Dead Men Don't Spend

Sep 16, 2011

Baltimore, Maryland

The Lehman bankruptcy was a much more important event than 9/11. It marked the end of a 60-year credit expansion. Maybe it marked the high water mark for the US empire too. And the beginning of the end for the US dollar-based world monetary system.

But the occasion went by yesterday without much notice.

What's most remarkable about this post-Lehman economy is that it is so un-remarkable.

What do we mean?

Well, yesterday we reported that consumers weren't spending...and that prices weren't rising. But that's just what you'd expect for a Great Correction.

And here comes the Wall Street Journal with another non-shocker:
The income of the typical American family-long the envy of much of the world-has dropped for the third year in a row and is now roughly where it was in 1996 when adjusted for inflation.

The income of a household considered to be at the statistical middle fell 2.3% to an inflation-adjusted $49,445 in 2010, which is 7.1% below its 1999 peak, the Census Bureau said.

The Census Bureau's annual snapshot of living standards offered a new set of statistics to show how devastating the recession was and how disappointing the recovery has been. For a huge swath of American families, the gains of the boom of the 2000s have been wiped out.

Earnings of the typical man who works full-time year round fell, and are lower-adjusted for inflation-than in 1978. Earnings for women, meanwhile, are a relative bright spot: Median incomes have been rising in recent years and rose again last year, though women still make 77 cents for every dollar earned by comparably employed men.

The fraction of Americans living in poverty clicked up to 15.1% of the population, and 22% of children are now living below the poverty line, the biggest percentage since 1993.

The WSJ goes on to provide more facts and figures. It scarcely needs to bother. We know what's happening. The economy is contracting. And as contracts, it squeezes jobs, incomes, spending and prices.

We saw a note in the press yesterday. It told us that even the wages of sin are falling. The union that represents waiters and cocktail servers at Atlantic City casinos says the hourly base has fallen from $8.74 to only $4.50. And tips are tumbling. Surveys of prostitutes show their earnings are a bit limp too.

And as people get squeezed by the financial correction...they gasp for breath. There are now 46.2 million people in America under the poverty line, according to the Los Angeles Times. That's the most in 50 years.

But nothing extraordinary about that either. This is the biggest correction in half a century too. And you don't have to look very far to find more confirmation.

That's why the 10-year T-note yield has fallen to the lowest level since right after WWII.

And it's why nearly half the people looking for a job have been looking for more than 6 months.

And it's why a recent poll shows that 72% of Americans think the nation is going to hell.

Now, finally, almost everyone realizes that this is not a recession-recovery situation. Something else is going on. The Financial Times calls it a Great Recession. Richard Koo calls it a "Balance Sheet Recession." And David Rosenberg says we should call it what it really is - a "modern depression."

But we'll stick with our Great Correction label. Because we think there is more going on here than even a 'depression' describes. (About which...more below...).

So far, practically everything that has happened is about what you'd expect -- the predictable, ordinary consequences of a contraction. There is nothing remarkable about it.

But what's this? The Dow rose 186 points yesterday. Stock market investors don't seem to have gotten the message: this economy is in a contraction. They're still pricing stocks as if they thought the underlying businesses would grow. But companies don't add sales or profits in a contraction.

At least gold investors seem to have a better idea of what is going on. They sold the yellow metal yesterday. The price dropped $45.

And the bond market too has its feet on the ground. The yield on the 10-year note is only 2.08%. That is a level consistent with a Japanese-style slump...

No surprises here.

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*** What if there were more going on than a simple financial correction...even a correction of a 60-year credit expansion?

What if the Great Correction were greater than we thought? More ambitious...more aggressive...and more dangerous?

In the space of last 500 years the human population grew approximately 1000%. If it were a financial chart, you'd look at it and think - 'uh's a bubble.'

What if we were approaching a correction?

Reuters reports that the population of Japan is falling like a stone. Some 20 million Japanese are expected to disappear in the next 30 years.

Declining, graying populations are not what you need for economic growth. Old people don't spend much. Dead people spend even less.

As a result, the economy shrivels up like a 90-year-old. In Japan today about the only business still growing is the funeral business. People spend $157 to rent cold rooms, where they can store their loved ones while they await a spot at the crematorium. No kidding. Here's Reuters:
The daily rate at Lastel, as it is known, is 12,000 yen ($157). For that fee, bereaved families can check in their dead while they wait their turn in the queue for one of the city's overworked crematoriums.

Death is a rare booming market in stagnant Japan and Teramura's new venture is just one example of how businessmen are trying to tap it.

In 2010, according to government records, 1.2 million people passed away, giving the country and annual death rate of 0.95 percent versus 0.84 percent in the United States, which is also the global average.

The rate of deaths is on the increase. Last year, there were an extra 55,000 dead and over the past decade, an average of 23,000 more people have died each year in Japan.

Annual deaths are expected to peak at 1.66 million in 2040 as the bulk of the nation's baby boomer generation expires. By then, Japan's population will have shrunk by around 20 million people, an unprecedented die off for a nation neither at war or blighted by famine.

In Yokohama, the average wait for an oven is more than four days, driving up demand for half-way morgues such as Lastel.

