In June of 1995, in Seoul, South Korea the Sampoong Department Store was packed with thousands of shoppers. Just after 6PM, the roof gave way, and a large portion of the 5-story structure pancaked into the basement. About 500 people died there that day, another 1000 were injured. The tragic collapse was due to poor planning, construction, and corruption. A building not only has to be designed correctly for the loads and stresses to be placed on it, but that planning must actually be implimented.
How does all of this relate to the economic future of our country? To put it simply, our current level of economic growth and prosperity (the load to be held up) is based on a very real set of supporting principles (load-bearing structures) which hold up the load, and help it resist the regular buffeting forces of bumps in the road. I believe that many of those load-bearing structures have been moved, altered, or weakened, in such a way that we will have to take some of the load off the building, and rearrange the rest in order to keep ourselves from a collapse. Here are some of the structural supports that have held us up in the last century, and how they are changing:
1- Population Growth. World population growth rates have been in decline for 50 years, with Europe leading the way. The US still has the highest population growth rate of any western country (due to higher immigration), but it too is significantly slowing. Growth is important because the more people live in this country, the more people need goods and services. If we had another major baby boom for the next decade or two, the demand for baby goods and children's goods would shoot up, spurring those industries, etc. But when growth slows, there are fewer and fewer new customers for products and services every year. That means less economic growth. Additionally, it means less government revenue growth as well, which has implications for national budgets and deficits.
2- Demographic Shift. The baby boomers are just now starting to retire. Take a look at the chart above and look at those big humps in the middle. Those are the boomers. As they all start to go into retirement, a few very important things happen. First of all, when they stop working and start living off their retirement savings, they stop putting money away every month into stocks and bonds, and start taking that money out so they can have a monthly income. Second, more of them draw on Social Security, which is a huge problem we're all going to have to deal with very soon, because we can't even come close to paying what we owe on that. Third, as people get older they need more medical care, and will spend more of their income on medical care than they did before, and less on other things. That bodes better for the health care sector, and worse for anything discretionary in nature. And lastly, old people die at a faster rate than young people, putting even more pressure on the growth problem I outlined in point 1.
3- Government Theft. More and more of our money is going to be taken by Uncle Sam. With an $11 trillion debt, trillions more pledged for this year's bailouts, trillions that will probably go to Obama's version of the New Deal, and over $1 trillion in deficits projected for next year alone, the debt burden of this country is shooting out of control. Let's be clear that in one way or another the country's spending needs to be paid for. Let's look at the options, none of which are pretty:
- Borrow. The country can issue more debt, on which it has to pay interest. Last year the government spend about $500 BILLION to pay interest on our national debt. At almost $1700 per person in this country, that's a lot of interest to pay. But with the national debt ballooning, you can rest assured that interest bill will go up, WAY up. That takes a bite out of government spending unless more revenue (taxes) are brought in or more spending (programs) are cut.
- Cut spending. This is how must of us try to get out of debt. But lower government spending would of course drag on the economy, and the government certainly doesn't want to do that, in an economic downturn especially. This is the long and painful way out as I see it, but the least likely one to happen.
- Increase taxes. We all pay more of our heard earned money to Uncle Sam. This isn't just income taxes, but also in the form of higher prices on products (companies have to pay taxes too). Taking more money out of the pockets of consumers definitely slows down the economy, as consumer spending accounts for 2/3 of the country's economic growth. It's hard to make a case for raising taxes when the economy is in the dumps and people are out of work.
- Monetize the debt. Basically this is just printing money. Let me explain. Let's say the government takes in $90,000 but needs $100,000 to do what it does, much like the deficit we're in now. So it issues $10,000 in bonds to the public. But then the government doesn't want to (or can't) pay the additional interest on that $10,000 so they decide to monetize it. They fire up the printing press, print themselves $10,000 in money, and use it to buy back the bonds from the public. So now they have the $100,000 they need, but the total amount of money in circulation has climbed by $10,000. As you may know, this means inflation, and now everybody's dollars are worth a little bit less, and buy a little bit less, and thus the prices you see at the store (and for every other physical material) actually move up. If you end up with lots of inflation, you make everybody more poor. See my article from September 5th to see some effects of too much inflation. So the problem here is that we end up with high inflation to try and wipe away our debt, and in the process we all become poorer in real terms, which is not a very desirable for anybody.
Are there any answers? I believe there are, but that it will take pain and hard work to get there. I believe we can take some load off our damaged building, repair the building a little bit, and rearrange what is left, so that the building does not tragically collapse on us. I believe that it will require personal responsability, and a major shift in attitude. It would be very hard for a while, but we're going to have to do it now or later. I believe our leaders should lead us by telling us that we need to spend less, save more, be ready for a rainy day, not by pandering to every group of people that walks through their doors. They should do what their constituents tell them, but they should also be active in informing and extholling them to do things that will benefit them and everyone else. They should be urging us to be conservative and frugal in our personal spending, and lead by example in our government spending. But I've not seen more than a handful out there who have the backbone to do not only what is necessary, but what is morally right AND necessary to get our contry back in the right direction.
