The Financial Meltdown We're In Was Made Inevitable 35 Years Ago

“As the percentage of the older population increases, and especially as young adults decline in absolute numbers, fewer, not more, dollars will flow into the economy.

“For the first time since the end of World War II, residential real estate will begin to depreciate on a national basis – a phenomenon which might come to be called the Great Real Estate Recession. (A study by the National Bureau of Economic Research projects a 47 percent decline in real dollars.)

“Loan-to-value ratio will obviously fall, weakening the entire mortgage finance industry as loan defaults inevitably increase.

“These predictions about the future of the U.S. economy apply to the economies of all developed nations.”

I made those predictions 20 years ago in my book, Serving the Ageless Market. Today, as we survey the carnage along Wall Street, there is no lack of explanations offered by politicians, economists, academicians and pundits. But thus far, I’ve not seen a single reference to the root cause – to the Big Bang trigger of the most calamitous financial meltdown since the Great Depression.

First, I don’t deny that greed, wanton deregulation, weird financial products that few understand, irrational exuberance and a flood of easy money all contributed to the financial mess we’re in. However, it was all predictable far longer ago than 1988, when I first predicted that the U.S. and probably all developed nations were headed for a cosmic scale economic meltdown. 

The seeds of today’s economic travails were planted in 1972 when the fertility rate fell below the level need to replace the population. In 1964, the last year of the baby boom, the fertility rate was 3.65 per woman of child-bearing age. In 1972 it was 2.01. Population replacement requires a fertility rate of 2.1. Through 2007 – 35 years after the U.S. has failed to have enough births to replace the population.

Negative growth fertility rates have adversely impacted the auto, housing, furnishings and a long litany of other product lines. And the effects of dropping below population replacement rates is far from over, as Japan’s experience can testify to.  Many seem to forget that the single biggest driver of economic growth is population growth. Increases in consumer populations have traditionally depended on on increases in the number of babies born. 

On my first lecture tour of Japan in 1990 I told my hosts that Japan was about to fall into a deep and long-term economic contraction due to two factors: a negative growth fertility rate and an aging population that was contributing to a falling rate of consumer spending.  At the time of that lecture tour some U.S. economists were predicting that the Japanese economy would surpass the U.S. economy by 2000. Of course that never happened. As I had predicted to my Japanese hosts who politely cut off my discussions, Japan fell into an economic contraction 18 months later that stripped over 50 percent of the value from real estate throughout the country – in some cases, as much as 80%. Today, a 750 square foot condo in Tokyo is selling at about 42 percent of its 1992 price.

When I share these thoughts with people, almost inevitably I’m told not to worry – immigration will certainly keep us from falling into the abyss of deflation that Japan fell into. However, while immigration – legal and otherwise – may keep the U.S. from as deep and as persistent and economic downturn as Japan has suffered, don’t count on it. The rest of the developed world is facing population shrinkage and aging populations.  This will slow economic growth worldwide. Population contraction will not support the kind of growth we’ve been accustomed to. Even China and India are experiencing economic deceleration. The post world-War II economic boom is over.

But as Tom Stoppard optimistically tells us in his play, Arcadia, though “The future is disorder... a door like this has opened up five or six times since we got up on our hind legs. It’s the best possible time to be alive, when almost everything you thought you knew is wrong.”

In my next post I will share some of my brighter thoughts about where we are heading. But in the meantime, don’t expect any sharp turn-around in the economy anytime soon – not in 2009 and not in 2010 in my view. But, again, I believe there are reasons to not fall into despair. I’ll explain why, next.

 

 

 

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Comments

[Darlene]

While it is usually nice to be proven right, I am sure you are with me in wishing you were wrong.

While I am not even close to being an economist, I did predict this meltdown years ago when I saw the wrong headed policies of the Bush admninistration. So sad.

[Josh Neumann]

I guess Robert Kiyosaki was proven right, for exactly the reasons you pointed out. Fortunately, there are plenty of opporutnities today for the savvy investor, and this is the time when the wealthy investors really cash in.

[Rachael]

Thanks for the information...I bookmarked your site, and I appreciate your time and effort to make your blog a success!

[yoyo]

Hey david dats a great post and very informative too, this blog is counted in my favourites now n ive bookmarked it. I'll be looking forward to your next blog.
Love n luck be with you dear.

[David Allen]

great blog and good luck David http://www.medspamarketinggenius.com

[Jules]

Seems obvious when you put it like that. Great post and observation in a Freakonomics style. Like it!

[Chris Mueller]

I never thought of it like that, yet it does seem that we are always able to overcome crisis after crisis. News hype is the difference between this crisis and the Great Depression.

[Karrie Pettit]

Great, another thing that we can blame our parents about :)

[Language training]

Your blog is really very nice.
Thanks.

[Joel Gutierrez]

You know I totally agree with you. I was watching a video that showed how are economy is set up to fail. This all being due to inflation and never being able to catch up with interest. I just say we just start over and create a better system. And I know that's not going to happen. But you Never Know...

[daniel molano]

I loved the comment someone made about great another thing we can blame our parents for! now that was funny. I dont care who you are! lol okay I do agree with you and we need to rectify this problem and figure out what works already! this country is friggin over 200 years old now. what have learned all this time? anything?

[hypotheek rente vergelijk]

I don't know how good it is to blame our parents for the result we have now. However we got to handle the situation better than they could think.