Perspective On The Future Economy

Baby Boomers are used to competing for everything. Their first grade class was the largest in history, making teacher attention-getting a competitive sport. Securing a coveted slot on the high school football team or the cheerleading squad was an all-out sprint. And, what about that first job? The waiting room was full of qualified applicants. Advancing in a large corporation was almost a contact sport. And the beat goes on. When “junior” was born, the best school was mandatory. A well-rounded after-school agenda was no less than soccer, ballet, band, orchestra, drama class, football, and swim team.

This post-war swell in the birth rate (it sounds so impersonal) had obvious economic benefits. A cornucopia of buyers of everything from houses to golf clubs to TV sets flooded the market. From the 1940s to now, the economic base has gone from manufacturing to consumer spending, which accounts for seventy percent of today’s economic activity. A robust economy resulted in job flexibility, career changing options, and opportunities for prosperity and growth for an entire generation. Those who were energetic and astute found success and a better lifestyle than most of their parents could have imagined.

As Boomers are beginning to retire and leave the work place, what is the encore, you might ask? Who will buy the flat screens, the new Chevy, and the latest, greatest digital, GPS-compatible golf clubs?

While not directly in line behind us, the Echo Boomers are thought to be 120 million strong. There is a noticeable gap in time, but this group will eventually drive housing growth and auto sales, key components of consumer demand.

Well-meaning and somewhat pampered, the Echo generation will inherit a digital, instantly communicating economy. Its members will also be the reluctant recipients of their parent’s spending spree. Deficit spending peaked in the late 1940s following the Great Depression and WWII with cumulative debt amounting to over 100 percent of gross domestic product (GDP). When the nation was jolted away from a currency based on gold supplies in 1971, deficit spending by our elected representatives began to accelerate and cumulative debt rose from just over twenty percent to near forty. Today, congress is preparing to launch our country into a new world of peacetime deficits not dreamed of by even the most reckless of our forefathers; it is projected to go as high as eighty percent.

This over-spending is financed by investors and foreign nations buying treasury bonds. One major concern is that these foreigners will stop buying bonds, making it difficult to keep the economic train on the track. Then again, demographic trends may play a role in this high-wire finance. Birth numbers reveal a surprising reality in other developed countries.              

Japan and Europe, for example, do not have an Echo population surge coming up behind the post-war generation. Population and job growth spurs consumer spending, and in the future will tend to make the U.S. good customers for foreign products, thereby stimulating foreign investment. Thus, the job growth in the U.S. will not be seen in these countries.

In the current environment, the housing recovery will be a key component to overall economic recovery. To that end, housing starts have been reported picking up lately from a near standstill in January. The current estimate is that 1.2 million new households are formed each year, and that number may accelerate as the Echoers become adults. After the sloppy credit practices of both Wall Street and congress are rectified, the housing market is poised to resume a healthy trend supplying these newly forming families with homes.

Adding up all public debt to include state and local governments offers another perspective for looking into the future. According to the CIA World Factbook from 2008, the United States caries this debt burden at about 60 percent of GDP, sandwiched between Sweden at 40 percent and Japan at 170 percent. Italy weighs in just over 100 percent while the U.K. is just over 40 percent. Many would argue that a better position on this list is like being on deck 2 of the Titanic.

I am reminded of the time not too far back, when I ran into my old friend Ben Franklin. You know, the guy who helped draft the Declaration of Independence and frame the U.S. Constitution. Ben was wondering how his work had turned out. I told him that things were progressing, but that democracy was a struggle, and it requires a lot of hard work to keep everything on track. “A democracy?” he queried. “We designed a republic, not a democracy. A democracy is where two wolves and a sheep decide what’s for dinner. Democracies aren’t permanent by nature, and only exist until voters figure out they can vote themselves generous gifts from the public treasury. Then they only vote for candidates who will give it all away.” I told him that he sounded pretty negative, even cynical. He paused, then said, “I may sound cynical, but I never lie. After all, I’m Ben Franklin.” See you soon, Ben!

Rick Glaze's first novel, The Middle Fork, was published in May. He is the president of Glaze Capital Management of Los Altos as well as a General Securities Principal offering securities through First Allied Securities.