Saturday, September 3, 2011

The Baby Boomer Economy | Political Blog

Here we are in 2011, the stock market has failed to consistently go above where it was in 2000, housing values have been dropping for 5 years, and unemployment has been increasing for 4 years. None of it seems to be improving, Why is this? Is Washington to blame for failed economic policies? In some respects, yes. Would a different approach to our economy over the last 10 years have changed how severe this downturn has been? Could it have been far worse? What can we do to help improve our economy?

These are the questions we all are facing everyday living in the US and in our stagnate economy. While housing, politics, and war are easy reasons to why our economy has failed to grow, they are not the main reason. The main reason we have the economy we do today is because of our baby boom generation. Every positive as well as every negative to our economy can be attributed to the demographic anomaly that the boomers are. That generation, along with medical advancement, and government policy have created a demographic anomaly that has dominated our country since the 1950's. The boomers are the reason for our unprecedented growth through the 80's and 90's, control our economy today, and will determine how successful our economy is for the next 30 years.

Through the boomers lifetime, you can see how they have affected economic policy, expanded our money supply, and the demand in our country, and how they affect our economy as they age.
The end of World War 2 ushered in a time of amazing prosperity for America. Soldiers came home and began having families. Our country expanded and our economy grew by leaps and bounds. From 1946 to 1964 over 80 million children were born creating enormous demand for products and housing as well as allowing the federal reserve to print more money. Currently, the federal reserve is allowed to expand the monetary supply for every child born in the US. More births equals more dollars added to the system. This leads us into the first great effect of the baby boom generation. In the 1970's and 1980's the boomers were starting to have families and came into their own. They needed products for their families, homes for their children, and they had the sheer numbers as a generation to supply all of it. However, because you had such an increase in demand our monetary system could not keep up. Inflation ran rampant and the fed was virtually helpless to stop it. The fed was able to combat the demand by raising interest rates to 15% in the early 80's to try and cool it.
Again, this demand and inflation was created by the sheer size of the boomer generation. Individually they did not consume more than anyone else, but as a group of 80 million strong they overwhelmed the system with demand. Fast forward to the 2000's, the boomers are no longer needing large houses and all the products and services that a family needs. Today in 2011, even with interest rates near zero, inflation is relatively low compared to the 6% and 7% they had at times in the 70's and 80's when they had 15% interest rates. Why would this happen? No demand. The boomers are now heading toward retirement. Some may ask, why aren't the younger generations consuming as much? As individuals they are not consuming less, but generation X is far smaller than the boomer generation.

Generation X, those born from 1964 to 1982 are much smaller than their predecessors. While 80 million people were born during the boomer years, only 60 million were born during the Generation X years. This has created a vacuum in demand that we have only really begun to see these last few years, but has been affecting our economic policy for over a decade. Generation X has had to pick up after the boomers and frankly don't have the numbers to compete in the wake of such a large demographic. One example is housing; housing expanded rapidly in the 80's and 90's and early 2000's. Early on it was demand created by the boomers having their own children, and then later in the 2000's it was demand created by loose regulation in Washington over the types of loans that were available. The general public became so use to owning homes that when prices increased everyone felt they still deserved a home. Negative amortization loans, adjustable rate loans, and interest free loans were created and allowed by the government. There was also zero overcite on whether people had income to afford the homes they were buying. This created a large false demand for housing because it was so cheap to get into a house. Had the government not originally allowed all of that to happen, housing demand still would have dropped like it has today, we just would never had seen the huge run up in prices along with the huge drop. Boomers, who are no longer having children and don't need as big of a house were replaced by generation X, who as a generation are 20 million people fewer. They don't have the numbers to fill the demand void created by the boomers. What you get is a housing collapse, partially created by government policy, but also created by lack of demand from a smaller generation of families.

The government lowering interest rates on everything also created false demand for products and services across the board through out the 00's. Then there is the little known fact that if you add up our deficit spending over the last 10 years it accounts for all of our yearly GDP growth numbers. In fact, our GDP has shrunk 1.2% in total since 2001 if you take out the government's deficit spending. The government has been propping up our economy for 10 years with deficit spending and lowering interest rates. How did we get to this point of such poor growth? Medical advancement and government policy came about at the wrong time to create an anomaly in our demographics that will continue to affect us well in to the 20's and 30's.

