February 7, 2009

Why Can’t We Just Spend Our Way Out of Depression?

By admin

The Canadian government has made a commitment to spend an unprecedented amount on ‘stimulus’.  So has the US.  The British government has bought many banks (along with the US) and will likely buy several more over the coming months.  The EU has reduced lending rates in order to encourage people to borrow, spend and borrow some more.

Through this process, the world’s economic ‘power houses’ are going broke and are printing unprecedented levels of money with an intent to encourage people to spend again.

There’s just one problem.  It won’t work.

Someone needs to remind them of a simple concept:  demographics.

During the 1950s, we saw a unique boom in suburban development and home building.  Why?  The Boomers were coming home in the swaddling clothes and their parents were in a massive nesting mode.

In Canada, the 1960s and early 70s saw the growth of programs, particularly social programs devoted to teen Boomers and their desire to get an education, start taking care of themselves and repeat the cycle all over again that their parents had started 15-25 years earlier.

Universal medicare, education and child support programs quickly became the norm and the best way to buy votes by leacherous politicians hoping to get into office and to stay in office.  As the programs expanded, the world’s leading economies – Canada included – saw their debt flower into surprisingly large numbers.  Conservatives will never forgive the ‘Pearson-Trudeau’ era because they felt their government had sold them out … and that’s exactly what happened.

But at least they had a plan.  I’ll come back to that in a moment.

Again, in the 1970s, we saw other economic shocks.  Gas prices spiked, not once, but twice.  First in 1974 and then again in 1979.  Why?  Well, there were thousands of reasons why, but I attribute a lot of the opportunity for OPEC with one thing:  demand.  As Boomers were graduating from their BAs and MAs, they wanted the one thing that America seemed to be good at producing:  a car.

All of those cars and all of those roads, in addition to all of the other by-products that came from oil (plastics, etc) meant the demand for oil exceeded demand for nearly any other commodity.

The oil shocks reached their peaks in 1979, but the prices of all other commodities kept climbing because Boomers were after another thing:  a house that needed lots of aluminum, copper wiring, rugs, furniture, 2×4 studs and so on.  More importantly, with housing demand, came unprecedented levels of demand for loans.  The cost of borrowing skyrocketed and interest rates in the range of 15-20% were not uncommon.

Phew.  It doesn’t end.  Once they bought their houses, they started saving and leveraged some of that capital and began to pump it into the market.  They kept pumping until we had our first massive correction in 1987 and another one in 1991.  The world economy didn’t really emerge from the first stock shock until the mid 1990s, only to be beaten down in 1999-2000 by the exceptionally irrational Dot-com boom/bust.

And then life seemed to happen to all of us while the Boomers were making other plans.  They kept saving, they kept borrowing and they kept spending, leading the charge for all of us as we entered a fantastic era of growth and prosperity.

Like all life cycles, that of the Boomer must come to an end.  The Boomers who haven’t retired are starting their retirement plans.  As they pull what little money they have left from the plummeting stock markets, they are forced to re-evaluate their intense levels of consumption and demand for anything and everything and focus on how they’re going to put food on their tables for the next 10, 20 or maybe 30 years.

Houses are being sold for smaller, more affordable (and probably downtown) locations.  Cars are getting smaller and, in many cases, they’re not needed at all.  Mainstream publishers are suffering as old hippies finally start to ‘tune out’.

So let’s not fool ourselves:  part of what we’re experiencing today (and I’m sorry … I don’t have numbers to show exactly how much) is just another stage in the long, continuous cycle of the Baby Boomer.  As they retrench, the world retrenches with them.

That’s why governments are just plain stupid if they expect that throwing a bunch of cash around is going to make one iota of difference in the grand scheme of things.  We’re entering the retirement of our vast, seemingly ever-expanding economies and the Boomers are leading us down the path.

What’s the solution?  Manage our expectations and start managing quickly.

OK … What’s the REAL solution?

  • Start creating an exit plan that includes a genuine way to manage economies, pre and post-Boomer.
  • Start building retirement homes instead of more roads.
  • Implement extremely efficient mass transit that will transport Boomers from one offspring’s home to another with little disruption or stress as part of the program.
  • Ensure that you have a realistic downtown intensification program, regardless of what size your city is, because Boomers will want to get from A to B as quickly and privately as possible.
  • Create public policies that give benefit to people who volunteer their time.  Volunteerism will become the greatest social activity over the course of the next 20 years.  If we don’t make it a part of our economy as well, we’ll be vastly undestating what’s happening in our country.

From a tax policy perspective, you’d better start thinking of ways to extract some of the massive wealth that’s about the be transferred from one generation to the next.  If policy makers don’t have the spine for that, at least have something in place that will capture the spending of the new-nouveau riche Echo generation.

What are your thoughts?  I know I’ve simplified the argument and I haven’t provided a single data point of research to back up my claims, but I feel like I’m on solid ground.