immigrants unskilled and uneducated, so they can vote for Democrats. Weird, because there is no guarantee that the educated, skilled immigrants would vote for Republicans.
Anyone know how people retiring abroad will affect us?
I think that it will be less of a problem than anyone thinks. Us kids are suffering right now. I think a big part of it is these old people hanging-on, refusing to retire. That and people sitting on their money.
We need to get the venture capitalist going.
I too wonder about the conventional wisdom of aging boomers cashing out of stocks. In light of the dividend tax cut, it makes a lot more sense to stay in the market, at least in big (relatively) safe stocks that pay a nice dividend, than it does to cash out and put it where exacty? Money markets that have a negative return when you factor in infation? Bonds?
I think companies now have a big incentive to give out dividends, which makes stocks more attractive, which makes people less likely to leave, etc.
Of course this assume rather low interest rates. If you can get 10% in a money market again then this doesn’t work.
If you believe in efficient (or near efficient) markets, this information – which I have been hearing for at least two years – is already priced into the market.
In addition, I agree with the earlier posts that any money taken out will be put right back in, which will show up again as earnings, so I don’t think this is anything to lose sleep over.