In 1960 a new medical advancement was approved, the birth control pill. The pill allowed for people to have sex without worrying about pregnancy, far less than they ever have before. Birth rates, soon after the invention of the pill began dropping dramatically. The end of the boomer generation in 64' gave way for generation X and much fewer births. At the time no one thought anything of it, but on the heals of the baby boom it accelerated the anomaly that would have already naturally been created. Then a second event happened in 1973 that further accelerated the demographic anomaly that has affected our economy. Abortion rights were passed that year, further eliminating more potential births in the United States. Those two events, along with the boom in births naturally slowing in the 60's, lowered birth rates from 25 births per 1,000 women in 1955 to less than 15 by 1975 and created a demographic that was lopsided. Early on in the demographic cycle it would be a boom to our economy, which the 80's and 90's were. Later in the cycle, without proper numbers to replenish that early demand the economy would sink and struggle. That is what we are heading into today.

The boomers are now only just beginning to retire and the simple fact is that generation x is too small to make up for the demand hole created by the boomers. We will spend the next 20 years dealing with what is left of the baby boomer effect and it will not be fun. The boomers, when they were young created large demand and large surpluses in productivity, housing, product demand, pension accounts, and job creation. Now that the boomers are retiring and the following generation is too small to make up for those deficencies, retirement accounts have and will be sucked dry, demand for products have decreased, the need for housing has decreased, and there are fewer jobs to provide to everyone. The reason we have seen relatively low inflation is because there is no demand, yet we have seen drastic price inflation in one area, the health care industry. Now that the boomers are retiring they are inflating the price of medical care with their enormous demand for it as they get older. This is just like the inflation created in our monetary supply in the 70's and 80's, the stock market inflation of the 90's and the housing inflation of the 00's. The boomers have been the cause for all of it. They didn't intentionally do it, it is just their sheer size as a generation which has created and enormous amount of demand and now no longer demand as much as they age.

Where do we go from here? Are there solutions to this in the short-term? From here we don't really need to worry about inflation, in fact a bigger issue is deflation. With lower demand and fewer people in the prime family building years, the amount of money in the system is actually decreasing and the federal reserve has spent the last 10 years pumping money into our money supply to keep prices from deflating. If the fed had not pumped money into the system over the past 10 years through lowering rates and stimulus programs, deflation would have been rampant and collapsed our economy even harder than we have seen to this point. Without the fed in place we would have had hyperinflation in the 70's and we would have seen a complete deflationary collapse right now that would have destroyed our system already. In the 70's and 80's the fed took money out of the system to cool it, where now for the last 10 years they have pumped money into the system to keep it growing and offset the demographic deficiencies that we have. If you are an investor, the stock market may be a dangerous place for quite sometime especially as the largest generation heads into retirement and change their allocations more into safer investments such as treasuries and bonds. This is actually a good thing for government debt because it will keep the price of servicing our enormous debt cheap, for now. As far as solutions to overcome this demographic anomaly, all we have is time. The government has been doing what it can to combat the demographic anomaly by dropping interest rates, instituting deficit spending to create fictitious demand, easing monetary and regulatory systems, but it all has pretty much been exhausted. The only solutions at this point are reduced funding for our social safety nets and to encourage education so that the following millennial generation will have the tools needed to innovate our way forward. We will spend the next 20 years battling a stagnate economy as boomers retire and become even more reliant on our social structure and zap demand away from our economy. The good news is that the millennial generation is just as big as the boomer generation and will create demand once again for housing, products, and services as they age and start having families. However, this will not happen for a good 10 to 20 years. Generation X is too small to make up for the lack of demand the boomers have left, while the millennials are too young and not in a position of power yet to generate the demand needed to move our country forward. Just like Japan in the 90's and 00's, just like China will face in the 30's and 40's, the US is in a demographic anomaly that will challenge us and persist for another 10 to 20 years. All we can do is learn to live with what we have and have patience as our demographics change back to a normal cycle of equilibrium.

Latest financial news -