Is Our Economy on an Unstoppable Demographic Slide?

January 25, 2009 by  
Filed under Economics

Economic prognosticator Harry Dent was a guest of Neil Cavuto last night on the Fox Business Network.  Dent is one of those “experts” who sells his opinions to investors and financial advisers in the form of subscription newsletters and the like.  I generally listen to what the hired guns have to say more as a matter of curiosity than to be educated.   Dent, however, said some things that seemed to make some real sense.  He clearly is no dummy, having been well educated in economics and finance, with a couple of best selling books to his credit.

The Life-Cycle Age Wave Theory

To summarize, Dent is a strong believer in life-cycle based economics, in which a national economy and its equity markets are driven by family and demographic spending patterns.  According to the traditional family spending cycle, young adults spend relatively little but ramp up as they have children.  Spending for these adults peaks as their children leave home then slowly starts to decline in the last 15 years of working life.  This spending pattern repeats, according to Dent, in 40 year cycles.   (This is also known as the “age wave” theory.) 

Dent believes U.S. baby boomers’ penchant for debt-driven consumption has ended and that what we are now experiencing is the beginning of the end of the cycle.  In other words, baby boomers are on a path of decreased spending that will continue for the next 12-14 years.   According to Dent, the effects of this “demographic slide” on our economy are unstoppable.  The economy and markets will continue to decline until perhaps 2011-2012 and then remain in a depressed state for another 8-12 years thereafter.  Yikes.

The closest parallel to our current demographic slide can be found in the Japanese economy from 1991-2005.  I hope Dent is wrong because during that period the Japanese stock market lost 80% of its value and its housing market fell 60%.  All of this occurred in spite of near 0% interest rates and repeated goverment stimulus plans.  Sound familiar?  Needless to say, Dent predicts that none of the Obama stimulus proposals can work. 

Please don’t take this post as an unqualified endorsement of Harry Dent and his predictions.  He’s been right before (he generally predicted the Japanese economic malaise of the 1990’s as well as the market peak in 2007) but also had some misses (Dow to 40,000).  (For more on Dent, you can visit his website but be forewarned that he is in the business of selling stuff.)

The Mr. ToughMoneyLove take on Dent’s “demographic slide” theory

First, as a baby boomer, I personally have the spending decline mindset that Dent describes.  Even though we have more disposable income than at any other time in our married lives, Mrs. ToughMoneyLove and I are cutting back and saving more to better prepare ourselves for retirement.  In fact, there is an increased sense of urgency in our spending decline, as a response to severe hits to our retirement nest egg.

Second, whether you like us or not, baby boomers are a powerful economic force.  There are 57 million of us.  According to the AARP, age 50+ Americans control 70% of the disposable dollars in the U.S. and purchase more than 50% of all new cars.   The collective annual spending power of U.S. baby boomers is approximately $2 trillion.  According to Nielsen research, baby boomer households account for 55% of sales of consumer packaged goods.  With all of this spending power going into an extended downhill slide, you can imagine the sustained negative impact on our economy.  And if Dent is right, there really is nothing that can stop it.

Third, right now our markets are fear driven.  That fear has driven a lot of money out of the market.  Even after the fear subsides, boomers are unlikely to move back in with full force.  I doubt that other investors can fully overcome the absence of boomer spending power at this point.  It will take a while, perhaps as long as Dent predicts.

Harry Dent has a new book out (The Great Depression Ahead) that I now think I had better read.  He has scared me into it.  If we are in for a declining and/or flat stock market for another 12-14 years, I need a Plan B.

What do you think of Dent’s demographic slide theory? 

Photo credit:  Ryan von Schwedler

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11 Responses to “Is Our Economy on an Unstoppable Demographic Slide?”
  1. Boss says:

    Hi TML,
    Continue to enjoy your writing very much. After reading The Coming Generatinal Storm and The Forgotten Man I am now looking into the gold market. Any suggestions how to approach precious metals? I have great respect for your opinion. Boss

  2. Interesting- I have a friend who gets those types of newsletters from his Dad after he reads them- many of them reference the similarities between the US and Japan’s long slide and have a very negative outlook for the next few years. Some of them correlate other similarities as well. But I don’t think anyone really knows. I do believe Japan has always had less of a consumer society though (they historically have always saved more). I do think things could get worse before they get better, but hopefully things will start looking up before 2012-yikes! The key is to pay attention, so as soon (or even before ) things start to happen, you are already going to Plan B as you mention. Look forward to hearing what your Plan B is.

  3. TStrump says:

    I really like Dent’s books.
    Just finishing up the ‘The Next Great Bubble Boom’ and will get his new book soon.
    I think his arguments are very appealing.

