Some analysts/economists opine that government spending cuts will tip the economy back into recession. I couldn't agree more but not for the same reason. Without the massive stimulus, our economy would have tipped back into recession over a year ago and while it would have been due to spending cuts, those spending cuts would not have been government spending cuts rather consumer spending cuts. This is the trend going forward, make no mistake, that consumer will be spending less because the largest generation, the Baby Boomers, have reached their peak in spending and are now finally beginning to focus on saving for retirement and paying down debt.
This is a natural process when children begin to leave the nest. You just don't need to buy as much stuff as you did before and the stuff you do buy tends to be more cash as opposed to leveraged purchases using credit. Think about the products and services we tend to buy and don't buy at different ages and stages of life. It is common sense that what we want and what we buy changes over time. When we're young we spend a lot of money on clothing yet as we get older, keeping up with fashions tends to be less important especially as we enter retirement. When we're young our medical expenses are lower and as we age, medical expenses get more expensive. When we're in our early 30's and beginning to start a family we need a house. As the family grows, we may need a bigger house which is why the people tend to buy their trade up home on average around age 37-42. Just the same when the kids leave the nest, we don't need that big home anymore and opt to downsize in favor of a home that is more management and lower cost to maintain. There are many examples, just look at the people you know, friends and family that are at various stages of their life to see what their financial priorities are.
If you look at various studies on how prepared Americans are for retirement you would be surprised. According to the Retirement Confidence Survey by the Employee Benefits Research Institute, 56% of workers have less than 25,000 saved for retirement. According to the U.S. Federal Reserve's Survey of Consumer Finance from 2007 which is that latest available, the median value of financial assets held by Americans age 45 to 54 was about $42,000. Americans ages 55 to 64 aren't much better off at $85,700. No wonder that when the kids finally leave the nest, we focus on saving for retirement because we are way behind!
It is this very cycle that causes aggregate consumer spending to decline when generations peak on a 46-50 lag. The Baby Boomer generation peaked in their spending around 2007 and we are finally beginning to feel the effects of the slow moving demographic shift. What the Government via The Fed is attempting to do is to get Baby Boomers to spend more and borrow more and guess what? It just doesn't work. These people don't want to spend and borrow more and the generations behind them (Gen-X, Echo Boomers) are not large enough to replace them just yet; that will happen in about 10-13 years. No amount of stimulus is going to get people to spend and we've seen the results so clearly in a slowing economy despite the largest stimulus we've seen.
Debt is like a drug for our economy; it makes you feel good at first but then you need to take more and more just to get the same high and eventually if you take too much it kills you. This is where we are at as an economy; we need to get off the debt drug. In order to do so we will have to go through debt detox. Detox is painful and unpleasant however once clean of the drug; we can re-emerge stronger and able to grow again. So, will cuts in government spending tip us into recession? I think the answer is yes, but we're going there anyways so why not go there with less debt burden, get this thing over with already so we can detox and move on to more prosperous times.