Is Our Economy on an Unstoppable Demographic Slide?
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
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