  4. TMN says:

    I’m not familiar with this particular commentator, but these types of arguments in general seem to leave out the prospect of immigration. Even with the current economic downturn, there’s a steady stream of young foreigners eager to bring their families here and settle in. Assuming that the spending patterns you mention don’t stop at cultural boundaries, there seems to be a ready-made way to create another wave of the type of spending we would need to recover on demand.

  5. Boss: I am not a huge gold fan (see this earlier post on gold as an inflation However, I do own a commodities fund that has some precious metals in it. It has not done well in the last 8 months. I am considering taking a small position in GLD which is by far the largest ETF that is 100% backed by gold bullion. That’s where I would look.

  6. RC: I am still working on a Plan B but it will probably include adding a small position in a gold ETF.

    TStrump – Are Dent’s books well written or just interesting in what they say?

    TMN: I think immigration can help with our SS and Medicare problems but I’m not so sure that they will have enough disposable income to compensate for declining spending by boomers.

  7. Strabo says:

    This theory of waves/cycles would make sense if children were only born every 15 years and things would happen to all of them to the same time (all of them having children at the same time and retiring at the same time). But children are born every year – which means that the fabled “baby boomer” are constantly replaced. A small part of them might retire and spend less this, but for them about the same amount of people now spend more because they have kids this year. The same repeats next year and so on.

  8. kitty says:

    Very interesting. One thing that I question though is that the article seems to imply that it is baby boomers who are more likely to overspend than the next generation. But is this really the truth? If the amount of credit card debt increased in the last decade, were it the baby boomers who are responsible or the younger crowd?

    @TMN – I think immigrants for the most part are more careful with money than native-born Americans. It’s purely anecdotal: based on the fact that I am an immigrant and judge by my circle of friends. At least some things – like eating out all the time – look more like an American habit. In many other countries including the one I grew up in eating out is a special occasion and cooking or taking a lunch from home is more of a norm. It’d be interesting if someone collected the statistics on spending habits of immigrants vs those born in the US.

    @Mr ToughMoneyLove – thanks for the link to the very informative post on gold. A couple of my friends who have been right in the past (e.g. sold stocks in 2001 and 2006) are fond of gold; another friend who also has been successful bought coins in the 90s but it considering selling now). I am reluctant to buy gold at these levels especially since I just don’t see how is anything other than perception of its being valuable is driving its price. I do have a tiny (really – only 2K) amount in GLD, although I did transferred some of my 401K in commodities fund in November and am buying more. I just don’t understand the attraction of gold: t’s not like any country is on the gold standard or will use gold standard at any time (and if this were to happen, could there be a confiscation like in 1933?).

  9. MasterPo says:

    For 20 years at least I’ve been hearing all sorts of doom and gloom about the aging baby boomers and how that will ruin the economy and country.

    While I understand your point, this is nothing new. It’s all been said before.

    ps- Why doesn’t someone do an article about my CRUSHING tax burden?? Between my Federal, State, SS, and Medicare tax I loose 37% of my pay before I even see it. With what is left I have to pay sales tax, use tax, excise tax, import tax, disposal tax, port tax, access tax, toll tax, energy tax, waste tax, licenses/permits/registrations, and STILL somehow find the money for food, shelter, savings(LOL!) and more.

    I need a printing press…

  10. Chris says:

    I’m another reader way down under in Western Australia who enjoys your blog. Approaching the 50 year mark, I also believe there may be a decline in spending and consumption as more and more people realise the striving to get more stuff provides very little lasting satisfaction for all the effort involved. For myself I want to be mortgage free, I have no other debts, and use this freedom to do volunteer work overseas, rather than acquire more debt that has to be paid for, and no freedom to do what you want.

  11. I’ve talked a bit about why I think gold is not the be-all and end-all investment, and why people shouldn’t throw their money into it thinking it’s ‘safe’.

    I think this demographic slide theory is interesting, but here’s to hoping it’s just history that won’t repeat itself.

    I’m now interested in learning more about it. Thanks!

    For me, I think it’s just because we’ve reached the pinnacle of what we can handle. It’s been too long with the U.S. having a declining population (baby boomers now nearing retirement age and we’re having less and less children), and each person overspending more than they could afford with the usage of credit and mortgage refinancing.

    If you look at Europe as an example of where the U.S. would be, had we not introduced easy forms of credit into an economy, we could start to see other factors that play into why we’re in such a bind right now. (In Europe, no one has a credit card, they all cook at home, they don’t go out often, they don’t over spend because they can’t.)

    I think it’s just the country trying to re-adjust itself out to deal with its new reality (not over spending on credit, saving more, having less children, boomers retiring and spending less), but it’ll take a while before it stabilizes to a more realistic economy.

    We were living on a cloud before, and now we’re coming back down to Earth.

    Great blog.

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