Too long for Tumblr
I’ll try to combine what I’ve read in three books: “Great Depression Ahead”, “Dollar Crisis”, and “Holy Grail of Macroeconomics”. The paradigms are demographics, vicious/virtuous cycle caused by the dollar’s status as the global reserve currency, and an over-indebted balance-sheet driven economy, respectively.
The US baby boomers are the largest economic force on the face of the earth, and they drive the US economy. Spending peaks around age 49, while income peaks just before retirement. Up until 2005, this age group was driving ever higher spending in the US. This drove economic growth, and because the US dollar is the global reserve currency, we can and did have a massive trade deficit. Seeking to maintain access to the US consumer, some foreign countries did not exchange their export-gained dollars for their home currency, instead they boosted their holdings of US dollar-denominated assets, thereby maintaining an exchange rate that encouraged more exports to the US.
The combination of US boomer-driven demand and foreign reserve-driven excess liquidity led US companies and homeowners to borrow heavily. Both groups did so because they forecast good returns, and because money was readily available.
Unfortunately, around 2006, the aging mass of baby boomers began to reduce their spending (kids are out of the house, already own a nice car, etc.). This reduced demand for goods through the economy. As economic growth slowed, the engine of net imports being converted into excess dollar liquidity stopped working. Companies that had borrowed to invest discovered that their projections were too rosy. Homeowners who had borrowed to buy houses that would appreciate discovered that there was no appreciation, and their jobs were now at risk. Many discovered that they had borrowed too much, and refinancing was no longer possible.
Looking ahead, baby boomer demographics will continue to drive reduced spending and increased savings. Consumers and companies will choose to pay down debt rather than invest in profitable new ventures, as the demand isn’t there, and the mountain of debt is. With a wall of savings and debt repayment, interest rates will be low. This is despite the fact that Chinese or other foreign economies will export less to the US, and thus their slowly growing reserves will do little to increase US liquidity.
US earnings growth will be anemic, interest rates will be low, asset prices will stagnate, and there is a risk that the US will lose its reserve status and decline dramatically.
My guess? Buy US junk bonds and non-US dollar assets. Maybe look at US-based exporters. But maybe the market’s already done that, and it’s too late for those trades.
