This is the script for my Demographic Doom podcast episode (#43) recorded on 10 May 2020 (released on 17 May 2020). It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including Podbean, Apple Podcasts and a video version on YouTube. See the description on the YouTube version for extensive annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is DemographicDoom.com
I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations. I'm trying to view the world from the widest possible angle, as aliens would see us from space.
Today I'm going to try to summarize the entire economic and demographic history of the United States in a single episode, from the end of World War Two to the present day, May 10, 2020, with the aim of trying to explain the economic crisis we're now experiencing. Although my focus is on America, much of this history may also apply to Europe, Canada, Australia and other countries that have closely tracked the U.S. in their economic development.
Two days ago, May 8, marked the 75th anniversary of "VE Day"—that is, "Victory in Europe" or the defeat of the Nazis. It's a major event in world history. Victory in the Pacific would follow 3 months later. Relatively speaking, the past 75 years have been good times, at least compared to prior centuries. There have been amazing breakthoughs in technology over this time, including medical and safety advances that resulted in dramatically increased lifespans, but there has also been a disintegration in some of the fundamentals that keep us afloat. Technology has created some profound dangers that our society hasn't yet learned to absorb, and I don't mean the obvious dangers you're thinking of, like atomic weapons and climate change. Some dangers are subtle and unexpected, like birth control and improved health care. Technology that seems good on the microscopic level—that is, for individuals—can have some bad long-term effects on the macroscopic level—this is, for the long-term health of society at large. Some of those good things gave us our current financial crisis.
The current crisis wasn't caused by Covid-19. That was merely the catalyst. The financial collapse it triggered has much deeper roots. I see the current crisis as the culmination of five demographic and economic trends over the past 75 years. We can think of history as being a series of layers. These are trends and cycles lying on top of each other that dictate the overall fate of society. There are many different layers, but only a handful of them are critical. I choose to focus on five processes over the past 75 years that I think made the Crash of the 2020s inevitable. They are:
The end of World War II ignited the great post-war economic boom, which I claim is ending right now with the great 2020 collapse. No one could have predicted the current pandemic, at least in its timing and pathogen, but a massive economic collapse was very predictable, based on these five processes set in motion in the 20th Century and exacerbated in the 21st. In this episode, I want to try to summarize those events for you without getting too deep into the details.
But before I go on, let me nail down my place in history, since you are probably a time traveler listening in the future. This is May 10, 2020. We're roughly a month and a half into the lockdown phase of the Covid-19 pandemic, when people have been told to stay home and nonessential businesses have been ordered to close. The last seven weeks have seen the most rapid job losses in U.S. history. The unemployment has gone from about 3% to something like 20%. It's hard to tell the exact numbers because most of the people not working have ostensibly been furloughed, with the expectation of going back. The problem is, many of the businesses now closed will never reopen, and those that do are going to be faced with plunging demand. Who is going to buy a new car or an expensive vacation right now?
In the month between February 23 and March 23, U.S. stock markets fell about 35%, one of the fastest and deepest losses in history. The remarkable thing, though, is that markets regained about half of their losses in April, in one of the greatest rebounds in history. This is insane when you consider that the real economy didn't get any better in April. In fact, it got much worse. So you have the economy in freefall and markets surging upwards. What's going on here? That's one of the things I'm trying to explain in this little history.
So let's start at the beginning: World War II. By all accounts it was a terrible event. It was especially devastating in Europe, which was wiped out economically and traumatized emotionally. No matter how bad things get in 2020—and they will get bad—they probably won't compare to the physical pain and destruction rained down on Europeans and some Asians during the war. Things were much better in America, where the mainland was completely untouched by any bombs or bullets. Americans endured their own hardships, like the the rationing of food and the loss of their sons in battle, but these could be seen as an extension of the hardships faced in the Great Depression, whose effects were still lingering at the time the war began. From an economic perspective, the Depression and War Years were one continuous era, from the crash of 1929 to VE day in 1945. That's 15 years of deprivation following the Roaring 20s when anything seemed possible.
Coming out of the War was like coming into the light after 15 years in a bunker. Suddenly, America was the economic powerhouse of the world, with all of its industry still intact. With the end of the War, America became the de-facto "leader of the free world", pulling the rest of the non-Communist world out of its pit. America helped rebuild Europe and Japan, which I think was one of the great heroic acts of history. Europe and Japan, in turn, became America's trading partners, and together we started building a colossal world market to the temporary benefit of all.
