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Flushing Money Down the Toilet

Posted by Larry Doyle on July 31, 2010 2:02 PM |

concept of flushing money down the toiletAre government stimulus policies and programs, which merely increase our ever burgeoning national debt, nothing more than throwing good money after bad? Many people believe so. Let’s navigate and and address that topic and others.

To this point at Sense on Cents, I do not believe I have ever addressed the topic of population growth in terms of overall economic growth. Well, I guess we truly do learn something new everyday.

Global population growth rates (note: not the actual population) have been steadily declining over the last 40 years. What does this fact mean in terms of our overall economic engine, global growth, and domestic deficit spending? Pimco’s Bill Gross addresses these topics in writing his August commentary, Privates Eye:>>>>

Observers will point out, as shown in the following chart, that global population growth rates have been declining since 1970 with no apparent ill effects. True, until 2008, I suppose.

The fact is that since the 1970s we have never really experienced a secular period during which the private market could effectively run on its own engine without artificial asset price stimulation. The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debt as a percentage of GDP from 150% to over 300% in the United States, for example. Lacking an accelerating population base, all developed countries promoted the financing of more and more consumption per capita in order to maintain existing GDP growth rates. Finally, in the U.S., with consumption at 70% of GDP and a household sector deeply in debt, there was nowhere to go but down. Similar conditions exist in most developed economies.

The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do. Prior deleveraging periods such as what the U.S. and European economies experienced in the 1930s exhibited a similar demographic with the lowest levels of fertility in the 20th century and extremely low population growth. Things did not go well then. Today’s developed economies almost assuredly offer substantially less population growth than the 1.5% rate experienced over the prior 50 years. Even when viewed from a total global economy perspective, population growth over the next 10–20 years will barely exceed 1%.

The preceding analysis does not even begin to discuss the aging of this slower-growing population base itself. Japan, Germany, Italy and of course the United States, with its boomers moving toward their 60s, are getting older year after year. Even China with their previous one baby policy faces a similar demographic. And while older people spend a larger percentage of their income – that is, they save less and eventually dissave – the fact is that they spend far fewer dollars per capita than their younger counterparts. No new homes, fewer vacations, less emphasis on conspicuous consumption and no new cars every few years. Healthcare is their primary concern. These aging trends present a one-two negative punch to our New Normal thesis over the next 5–10 years: fewer new consumers in terms of total population, and a growing number of older ones who don’t spend as much money. The combined effect will slow economic growth more than otherwise.

PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services. Until we do, policymakers will continue to wave their hands in front of the electronic eye – waiting for the flush, waiting for the flush, waiting for the flush, with very little success.

All very interesting perspectives.

LD

  • coe

    Bill is brilliantly spot on here, and the implications are alarming – I have read quite a bit about the decline of the birth rate in most of the western world (I believe the U.S. is now just a touch above or near what is called “the replacement rate”, while most all of Europe is in free fall – forget growth so necessary to help pull our economic fat out of the fryer!)…to tie those statistics into the consumption patterns of an aging population doubles the pain and exacerbates the anticipated results…let’s face facts – as we age, we consume less, both literally and figuratively, and for most of us, we become more concerned with the spiraling costs of health care, the downdraft of the housing market as it relates to valuation of our balance sheets, our own mortality in terms of acknowledging fewer future years of earning productivity, (for some) of the consequences of tax policies on things like dividends and capital gains and estate planning, and we develop an overarching fear of the “big surprise” – all of which contribute to a belated and somewhat desperate attempt to turn quite conservative in our spending – with an eye as to what we might leave our children and grandchildren. Take the concept a step further – If we dare to compare these birth rates with those in the “non-western” world, the contrast is startling – and, unless things change for the better on that front, the political and social service implications therein are daunting to contemplate – though there is no joy in hypothesizing just how much money we will have to spend on wars, defense, and entitlements – not the best way to “spend” our society’s time in the 21st century! Wake up everybody!!! It’s a bold, new world – and we need to stop trying to force others to embrace our political vision, and start to embrace these realities and get back to being productive ourselves!

  • Rob

    Excellent points by Gross. The last paragraph is the most important point; countries, espically the USA cannot spend our way out of this cycle via goverment programs that try to force spending or, and even worse in my opinion, accelerrate it from future quarters into the present. Instead, policy makers aka the Obama adiministration should focus on real job growth by having the government invest in growing industries such as renewable energy. Sensible growth policy that focuses on jobs will accomplish consumer spending without wasting taxpayermoney. Who knows, such policies might even lead to other accomplishments like lessening our dependence on oil and other fuels thereby increasing disretionary spending.

  • Sean

    Deflation!

  • fred

    Immigration as a growth industry? Policy development, infrastructure buildout, international sales and marketing effort. Let’s go after the best and the brightest and get all the illegals on the books!






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