Wednesday, August 26, 2009

The Worst Generation and the Dead Parrot

Ted Kennedy died and so with him some of the best attributes of an otherwise dismal generation. I refer to the Baby Boomers, an insufferable lot who gave us the likes of George W. Bush, Bill Clinton, and myself.When you look around at American society and its many short comings keep us in mind whether its schools that teach nothing and resemble medium security prisons or mile after mile of McMansion subdivisions and strip malls.Now it appears that we will drag down our offspring and their progeny for years if not decades to come. Dave Cohen fills in the blanks in this illuminating if not depressing article. Here are some highlights if you can call them that:

"I was born in 1953, which makes me a post-World War II “Baby Boomer” (those born between 1946 and 1964). First off, I want to issue a blanket apology to younger cohorts (generations X & Y) for the excesses of my generation. No generation in the human history was given so large an opportunity to ravage the Earth through excess consumption, and Boomers did not squander that opportunity. No generation has adversely affected the welfare of future generations as the Boomers have. So much for Woodstock and the Age of Aquarius...

"I’m sure you’ve heard the expression “spend money like there’s no tomorrow.” That’s precisely what the Boomers did. It was an unprecedented debt-fueled spending spree made possible by easy credit. See my Don’t Buy Stuff You Can Not Afford for some details. As Bill Bonner put it at the Daily Reckoning, that household debt now “represents spending that has been taken from the future.”

The first Boomers reach retirement age in 2011. Business Week reports that it has long been expected that aging Boomers would cash out and decrease their spending. But the real Big Chill arrived a few years early.

When 79 million people—nearly a third of Americans—start spending less and saving more, you know it won’t be pretty. According to consulting firm McKinsey, boomers’ conversion to thrift could stifle the economy’s hoped-for rebound and knock U.S. growth down from the 3.2% it has averaged since 1965 to 2.4% over the next 30 years. “We would have gotten here in 5 or 10 years as boomers retire, but [the economic crisis] pushed it up,” says Michael Sinoway, managing director of consulting firm AlixPartners. “Now [companies] are scared things won’t come back”…

Not so long ago, boomers were never going to die. Filled with a self-confidence born of unprecedented prosperity, many thought rising markets would assure their future. If the economy faltered, well, it would rebound more strongly than ever, as it had so many times before. And so boomers spent—and borrowed—as if there were no tomorrow.

Tomorrow is here. With retirement looming, the Great Recession has put Boomers into emergency thrift mode. Unsurprisingly, McKinsey Quarterly reports that most of them are unprepared for their golden years.

The low savings rate and extensive liabilities of the boomers have left about two-thirds of them unprepared for retirement. We reached this conclusion by assessing the level of post-retirement income and assets that the boomers would need to maintain 80 percent of their peak pre-retirement spending.This analysis—based on net financial assets such as bank deposits, stocks, and bonds, minus credit card balances, car loans, and other non-mortgage debt—indicates that 69 percent of the boomers are not prepared to maintain their lifestyles. The inclusion of home equity, whose value is declining in many regions below the levels prevailing when we undertook our analysis, only reduces the proportion of the unprepared to 62 percent.

The home equity situation is not improving. According to American CoreLogic, more than 15.2 million (32.2%) of all mortgaged properties were in negative equity in June, 2009. (Negative equity means your mortgage debt exceeds the value of your house.) An additional 2.5 million homeowners were nearly underwater. Although the rate of decline in home prices has slowed, it is not at all clear that we have reached the bottom in the housing market. Beyond home equity, Boomers’ net worth has taken a huge hit as asset values fall. Many Boomers will have to work longer than they anticipated.

Economists and demographers say Boomers will need to replace some $2 trillion of wealth lost in retirement funds [e.g. 401k plans] during the recent stock meltdown, plus the billions in home equity that have vanished in the housing crash. Government policy makers will have to figure out how to provide for a huge cohort of people who could live well into their 80s.

McKinsey found that the Boomer spending accounted for an astonishing 78% of GDP growth during the “bubble years” from 1995 to 2007. Much of that spending will disappear. The “generational crash” will be a drag on the economy for years to come."

"In this and other columns I have cast doubt on a prosperous future for the United States. Since 1983, the American consumers—rhymes with Boomers—spent tomorrow’s wealth today. GDP growth depended on ever-greater borrowing and was thus systematically inflated. All this time America’s industrial base declined (moved to China) and its (no longer cheap) imported oil dependency grew to ~66% of total consumption. To keep the party going after 1995, the U.S. blew two enormous bubbles, one in the NASDAQ and a much larger one in housing. We used those bubbles to float up to the mountain top, where all that thin air made us giddy. Now we’re sobering up as reality propels us down the other side.

The boom times are over. A secular change has now taken place. The U.S. will look more and more like a Third World country. In health care, compared to Canada or Europe, it already does. Thus our prospects for another economic boom in the next decade are like those of Monty Python’s famous Norwegian Blue parrot—

“This bleeding parrot wouldn’t boom if I put 4 thousand volts through it! It’s bleeding demised… It’s not pining for the fjords, it’s passed on. This parrot is no more. It has ceased to be! It’s expired and gone to meet its maker. This is a late parrot. It’s a stiff! Bereft of Life, it rests in peace! If you hadn’t nailed it to the perch, it would be pushing up the daisies! It’s run down the curtain and joined the choir invisible. This is an ex-parrot!!!”

American Economy 1983-2007: Requiescat in pace

Forget about a “V-shaped” recovery or Ben Bernanke’s “green shoots.” This parrot is no more, it has ceased to be."

Yeah I'm sorry too.

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