What really started growth trend, however, were babies. Lots and lots of babies. GI's coming home from the war married their sweethearts and the baby-making began. And the phenomenon was repeated elsewhere in the world. Canada, Australia and eventually Europe joined the baby train. This Baby Boom is my first layer of history. You can't have an economy without people earning money and buying things, and the Baby Boom provided them in abundance.
This Baby Boom was something of an anomaly, because up to that point birth rates were consistently falling in the developed world. As countries industrialized, their citizens had fewer and fewer children, even without reliable birth control. A lot of this can be attributed to better opportunities for women, later marrying ages and maybe choosier marriages, where young people waited for true love, rather than accepting a mate assigned by their elders. In Colonial America around the time of the American Revolution, the fertility rate was something like 7 babies per woman, with many of those babies dying in childhood. By the middle of the Great Depression, fertility had fallen to less than 2.5 babies per woman—which is very close to the 2.1 replacement rate. Again, this was without the birth control pill, although condoms were available starting in the 1920s.
Then, after the war, baby-making exploded in America. The war in Europe ended in May 1945. GIs came home over the summer, and nine months later, in early 1946, babies started popping out of American women, peaking at a fertility rate of about 3.5 babies per average woman in the 1950s. This means that for every woman who had no children, there must have been another who was having 7 or 8. The party didn't end until the 1960s with the invention of oral birth control, the pill. Birth control had a huge effect on society, giving rise to women's liberation and turning sex into a recreational activity. The main economic point is that it ended the Baby Boom, in roughly 1964, and fertility rates resumed their long-term downward trend.
Although the boom in births ended in the 1960s, the children themselves didn't go away. In effect, the Baby Boom was a huge economic stimulus program that powered economic growth from roughly the 1970s until, let's say, 2011. As they came of age, the Boomers needed homes, so huge subdivisions were built for them, as well as shopping malls, cars, appliances and all the services and infrastructure to support a growing population. The Boomers themselves provided the labor for these projects, so they were a self-sustaining project for a while, powering the US economy through the end of the 20th Century and into the 21st.
You may think the economic growth of the 1980s and beyond was caused by the pro-business policies of Ronald Reagan, but that was the period when the Baby Boomers reached the peak of their economic productivity. In 1986, the Boomers were all between the ages of 22 and 40, which would have been the time when the most people were buying homes and buying new stuff to put into those homes. Although the Boomers didn't have babies at the same high rate as their parents, they did have them, maybe only one or two of them, and this became known as the Baby Boom Echo. All those children needed toys and supplies, and thanks to rising prosperity they got a lot more money spent on them than the Baby Boomers did. In short, the Boomers were a huge engine of growth at just about the time Reagan came along.
The tide started turning in 2011. That was the year when the first Baby Boomers born in 1946 turned 65, or the generally accepted retirement age. Not everyone is lucky enough to retire at 65, but the general trend still holds: more and more people would leave the workforce over the next couple of decades. When someone retires, they start collecting more money from the government than they give. They stop investing and start selling their investments to pay their expenses. They stop producing resources and start absorbing them. That's one of the reasons our economy is in dire straits right now. There are too many retired people and not enough active workers to support them, and with so few children in the pipeline, the trend can only get worse.
Stimulus of any kind always has a bad side, namely what happens when the stimulus ends? It is kind of like an athlete taking steroids to improve his performance. Yes, he races ahead of all the other athletes for a few years, but then the costs kick in and his body goes to hell. The Baby Boom boom was a mixed blessing for the US. Sure, it powered the growth of the late 20th Century, but it also established unreasonable expectations for growth. Even beyond 2011, Americans continued to plan and invest as though continued growth was inevitable, like a roller coaster that only went up. Few of us were ready for the dip on the other side, which is what we're staring into right now.
The natural boom-and-bust cycle of the Boomers growing up and growing old was bad enough for the economy, assuring a painful reckoning right around now, but I see four layers on top of this base layer that are making things far worse.
The next layer of history is the vast improvements in medical care over the past 75 years. Before World War II, the average longevity for an American was about 60 years. Today it's around 79 years. That's roughly 20 years added to the human lifespan. In 1946, if you had a heart attack, you died. Now, if you get medical attention fast enough, you're probably going to survive. Modern medicine might even save you from your second, third and fourth heart attack, as well as countless other serious diseases that would have killed people in an earlier era.
