Thursday, December 6, 2012

The Factors of Debt, Demographics, Technology and Globalization Mean That This Time Really Is Different ... A Most Challenging Economic Future Lies Ahead

For those longing for the good old days to return, forget it. The foreseeable future won't be anything like the past. Why's that?

For an answer, let's just consider the following four factors to see how things have changed: (1) debt, (2) demographics, (3) technology and (4) globalization.

DEBT -- Getting into debt is easy. Getting out means paying both the interest and the principal on the existing debt. Those payments restrict future consumer spending and investment. We can't spend the same money twice. Our debt burden is currently at historical highs.

DEMOGRAPHICS -- We're getting older as a nation. Now that more and more baby boomers are turning 55 each day, we've reached a tipping point. The baby boom has turned from long being our economy's friend into its enemy.

Simply stated, oldsters aren't as productive and don't participate in the work force to the extent that they did prior to becoming oldsters. Neither do they spend as much money on buying things, thus negatively affecting consumer spending. And demography isn't negotiable. It's a fact.

TECHNOLOGY -- We're replacing expensive workers with machines. We're also becoming much more productive in the workplace through the widespread use of real time information. For me, it's hard to see where the necessary growth in employment will come in this new technology and information enabled economy of the future.

GLOBALIZATION -- That's the kicker. We have a high wage economy in a low wage world as other countries are developing their economies to compete for a bigger piece of the global pie.

Another albatross is that U.S. unions are aligned with the Democrats and doing everything they can to "protect" existing and world leading wage and benefit levels in an ultra-competitive global marketplace. Reducing pay, however, will reduce consumer purchasing power, too. It's a rock and a hard place for the American worker who doesn't pursue a quality education. And getting a quality education in the U.S. today at an affordable cost is no slam dunk either.

So for those who are waiting for 'normal' economic growth and unemployment rates to return soon, don't hold your breath. The new normal economic growth may be closer to 2% than 4%. If that's the case, this growth shortfall will have a huge impact on our future economy and overall society as well.

Thus, this time is different as permanent structural changes to our national and global economies have taken place over the years. And four of them are biggies.

So if we keep running the same old plays from the same old playbook in the future, we won't be winning many games. Debt, demographics, technology and globalization have seen to that.

In other words, the future ain't gonna look anything like the past.

Bill Gross lays out four structural factors weighing on U.S. economy capsulizes the situation:

"Debt, demographics, technology and globalization are weighing on U.S. economic prospects, Pimco’s Bill Gross said Tuesday in his monthly newsletter.
1.) Developed global economies such as the U.S.’s are carrying too much debt. “As we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come,” Gross says.

2.) Globalization has sparked growth, “but if it slows, then the caffeine may wear off,” Gross warns.

3.) While technology has been a boon to productivity and therefore real economic growth, it has its shady side, he adds. “In the past decade, machines and robotics have rather silently replaced humans, as the U.S. and other advanced economies have sought to counter the influence of cheap Asian labor.”

4.) Gross points out that demographics are becoming a silent growth killer. “Almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark,” Gross says.

“This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced consumption. Those approaching their seventh decade need fewer cars and new homes.”"

Summing Up

Bill Gross is a very smart individual and the world's most successful bond manager. It's always worth listening to what he has to say.

He's a quick wit and entertaining writer, and I recommend that you click on his monthly investment letter hereinabove and read it for yourself. It only takes a few minutes and is worth the time.

While all of us may not like what he has to say, it's something we all need to hear.

This all reminds me of the following expression: Tomorrow is never today 24 hours later.

Thanks. Bob.

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