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Bring on the Depression?

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October 02, 2009 – Comments (16)

Naked Capitalism has a post with a flashy title, "The recession is over but the depression has just begun."

I can no agree more with the author's assertation:

The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

Relative debt today is much higher then the relative debt that brought on the depression.  

One of the things that is different and hardly no one takes into account in their analysis - and it will be highly significant - is the aging population.  An aging population add increased stress and people are becoming seniors at a faster rate then ever before in history.  

Another thing that is different is the entire economic history as we know it has occurred through a period of exponential population growth.  That kind of exponential population growth is over.  There is increasing poverty and increasing starvation and technology has run its limit to continue to support an increasing population.  It seems to me that most markets that there was economic expansion into are now saturated.  For 500 years we have been on the growth phase of economic development and now we are facing a mature economic world.  I don't see it as any different then the life cycle of a business or a product.

Anyway, the above post is a good read.

16 Comments – Post Your Own

#1) On October 02, 2009 at 1:39 AM, AllStarPortfolio (38.77) wrote:

The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

 

For 500 years we have been on the growth phase of economic development. .  . . . . Report this comment
#2) On October 02, 2009 at 2:15 AM, EV38 (99.79) wrote:

To call it simply economic development is not fair...its technological development that helped improve standard of living and therefore the economy. The alternative to "500 years of economic develoment" is the dark ages. The only way that can really happen is if Bin Laden or one of his comrades wins.

The aging population is a function of the success of society - an increased life expectancy. And although there will be a greater burden placed on the health care system, these people aren't going to be totally useless economically. I know from older family members and their friends retirement will really mean part time job or small business. Rather than an economic depression I think there's another risk - the demand for stocks will decrease regardless of economic climate as the older people switch their portfolios from stocks to cash. It'll be interesting to see if the richer classes of the third world can pick up the slack.

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#3) On October 02, 2009 at 5:23 AM, Dfndr (37.74) wrote:

Just a few points: 

1.  People are aging at the same speed the always did (unless noone told me the minute got shorter).  Yes we have the baby boomer generation hitting those years.  But it won't strain the economy and drive us into a depression. 

2.  If you've done your homework than you would know that just like when automobiles, radios,TVs, and internet hit the market they too became saturated until the next technology came along.  Not once did we enter a depression becasue of it. 

3.  I seriously doubt technology has "peaked" and that we can not support increasing population.  I think in 20 years we'll be amazed at what technology produces and someday your grandkids will laugh because you had a CD player in your car (ref. 8 track)

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#4) On October 02, 2009 at 9:23 AM, Entrepreneur58 (40.30) wrote:

<<<Another thing that is different is the entire economic history as we know it has occurred through a period of exponential population growth.  That kind of exponential population growth is over.>>>

Back in the 70s a guy wrote a book called "The Population Bomb" which predicted that the world economy would crash due to a rapidily expanding population.  Ironic, isn't it, that now people are calling for the economy to crash due to lack of population growth?

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#5) On October 02, 2009 at 9:38 AM, russiangambit (29.49) wrote:

> People are aging at the same speed the always did (unless noone told me the minute got shorter).  Yes we have the baby boomer generation hitting those years.  But it won't strain the economy and drive us into a depression. 

Read today's Bloomberg, SSN applications are up 50%. When older people loose jobs most have only one option - lower retirement.  And it won't strain the economy.

As an anecdotal story we had a storyin Houston, where a 56 y.o. woman who worked all her life goes and robs 2 banks in the borad daylight. Why? Because she is desperate -  she was unemployed for over a year, not eligible for SSN yet, hewr mother recently died and she has a ton of medical bills and she doesn't get her mother's SSN anymore. Unemployement benefits in Texas are not being extended because the unemployement rate is about 8.5%, i.e. below the average.

You see no soup lines, yet there are many many stories like that. It is disturbing. I think we need more soup kitchens and other food distribution centers. People are getting truly desperate as they are falling off the unemployement rolls and cannot find new jobs due to their age.

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#6) On October 02, 2009 at 9:39 AM, russiangambit (29.49) wrote:

> And it won't strain the economy.

That was mean as a quesiton. I strongly disagree with this statement.

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#7) On October 02, 2009 at 9:45 AM, russiangambit (29.49) wrote:

> Back in the 70s a guy wrote a book called "The Population Bomb" which predicted that the world economy would crash due to a rapidily expanding population.  Ironic, isn't it, that now people are calling for the economy to crash due to lack of population growth?

Well, people who visit India get really sick very often. Why? Because the overpopulation in India breeds very strong deseases which Europeans and Americans have no immunity to. It is only a matter of time white world is wiped out by a desease coming from India , just like Indiands in America where when whites came.

Sanitary population is horrible in Indai , there isn't enough clean water. I think INdia will truly explode in 30 years or so, if not sooner.

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#8) On October 02, 2009 at 11:19 AM, FreeMarkets (97.61) wrote:

Actually a very poor read.  To argue that debt is our problem (which it is), but the only solution is gov't spending, shows an amazing lack of a coherent argument.  Gov't debt is the people's debt and ONLY through savings can consumption begin.

This one statement If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping.

WTF! Not only is he wrong - even KEYNES wouldn't agree with that statement, but he's viewing the government assets/liabilities as part of the same balance sheet as the individuals.  Has this guy never heard of a country that has had its individuals save money at the same time the gov't did.  You don't even have to go back in history to see China - which is the ONLY G7 country experiencing significant growth today.

The good news - I never have to waste my time reading that blog again.  

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#9) On October 02, 2009 at 12:31 PM, davejh23 (< 20) wrote:

"If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping."

