Deflationary People

The Daily Reckoning
Weekend Edition
November 16-17, 2002
Paris, France
By Addison Wiggin

“There are inflationary people and deflationary people,” reads a post on the Daily Reckoning discussion board. “Young adults are inflationary people. They have access to money, but they are not as productive as they can be, and they spend money foolishly…

“Do you remember how stupidly you spent money when you were young? Can you be that stupid again? If your answer is ‘yes’, you are in denial. You are old, and that’s a fact.

“Older people are deflationary. You may think you can act like a young adult. You think you can spend money foolishly. But, don’t kid yourself, you have learned a few things over the years. You can’t be as stupid as when you were young even if you tried.

“You think about retirement…”

The Dow finished up a measly 36 on Friday. The Nasdaq and S&P 500 barely moved this week… and we’re awaiting CPI, new mortgage applications, housing starts, jobless claims and a new set of international trade numbers… which we’ll no doubt analyze until we’re blue in the face.

So in the meantime, that is in the absence of any serious “direction” being indicated by the economy or the markets, we’ll spend a few moments asking a simple question: What if its all just a question of attitude?

The Baby Boom generation in this country has nothing, if not ‘attitude’. For the better part of their lives they’ve enjoyed determining what’s cool, what’s hip, what’s in and what’s out for the rest of a helpless consumer nation. Sex, drugs and rock n’ roll… disco (ouch!), New Age healing, lite beer… credit cards, direct marketing, suburban particle board plantations and SUVs… you name it, these are trends that the US population has had to suffer alongside the changing fashions of its largest age bracket since they first learned how to say: “peace”. So… what happens when, even if by accident, they decide it suddenly becomes ‘cool’ to pay off your debts?

“Japanese baby boomers set the pace of the economy in Japan,” writes our friend on the discussion board, an anonymous reader who goes by the name ‘Hit_an_Iceberg_in_98’, “The Japanese baby boom started 10 years earlier than the U.S. They are old and they are very deflationary people. Japan can’t get out of deflation because Japanese are deflationary people. Likewise, U.S. baby boomers set the pace of the economy in the U.S. U.S. baby boomers are 10 years younger than Japanese baby boomers, but they are no young adults. They are turning more deflationary every day.”

The US Census Bureau website hosts a dynamic charting program that plots the population of every country in the world by age group and year. A quick comparison of Japan with the US yields an interesting observation. Japan’s “baby boom” does appear to be about 10 years older than the US. The younger generation in Japan – with the exception of a serious “echo”, gets progressively smaller in quantity until about the year 2050. The US Boomer population, while less pronounced, remains the largest age group in this country until about 2025.

Tackling the Inflation/Deflation issue this week, friend of the DR, John Mauldin, suggests that as the Boomers get older the laws of supply and demand will begin to exert upward pressure on prices for goods and services. “The Boomer generation,” suggests Mauldin, “will demand goods and services, and because there are [less] workers, the economy will not be able to supply enough and the workers will demand more of the saved assets (sic!) of retirees for what they produce. This can come as an increase in prices for the production of good and services, or as a drop in the value of the saved assets, or both.”

Essentially, Mauldin is of the mind that no matter how you slice it, we’re headed for inflation. Seems fairly logical: if there are less workers around to produce the goods and services desired by an aging population – those goods and services that are produced will become more valuable.

But, we ask without trepidation, could it be that Mauldin has the supply and demand curve backwards?

“Inflation hawks,” wrote Jude Wanniski in an article for the American Spectator about a year ago, “will deny that deflation is possible while the CPI [the price of goods and services] ekes up and various money supply indices bulge like mattresses in a banking crises.” As Eric Fry reported in our own pages this week, M3, the so-called broad money supply, jumped $32.6 billion last week – its biggest weekly increase since August.

Even bank credit is soaring. “Total bank assets have surged $493 billion over the past 28 weeks to almost $6.9 trillion, an annualized growth rate of 15.6%,” reports the Prudent Bear’s Doug Noland.

But what if the Boomers have already become ‘deflationary people’? What if the largest group of Americans cease in their desire for the goods and services they have built up a reputation for desiring? After all, isn’t this the group that once traded in their Doors albums and dayglo t-shirts for Donna Summer and sequins? Worse… what if all that exploding credit is being used to – heaven forbid – service existing debt?!? What then?

Well, we’d have an awful lot of particle board houses, SUVs and widescreen TVs sitting around. Not to mention an enormous debt-load to work off as many of those items were purchased in the heat of ‘la, la, la live for today’ ecstasy. Rather than desiring new goods and services, it’s possible the Boomers will find themselves working longer (years and hours) to pay off old purchases. Hardly the result of a rebirth of the Puritan virtue of ‘saving’, prices for goods and services would fall as people are forced to save money simply to ‘get back to even’ in advance of retirement.