"Otherwise people have to keep the bodies at home where there isn't much space," says Teramura. It also provides a captive audience to which he can market his other funeral services and wares."


Destiny is demography

The San Francisco Federal Reserve bank came out with a gloomy forecast last month. Its analysts said that stocks were likely to earn paltry returns over the next 10 years. The reason cited was simple enough; stockholders don't live forever.

'Demography is destiny,' said Auguste Comte. 'It works the other way around too, ' he might have added. If they thought they were going to live longer, America's most ubiquitous age cohort - the baby boomers - might continue to buy stocks. Instead, the cold hand of the grave is on their shoulders and on the whole economy. The boomers are retiring at the rate of 10,000 per day over the next 18 years. They will sell stocks to finance their remaining years.

Old people have always been a drag on an economy. Migrating tribes left them behind. Eskimos put them out on the ice. Old people generally bowed to their fate with good grace. In times of famine, for example, they stopped eating so the young might live.

Mortality has doomed the stock market, says the S.F. Fed. P/E ratios will likely be cut in half. Investors are unlikely to see their stocks return to 2010 levels, says the report, until 2027. And this assumes that US companies will continue to grow profits as they did since 1954. Not very likely. Because democracy, energy, and financial quackery are destiny too. Jointly and severally, they are responsible for the biggest financial debacle in history.

This week, Deutsche Bank came out with a report of its own. It, too, is confident that the "Golden Age" - 1982-2007 - is over. In its place is a "Grey Age." Instead of the nominal 12.8% gains of the Golden Age, investors have gotten returns of - 2.8% per annum for the last 4 years. Deutsche Bank expects stock market investors to lose about 10% of their money - in real terms - over the next 10 years, while the economy goes through 3 recessions!

But what would you expect? Everything droops. For the last 3 or 4 centuries the winning formula for developed economies and their governments has been simple: More energy. More output. More people. More credit. More promises. This formula has been so effective for so long people began to think it was destiny itself. It's not. Instead, it is slave to destiny not its master.

By 2007, the slave was put in his place. The business cycle turned sour. Native populations in Europe and Japan are falling. Energy use per person in the developed world has leveled off. Private sector credit is shrinking. So is real private sector output.

The feds responded to this challenge as they had to every post-WWII slowdown. They added more - more money, more credit. The government itself spent more money and used more energy. But the economy did not react in the old manner.

An obvious reason: people are no longer as young and sans-soucis as they used to be. A young man's eye may be drawn to fast German cars or slick Italian suits. But an old man can barely see at all. The baby boomers no longer roll their joints; they rub them. And they are no longer the source of an economic boom; now, they are the proximate cause of the bust.

But there's more to this new Grey Age than demography. People too are subject to the law of declining marginal utility. They wear out. But so do even the most enduring and impressive economic trends. There were only 450 million people on the planet in 1500. It took 99,000 years to reach that level. Then, over the next 5 centuries -- the population soared 10 times. Today, it is hard to find a parking place in any major city. How was such a big jump in population possible? Destiny was demography. With ready, cheap energy at hand, man could grow more food. And then he could ship it all around the world. And he could put his talents to work making more and better machines...which would vastly increase his output and his standard of living.

But the Machine Age ages too. The first tractors appeared more than 100 years ago. They may have increased production 10...20...100 times. Since then, improvements have been incremental, not revolutionary. We have bigger, faster, better tractors - that use more energy than ever.

Meanwhile, energy itself came to be more expensive. When the price of energy rose in the '70s, the "30 glorious years" that followed WWII were soon over. Hourly wage rates stopped increasing and have not gone up since.

Yes, there is plenty of energy around. But it is net output that you get from energy that counts, not the raw output. If a gallon of gasoline costs $ must produce more than $5 in additional output or the economy gets poorer. As the price rises fewer and fewer new energy apps pay off.

Likewise, credit is subject to the law of declining marginal utility too. In 1950, an additional dollar of credit added about 70 cents to GDP. By 2007, the US economy was adding more than $5 of debt to produce a single new dollar's worth of GDP. Now, the feds' new credit inputs produce negative real returns.

The jig is up. More no longer works.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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4 Responses to "Dead Men Don't Spend"


Sep 17, 2011

As usual good writing......



Sep 16, 2011

The pessimism in the letter is overbearing! It also does not mention the role of Public Health/ hygiene engineers who made it possible along with improved farming of course for the average lifespan to increase to present day levels from the 30's in the dark ages.
The breakthroughs will come both in maintaining good and productive health for the aged as well as in harnessing renewable energy sources, I'm sure as I do believe in increasing ingeniousness of the young, with resources at their hand. Such breakthroughs have always been and are like black swans, sighted only rarely but often enough.



Sep 16, 2011

"The baby boomers no longer roll their joints; they rub them". True. So invest in Pharma :)



Sep 16, 2011

but the human knowledge is getting more specialized in every area of scientific generations of humans will be more successful in the coming ages.
if the present day mess is created by the US citizens,it is their fault.they are going to suffer.US may be losing their leverage in world politics.only that much.

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