Got demographics? (page 1 of 3)

An economy that consumes more than it produces is bound to collapse into insolvency, right? And by this rationale, the United States is due for a massive economic correction to purge these excesses?

It is highly likely that these economists will be correct about an eventual crash, though the reasons they list are effects, not underlying causes. And this inevitable crash will happen a little later than most economists think. Our forecast, at the H.S. Dent Foundation - and we have been largely correct thus far - is for our economy and markets to boom for the rest of this decade. But around 2010, the day of reckoning that economists have long feared is likely to finally come.

First, a little background. We acquired a fair amount of notoriety in the late 1980s by forecasting that the Japanese boom was quickly going to go bust and that the U.S. was on the verge of its own two-decade boom. At the time, every major financial figure, with the sole exception of Sir John Templeton, forecasted that the 1990s would be a miserable time for American investors and that Japan would soon be the preeminent world economy.

In our book, The Great Boom Ahead (1993), we forecasted falling interest rates, falling inflation, growth in productivity, and - perhaps most audacious given the economic mood of the day - we even forecasted that the Dow would hit 10,000 and that the U.S. government's unprecedented deficit in 1992 would turn into a surplus between 1998 and 2000 due to a massive increase in revenue. We will discuss below how we reached our conclusions and what all of this means for us today, in 2006.

Traditionally, there are two ways of explaining how an economy grows. An old-school classical economist would insist that savings and investment in productive assets is what pushes the economy forward - "Supply creates its own demand," as Say's law says. "To the contrary," a Keynesian might retort, "What happens when there are no buyers for what you have to sell? The key is aggregate demand that spurs production."

Turning Japanese: Production

In fact, both of these points of view are true to an extent, but neither sees the full picture. Production creates jobs, which provides income and gives the means for consumer spending, so classical economics certainly have merit.
Company profits are reinvested, and the virtuous cycle continues. But the other side of the coin, Keynesian economics properly points out, is that consumers must make decisions on how that income is used; will it be spent or saved?

Both of these views attempt to explain the "how" of economic growth, but neither explains the "why." And both are focused disproportionately at the macro level. It is the micro level - the extreme micro level where we find the answers.

The single biggest expense to the average family is children, and the older they get the more expensive they become until they finally leave home. The U.S. Government estimates that the cost of raising a child born today from birth through high school to be $211,370. Raising the standard two children would set an American family back nearly half a million dollars, and these figures do not take university education costs into account. It is this highly predictable spending by families that drives our modern, mass-affluent economy. This spending continues even during very difficult times, as the first half of this decade has shown.

Since the year 2000, Americans have suffered through one of the worst bear markets in history, a disputed presidential election in 2000, and the worst terrorist attack in American history, two subsequent wars in Afghanistan in Iraq, and a massive oil bubble.