This is certainly good for the people saved—like myself for example, dealing with cancer—but it's not good for the economy, because every life saved guarantees higher medical expenses and pension costs in the future. At the time Social Security system was established in 1935 and Medicare in 1965, the average citizen didn't live very long beyond age 65. Now someone who reaches age 65 is expected to live to about 83, in ever-worsening medical condition. Each additional year carries ongoing pension costs and rising medical costs.
America doesn't have free public health care for all, but it does have almost-free health care for people 65 and older, called Medicare, so the government is committed to paying medical costs for its citizens during the single most expensive phase of life: the dying phase. The government can try to raise the retirement age or the age for Medicare, but ultimately you can't cheat death. If people don't die quickly of a specific disease, they die slowly of an accumulation of medical issues collectively known as "old age". Look at any elderly person in their 70s or 80s, and you'll see that a great deal of their lives revolves around visiting doctors and taking medicine to stave off their inevitable demise. Especially with advanced medical technology, old people absorb a lot of medical resources as the approach their end, and this expense is becoming increasingly difficult for society to bear.
These statistics are pretty easy to calculate. Demographers know, in general, how long people will live and what kind of drain they will be on Social Security and Medicare. You'd think that a sensible government would prepare for the coming shortfalls, but there is hardly a sensible government on Earth. Kicking the can down the road is the official sport of politics because there's no benefit to politicians to solve a problem decades in the future. You only get credit for making things better since the last election. Raising taxes or lowering benefits won't win you any votes, so politicians inevitably resort to borrowing whenever they can get away with it.
We'll talk about this debt problem in Layer #4, but I want to throw in another layer first. Layer #3 is something I call "taste inflation". It is a psychological phenomenon that afflicts us all. I invented the term "taste inflation" in an essay in 2009. It is the observation that when excess resources are available to someone over an extended time, their tastes tend to expand and become ever-more refined until the excess resources are absorbed. Taste inflation means that no matter how much money you make, it is never enough, because your "needs" have risen along with your wealth. The past 75 years have been a period of taste inflation in America when expectations have risen along with our prosperity. People have taken on unnecessary debt to support these desires, while whole new industries have arisen to service these frivolous needs. This makes the whole economy more vulnerable in a downturn.
Here's an example: When America was first emerging from World War II, the population as a whole was pretty frugal and utilitarian. They had just emerged from 15 years of hardship, and they had learned how to get along with very little. When a young couple got married right after the war, they were happy enough to move into a simple tract house in a newly built development in the suburbs. Tons of these simple homes were constructed in the 1950s and 60s. Every house was identical, and they were laid out on a rectangular grid. People were happy with their simple home because it served the basic needs of shelter and providing a safe environment for their children.
But these modest goals didn't last. As prosperity grew, so did the tastes of home buyers. They expected fancier and fancier homes. Whatever your income was, you bought the most elaborate house your income could afford. It didn't serve the shelter function any better than the tract home, but people felt they needed it. They needed it for their ego and to show their status to others. In the end, someone might have been making more money than they would have in the 1950s, but they still felt poor because their debts had committed them to these higher tastes.
In the late 1940s, you had plumbers, heating technicians, pest exterminators and other businesses serving the basic needs of homeowners. By 2019, desires were far more complex, and there was a proliferation of businesses to serve those needs. You had businesses selling marble countertops, curtains, specialty soaps, exotic food and a vast array of entertainments that simply didn't exist in the mid-20th Century. I talked about this in Episode #41 and an earlier video, where I call it the "vanity economy." The vanity economy displays a society's wealth, but it's also highly vulnerable in a downturn, because no one really needs this stuff.
In the beginning of this 75 year period, we had a need-based economy. People were seeking food, shelter, clothing, a safe place to raise their children and not a lot more. By the end of the 75 years, we had a vanity-based economy that was largely dependent on selling people things they didn't really need. This is supportable in times of prosperity, but it becomes a problem in a downturn, when nonessential products and services are the first thing people cut from their budgets. A simple change in the consumer confidence can kill half the economy in an instant, just like it's doing now. The other problem is when people have borrowed to support their inflated lifestyle, like buying an SUV for $600 a month when they could have bought a sedan $300. Those debts don't magically deflate when your income goes down. This leads to defaults and all their ripple effects.
