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Stimulus versus Austerity

The criticism of austerity is aimed at countries such as the UK which implemented austerity and now their economy is slowing. Of Course it's going to slow when you cut back! But that is what they need long-term to get healthy again.

Many argue that if we hadn't done stimulus, we would have had a depression, unemployment would be worse, etc. My counter to that is that I agree that unemployment would have likely gone higher and we would likely have seen a depression however those effects would also have likely happened faster and put us on a path to recovery sooner. The stimulus has the effect of stretching out the pain longer.

Also from all the commentary I watch and read, there are many arguments why we have slow growth. No one seems to talk about how demographics affect the economy, NO ONE! Demographics is a huge driver, perhaps a primary driver of economic growth because without people, you don't have consumption and without consumption you don't get economic growth. This issue seems simple to me; when you have less people consuming, you will have recessions and varying degrees of economic contraction. The contraction is a function of how the demographics change over long periods.

If we look at the economic growth that began in the early 80's, many argue that it was because Ronald Regan lowered taxes and eliminated regulation creating a pro-business environment among other possibilities. Do I think that these policies had a positive effect on the economy? Well yes I do, however this period of growth continued and accelerated under Clinton who raised taxes.

If we consider demographics, the earliest of the Baby Boomer generation began to reach their peak spending phase right at the beginning of the 80's. Up until now, there have essentially been more people reaching this peak spending stage of like than the previous year which is in other words a strong consumption trend. This did not occur because people just one day decided to spend more money; it is a natural stage of life that occurs after which consumption begins to decline. At this stage of life when the kids leave the house (for those who have children), people begin to focus on paying down debts, spending less and saving for retirement. Also they just don't have the same consumption needs as they did when they were raising a family. There is only so much stuff you can buy for your house.

What we have to consider is that the population and more specifically those who reach their peak spending years, is not flat; it fluctuates with the rise and fall of birthrates. As the birth rate rises and falls, you will have a corresponding rise in fall of those reaching their peak spending years. So going back to my point about the growth that began in the 80's, the demographic trend of peak spenders correlated nearly perfectly. Also it happens to be that this demographic trend is peaking and beginning to decline just as the economy is seeing sluggish growth despite massive Government stimulus. Coincidence? I think not. Demographics is a force you simply cannot fight by dropping money from Helicopters. There are underlying forces at work that the Fed and the Government either don't understand or don't want to admit they have no control over.

We have seen the same or at least similar events occur in Japan over the last twenty years. Their economy peak in 1990 and they have been struggling every since. They have implemented stimulus after stimulus. Each stimulus the economy improves short term and then just goes right back to contraction and deflation. If we look at demographics of Japan, we see a Baby Boom not unlike ours along with a sharp decline in demographics which has really never recovered to the same heights. Japan is an excellent case study to show that government stimulus just does not work and that perhaps we should look at other drivers of the economy such as the people in it and their consumption.

To steal a quote from James Carville, Bill Clinton's campaign strategist, who said, "It's the economy stupid;” I say to all the economists and political pundits who argue about how tax policy, regulation, and everything else they say is causing sluggish growth, "It's demographics Stupid!”

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