Tuesday, January 20, 2009

A Depression---Right on Schedule

I am getting so sick of people blaming the current financial situation on Bush. He is no more responsible for this than Clinton was for the minor recession Bush inherited, or the elder Bush was for the recession in the latter years of his term, or even than Carter was for the multiple economic problems during his term.

Economic booms and the following panics/depressions/recessions/slowdowns--call them what you will--happen mainly because of demographics. This fact was explained in Harry S. Dent’s book The Great Boom Ahead. This book explained how the rise and fall of birth rate throughout American history coincided very nicely with economic cycles 45 years later. Dent attributed this to the fact that a family reaches it's peak spending years about when the parents reach 45, or maybe 47 for a generation that began their families a little later. At that point, families break up and new families start. New families don’t yet have the buying power their parents have, and so spend less. Since consumer spending accounts for at least two-thirds (if not three-fourths) of the economy, by tracking the number of births, you can track the number of 45-47 year olds, and you can tell when your economic peaks and valleys will be. That is Dent’s theory. Other factors may drive the severity, or hasten or delay the event, but demographics is the main driver.

In The Great Boom Ahead, Dent showed charts of birth rates, and the peak of the baby boomers happened in 1961. Using 47 as the peak spending year for a generation that tended to marry later, he showed that 2008 was a possible start of an economic downturn, a severe one, that would last until 2016, corresponding to 47 years after the uptick in births when the youngest wave of boomers began having children.

Could all this be true? Consider the severe depression we had in 1973-74. The Arab oil embargo and corresponding spike in gasoline prices probably had something to do with that. But 45 years before that was 1928, right before the start of the Great Depression, before dads and moms might have decided they couldn’t afford to have more kids, and at the end of a lesser baby boom that followed World War 1. What about the 1980-82 recession? Forty-five years before was 1935, the darkest part of the Depression, when the birth rate was fairly low.

I'd need charts in front of me to do more correlation, but Dent has convinced me. Now, I know that he fell out of favor in the '00 decade, when he tried to apply his theories of economic booms and busts to specific target amounts for stock indices. Shame on him for not sticking to what he knew best. Events have turned out to prove him correct on his basic assessments.

Since birth data is available in the USA only since 1911, that can't be used to assess the cause of the Great Depression. Or can it? If data isn't available, at least we know history and can speculate with some reasonable accuracy what events did to the birth rate. The Wall Street collapse was in 1929, the depression began probably in 1930. Count back 45 years before 1930 and you have 1885--twenty years after the end of the Civil War, and probably at the peak of the baby boom that surely must have happened after that war ended, the war that had the highest percentage of our population off on the battlefield. The Civil War boomers, if I may call them that, probably had their peak birth rate around 1885; I bet this was followed by a number of years, perhaps as long as a decade, of reduced birth rate, until their children began having a lot of children. Hence the number of 45 year olds must have greatly diminished around 1930. And voila, a depression that last a decade, ending as much from the increasing number of adults approaching age 45 as the outbreak of war, and less to do with New Deal meddling, possibly even overcoming New Deal meddling.

So, the current economic situation is not due to anything George Bush did or did not do. It is due to the end of peak spending by the largest wave of Baby Boomers. And it is right on schedule. Look for the USA to climb out of it around 2016, again right on schedule. And all the tinkering that GWB has fallen into, and that Paulson is wrecking with relish, and that Obama plans to expand with glee, will have no positive impact.

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