Is this a solution, or simply an observation.  It's true that if the private sector goes from a negative savings rate to a positive savings rate without a significant increase in wages, that government must fill that gap with deficit spending in order to not show economic (GDP) decline...recession...depression.  Consumer spending made up a huge part of GDP and it has declined significantly without large increases in wages...if gov't didn't fill the gap with massive deficits, we would already be in a depression by definition.  Keynesians would argue that this is necessary and that when (if) the economy recovers, gov't will run a surplus and pay down the debt...does this actually work in real life?  No.  $2 trillion dollar deficits are not sustainable.  The dollar will be destroyed before we have a "real" $14 trillion GDP.  Gov't cannot pull back deficit spending without a "double-dip" (if you can even call it that) recession...depression.

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#10) On October 02, 2009 at 3:11 PM, GeneralDemon (27.72) wrote:

"An aging population add increased stress and people are becoming seniors at a faster rate then ever before in history."

Man, this is so true, I've aged 10 years this past year alone!

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#11) On October 02, 2009 at 3:36 PM, Rehydrogenated (32.56) wrote:

I don't know about you guys, but im retiring at the age of 25 just to stick it to our economy.

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#12) On October 02, 2009 at 5:19 PM, JaysRage (90.49) wrote:

The linked post is very well written.    I generally agree with everything within it.   It articulates my general assessment of the current situation as well.    We're not out of the woods until we have solved the root causes of the situation we're in.

1) Individuals were over-leveredged, primarily by using over-inflated housing equity and credit cards to fund purchasing.

2) Businesses were over-leveredged, primarily by using future earnings to fund purchasing, but also partially due to unsustainable pension payments that had not been updated to reflect the aging population. 

3) Banks were over-leveredged by not having proper assets reserved to cover all of the debt that they were under-writing for #1 and #2.   They continued to overlend to artificially inflate earnings and balance sheets. 

Oil prices were the pin that popped the bubble, but it was inevitable.   

Banks have come a long way in their recovery, and some businesses have gone out of business, and balance sheets have begun to look better.   #2 is looking much healthier, but it came at a high cost in unemployment.  #3 is still holding a lot of bad debt, and even good debt is looking worse, so I'm not sure that we're out of the woods there.   #1 is where I'm most concerned.    I think that the average American is still ridiculously leveredged, and the increasing unemployment is not helping things.   This is putting increasing pressure on #3 that will topple what seemed like stability.  

The American consumer is not yet in a position to consume, and I think it will take years before Americans in aggregate have unwound their debt far enough to resume healthy increased spending. 

 

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#13) On October 02, 2009 at 5:43 PM, gman444 (29.11) wrote:

Dwot---one factor you may want to add in your formula is the consequence(s) of decades of overconsumption in the US.  The rates of obesity and related health problems are staggering--you don't have to be old to be unable to be productive.  I don't have stats, but I'd bet that the medical disability rate has increased considerably in the past 30 years or so. 

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#14) On October 02, 2009 at 6:39 PM, stan8331 (97.44) wrote:

I don't think the movement of the baby boom generation toward retirement will be a major stress due to a reduction in the size of the labor force, because many will continue to work, either full or part-time, well past the nominal mid-60's retirement age.  The massive stress will come from their healthcare costs as they continue to age. 

That's why it's so critical to reduce the huge percentage of GDP we're currently devoting to healthcare.  Unfortunately, actually lowering healthcare expenditures is something neither political party has shown any real interest in.  Of all the problems we face, I think healthcare costs for the baby boom generation are the thing most likely to push us into a real Depression.  All this jabbering back and forth between Democrats and Republicans about a govenrnment health plan is beside the point - if whatever we do fails to drastically reduce healthcare costs, the country will end up going bankrupt.  

But I don't believe a Depression is inevitable, or even likely.  America has always shown great resiliency and resourcefulness when faced with daunting challenges.  Yes, we have gotten very fat and lazy, but our fundamental character has not been obliterated.  We are still willing to sacrifice when the cause is pressing and just. 

 Right now, basically all our politicians are afraid to tell us that we can't have our cake and eat it too.  Nobody want to be the messenger who gets shot for his trouble.  But I think leaders will eventually find the requisite courage, and that the people will respond positively to a compelling, sincere message.  America's best times are not behind us - we still have many competitive advantages over the rest of the world.  We only need to accept that a resumption of healthy growth will require a degree of sacrifice from everyone, and I believe that can happen. 

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#15) On October 02, 2009 at 8:15 PM, dwot (97.03) wrote:

EV38, I use the term economic development in a very general sense and technology is a part of the economy, is it not?  I think the ability to profit from population growth is under estimated and population growth isn't following a pyramid anymore.  Technology is not making the same percent gains it used to, and some technologies seem to have reached the limits of the products available.  Take mining, how much bigger can they build trucks and cranes, etc.?  At one time they were probably able to build new machines that doubled and tripled capacity.  Now I bet they go for single digit percent improvements.  Technology is like that in so many areas.  Sure, there are new areas with huge improvements, but resources aren't going to anything like the improvements of the past.

 dfndr, your statement about people aging at the same rate has nothing to do with how demographics affect the economy when the birth rate is enormously different in different periods and age cohorts are different sizes.  We are moving from a pyramid for the aging to a cylinder and we still have policies to support the top as if there is still a pyramid below and that is an enormously growing burden as the ratio of workers to support the aging population declines.

JaysRage, good summary.

gman444, I think health insurance is going to be a bigger issue.  I doubt very much there is even half the reserves necessary to deal with what people think they've paid for.

 

 

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#16) On October 08, 2009 at 7:42 PM, Teacherman1 (62.19) wrote:

Hey, I'm old and I still support myself. Does that help?

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