In that scenario, it’s equally possible another curious ‘economic event’ could unfold. Those consumers still in the market for houses, cars and dream vacations to Club Med could suddenly get a clue… and decide to wait a little to buy the next new ‘big ticket’ item. After all, if prices are beginning to slide, holding out a bit lands you a better deal you can brag to your friends about. Inadvertently consumption gets delayed, savings increase; again not by virtue of a moral reawakening, but simply because it makes more sense to wait.

Demand decreases further. Prices continue to fall… and so on and so on. Possible? Maybe. Maybe not.

Either way… hope you like sushi. Me, I like it just fine with a tall chilled glass of Asahi.

Cheers,

Addison Wiggin,
The Daily Reckoning
November 16, 2002

P.S. If you’re interested in participating in the Great Deflation Debate yourself, visit the Daily Reckoning website and click on the Discussion Board, you’ll find it in the left-hand column.

In the meantime, take a look below… the Daily Reckoning’s Book Of The Week, courtesy of our friend’s at Laissez Faire Books:

— The Daily Reckoning’s Book Of The Week —

Economics in One Lesson (50th Anniversary Edition)
by Henry Hazlitt

Few authors have done as much to help people understand the basic economics concepts that govern our every day lives as Henry Hazlitt (1894-1993).

Especially with this ingenious book, written in 1946, he explained simply yet with great sophistication, how free markets deliver both liberty and prosperity, while government intervention hurts people.

Now Laissez Faire Books offers the 50th anniversary edition with a new foreword by Steve Forbes.

In his book, Hazlitt focuses on a seemingly simple principle which helps answer questions perplexing thinkers for centuries. For example, how do you achieve prosperity? How best to relieve poverty? How to do these things while preserving freedom?

Hazlitt’s principle helps resolve crucial controversies of our own time. Why did the New Deal fail to lift America out of the Great Depression? How do millions of people, who don’t know one another, cooperate to achieve economic wonders of the world? As Hazlitt expands on his principle, he exposes the fallacies of laws which cause human misery.

“Henry Hazlitt is one of the few economists in human history who could really write.”

— H. L. Mencken

Economics in One Lesson (50th AnniversaryEdition)

THIS WEEK in THE DAILY RECKONING

THE FED IS CULPABLE, PART II (11/15/02)
by Hans Sennholz

“…An administration walking in the footsteps of Presidents Hoover and Roosevelt – who practically closed the national borders to trade and commerce, doubled the tax burden, and imposed numerous business regulations and restrictions – undoubtedly will create another ‘great depression.’ An administration that lightens its burdens and releases the energy of the people will facilitate a speedy recovery…”

THE FED IS CULPABLE (11/14/02)
by Hans Sennholz

“Economic bubbles have plagued the American economy ever since the First United States Bank opened its doors in Philadelphia in 1791. They preceded and led to many financial crises, and even depressions…Does it really matter what the Fed does in its attempts to control them?”

BUBBLE AFTERMATH (11/13/02)
by Kurt Richebacher

“…For the first time in the whole postwar period, the U.S. economy has slumped against a backdrop of the most aggressive rate cuts by the Federal Reserve and the most rampant money and credit growth ever. Implicitly, the forces depressing the U.S. economy this time are radically different from those that fueled past recessions…”

THE INFLATION TRADE (11/12/02)
by Andrew Kashdan

“…Long slow-motion deflation…or Fed-goosed inflation? They appear to be the only questions worth debating when it comes to the U.S. economy. With respect to the latter, an “unanticipated” return of inflation offers potential profits for investors in commodities and natural resources…”

ARMISTICE DAY (11/11/02)
by Bill Bonner

“…Over the four years of the first World War, one by one, the people back at home got the news…the telegrams…the letters. The church bells rang. The black cloth came out. And for years after…at 11 A.M., the bells tolled, and even in America, people stood silently…recalling the terrible toll of four years of war. Now it is almost forgotten…”

———————

HEADLINE, NEWS And INSIGHT: Politics as usual, or a useful revolution?… And, what is this we keep hearing about a ‘recovery’? You decide…

Is There ANY Benefit To A GOP Senate?
by John Mauldin

“…What difference, if any, will a GOP-controlled White House, Senate and House make to the stock market? It all depends on what they can get passed, of course. Lowering the capital gains tax would help marginally, I think, as would other measures. But the big difference would be made if the double taxation of dividendswas eliminated…”

No Sign Of A Sustainable Recovery
by Dr. Kurt Richebacher

“…The American boom of the past few years was the greatest consumer borrowing and spending binge of all times. What is wrong with a consumer spending bubble? Well, eventually, confronted with shattered stock market wealth, the consumer is bound to resume his old-fashioned saving from current income. Doing so, he will finally pull the rug from under theeconomy…”