By many measures, people were much wealthier in 2019 than they were in 1950. We have access to goods and technologies that could hardly be imagined back then, but because our needs have expanded to fill our income, we don't feel wealthy. The inevitable trap of taste inflation is borrowing money to support our vanities, which leads us to the next level of our macroeconomic history: excess debt.
So Level #4 is the vast explosion of debt over the past 75 years. In the U.S. and the world at large, governments, individuals and corporations have far too much of it. By any outward measure, adding up the worlds debt and its income, there's more debt outstanding than can possibly be paid back. In 2019, the debtors of the world were barely keeping their heads above water. The crash of 2020 will push many of those heads underwater.
Let's just look at the simplest example: US government debt. At the end of the World War II, the government had a ton of debt, roughly 110% of GDP, but it had a good excuse: It had to borrow to fund a war and save the world. That debt was brought down over the course of the following decades, reaching a low of 24% of GDP in 1974. Since then, the national debt has been climbing, and by the end of 2019, it was back to roughly 110% of GDP, with no war to justify it. There's no real excuse for our current debt levels. It's just that politicians would rather borrow from the future than raise taxes or cut popular programs. Frankly, who can blame them? It could cost them their jobs to plan for the distant future.
There's also been an explosion of consumer debt. This is a 20th Century phenomenon. Before the war, you might have had a home mortgage with a local bank or a credit account with your local department store, but credit didn't become ubiquitous until technology linked banks and merchants together. General-use credit cards weren't invented until the late 1950s, and they didn't reach wide acceptance until the 1970s. Now you can use your credit card anywhere in the world.
Computer technology gave us a dizzying array of other credit instruments. We don't just have mortgages but mortgage-backed securities, exchange traded derivatives and a thousand other credit-based products that investors, banks and corporations trade among themselves. If the consumer is up to his neck in debt, so are corporations with trained economists on the payroll. Hardly anyone can resist the lure of debt, especially when interest rates are low, as they have been thanks to the next Layer of history, which I'll get to in a minute.
So we've got four processes going on in the first four layers of history since 1945: the rise and fall of the Baby Boomers, increasing lifespans, the rise of the vanity economy and the explosion of debt. These things were sufficient in themselves to bankrupt the economy and lead to a massive crash. I contend, in fact that the crash should have happened in 2008. We certainly had a massive downturn, but it wasn't massive enough. Governments and central banks rescued us, using tools that only set us up for an even worse crisis later.
Layer #5 in modern economic history was the desperate attempt by governments and central banks to rectify all the problems caused by the other four layers. In 1971, Nixon took America off the gold standard. There were legitimate reasons for this, and you can argue that he had no choice, but the net effect was to detach the dollar from any kind of fixed value, like a certain amount of gold per dollar. Instead, the value of the dollar would be managed by a central bank, the Federal Reserve, which would set interest rates and control the amount of money in circulation. Turns out, this is far more power than any human or human organization can manage.
I'm going to skip over 37 years of monetary policy to the last financial crisis in 2008 and 2009. This should have been the time when all the problems of those other four layers came to a head. The economic stimulus of the Baby Boomers was starting to run out; people had reached the maximum longevity benefits of health care; the vanity economy was in full swing, and debt had already reached unpayable levels. This should have been the start of the Great Collapse. Indeed, the economy was in horrible shape, and governments and central banks tried desperately to save it. Banks were bailed out; interest rates were lowered and new money was printed. These efforts were effective in the short term, but didn't resolve the underlying issues.
If I were to give you a year when the economy ran out of gas, I'd say it was 2008. Since then, it has been running on fumes. The economy appears to have been prosperous, but this is an illusion supported entirely by Federal Reserve manipulation. In particular, the Fed and other central banks lowered interest rates to near zero and kept them there for almost 12 years so far. Instead of promoting true economic growth, this created an environment of speculation and asset inflation. It discouraged people and institutions from conventional "safe" investments like savings accounts and government bonds and pushed them into speculative ones like stocks. The more money poured into stocks, the higher the prices went, resulting in the still astronomical stock indexes I see at this moment.
