“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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