Since you're a time traveler, I want to describe for you just how insane stock market prices are right now, May 10, even after the economy is at least seven weeks into its worse downtown since the Great Depression. Although US markets dropped by some 35% from Feb. 23 to March 23, they have since rebounded by more than half. As the news got worse and worse in April, the stock markets did better and better. Two days ago, on the morning of VE Day, the U.S. Labor Department released the worst job-loss report in American history, indicating unemployment has jumped from 4.4% to 14.7% in a single month. This is terrible news, especially since some economists, including those at the Fed, think the real unemployment figure is much higher, at least 20%. Later the same day, major stock market indexes rose by about 2%. It's astounding to me, an exercise in antigravity and perpetual motion. Bad news is being treated at good news.
I shouldn't have to remind you that unemployed people don't spend much money. Neither do people who fear they might become unemployed, which describes most of the other 80%. Businesses that are closed for the virus don't generate any revenue and don't buy much from other businesses. Industry after industry, from oil to cruise lines to sit-down restaurants, seem close to collapse. This all adds up to horrible corporate profits, perhaps for years to come, and profits are supposed to be the basis for stock prices. So why are stock prices still flying relatively high?
One stock market index, the NASDAQ has regained all of its losses for the year. The latest index price is 9121, compared to 8972 on Dec. 31. It's like the virus and the resulting shutdowns never happened. Why would anyone buy a stock right now at the same price as 2019 with the absolute certainty of a devastating recession?
The answer is anyone's guess, and I have two of them: My Guess #1 is that Investors are stupid and are in denial. They think the economy is going to bounce right back as soon as the shutdowns end. Keep in mind that markets are driven mainly be the people who buy a stock, not the people who don't, so only the true believers are driving the market. Those who don't believe have already withdrawn from the market altogether. The smart money has left the building, so only the stupid money remains to determine stock prices.
My other guess is that stock markets are rising on bad news because investors believe that bad news will assure Federal Reserve intervention. Over the past 12 years, the Fed has created the expectation that it will always step in to rescue markets. In the past, it did this by lowering interest rates. Today, it is buying corporate bonds and printing new money. In other words, the Fed has created an artificial world where earning don't matter anymore; the economy doesn't matter anymore and borrowed money is always cheap. This may prop up the market in the short term, but it can't work forever. Now, with the Covid-19 crisis shutting down businesses, the Federal Reserve is locked into massive money printing scheme with no end in sight. The government is spending money on a unprecedented scale, and the Fed is effectively printing the money to make up the shortfall.
A few days ago, I received a check for $1200 from Donald J. Trump. I didn't ask for this money; it was simply handed to me for having been a taxpayer in the previous year. It is called helicopter money: money just dropped from the air onto average citizens in the hope that it will stimulate the economy. Now don't get me wrong: I'm not going to turn away free money, but you have to wonder where it's coming from. The answer is that it was conjured into existence out of thin air. It's magic money supported not by tax revenue, which is collapsing, but by suckers around the world willing to buy U.S. bonds. It's like no one has to work anymore because they can just receive money from the government, no strings attached.
But there are strings. There always are. The government can't just print money indefinitely. There's always a breaking point. As discussed in Episode #39, I think the result will eventually be significant inflation, even hyperinflation. I just don't know when. For now, in May 2020, the world is soaking up US bonds and US dollars as fast as the government and Fed can produce them. For various technical reasons, the world outside the US desperately needs dollars right now, but This can't go on forever. There has to be a satiation point where investors say, "That's enough. I already have enough bonds and dollars." That's when the price crashes.
A price crash for US bonds means a rise in the effective interest rate, which is devastating for a government that has become used to low interest rates. Right now, the US Government can borrow money from a gullible public for 10 years for an annual interest rate of about 6/10s of one percent—that is, less than 1%—which is insane for a debtor who obviously can pay his bills. Compare this to the historic norm of something like 5% for a government that was much more solvent. An interest rate of less than 1% tempts politicians of both parties to borrow and spend even more, because the annual interest cost is so low, but if the interest rate rises, say to the norm of 5%, the government would be spending almost half its annual tax income on interest payments alone. This is the sort of nightmare scenario you can expect when there are more bonds than buyers, and in one way or another, it means the collapse of the whole government.
The Federal Reserve can't let the US government collapse, so it is obligated to buy any excess bonds to try to support the price. The money it uses to "buy" these bonds is conjured into existence, just like the $1200 I got from Donald Trump, increasing the supply of US dollars. Although foreign investors currently love dollars, this too will eventually reach a breaking point where there are more dollars than buyers of dollars. A crash in this market means inflation. The amount of goods each dollar can buy is going to decrease. As I discussed in Episode #39, I think the inflation is mainly going to hit the things you really need, like food, while the things you don't need, like luxury cars, may actually decrease in price.
If inflation rises then eventually interest rates will, so there's really no way out. As more businesses fail and more people move from "laid off" status to full "unemployed", the pressures will build on politicians to increase their bailouts and stimulus payments for individuals and businesses. Since the tax base is now shrinking, this money can only be borrowed. In 2019, the US government spent $4 trillion while taking in only about $3 trillion in taxes, leaving a deficit of $1 trillion, which was bad enough. Now the deficit is shaping up to be around $4 trillion in 2020, with a lower tax income, so the government is borrowing and printing far more money than is making in taxes. This is a stunning development that would cause massive hyperinflation in any other country, but the dollar's special status as a reserve currency is keeping it afloat for now. It just can't go on forever.
You know Wile E. Coyote in the Roadrunner cartoons? He runs off a cliff while chasing the Roadrunner, but it will take him a while to realize it. He has to look down first, hold up a sign that says, "Yipes!" and then he falls. That's what's happening to the economy. It's still suspended in mid-air after running off the cliff some time ago. I contend that the Coyote's feet left the solid ground back in 2008. The whole economy has been supported by cartoon physics ever since.
When the Coyote finally falls, he's gonna fall hard.
Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.
I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations. I'm trying to view the world from the widest possible angle, as aliens would see us from space.
Today I'm going to try to summarize the entire economic and demographic history of the United States in a single episode, from the end of World War Two to the present day, May 10, 2020, with the aim of trying to explain the economic crisis we're now experiencing. Although my focus is on America, much of this history may also apply to Europe, Canada, Australia and other countries that have closely tracked the U.S. in their economic development.
Two days ago, May 8, marked the 75th anniversary of "VE Day"—that is, "Victory in Europe" or the defeat of the Nazis. It's a major event in world history. Victory in the Pacific would follow 3 months later. Relatively speaking, the past 75 years have been good times, at least compared to prior centuries. There have been amazing breakthoughs in technology over this time, including medical and safety advances that resulted in dramatically increased lifespans, but there has also been a disintegration in some of the fundamentals that keep us afloat. Technology has created some profound dangers that our society hasn't yet learned to absorb, and I don't mean the obvious dangers you're thinking of, like atomic weapons and climate change. Some dangers are subtle and unexpected, like birth control and improved health care. Technology that seems good on the microscopic level—that is, for individuals—can have some bad long-term effects on the macroscopic level—this is, for the long-term health of society at large. Some of those good things gave us our current financial crisis.
The current crisis wasn't caused by Covid-19. That was merely the catalyst. The financial collapse it triggered has much deeper roots. I see the current crisis as the culmination of five demographic and economic trends over the past 75 years. We can think of history as being a series of layers. These are trends and cycles lying on top of each other that dictate the overall fate of society. There are many different layers, but only a handful of them are critical. I choose to focus on five processes over the past 75 years that I think made the Crash of the 2020s inevitable. They are:
- The rise and fall of the Baby Boomers, who powering the economy in the late 20th Century and are now draining it in the 21st.
- Improvements in safety and medical science that have extended the human lifespan by some 20 years. That's great for people like me who have benefited from the life extension, but it's bad for the economy, which must now support more elderly people, living longer into old age and using far more medical resources.
- The inflation of personal tastes over the past 75 years, so that things that were once considered luxuries are now seen as necessities. Since 1945, consumers have higher expectations and economy has become more vanity-oriented, which makes the economy more vulnerable in a downturn.
- The huge debts that have be incurred by governments, corporations and individuals that can't possibly be paid off. Sooner or later, there has to be a day of reckoning, and I'm betting on sooner.
- The desperate manipulations by governments and central banks to try to save us from the four other layers. They've lowered interest rates and printed new money in a desperate attempt to keep the economy afloat. This may have rescued us in the short term, like in 2009, but it will make matters far worse in the end.
History has many other layers. We could talk, for example, about climate change or the widening gap between rich and poor, but the five processes I just mentioned are enough to explain our current economic collapse. Each one is sufficient to assure a downturn, but together they equal full-bore disaster—the one that's currently unfolding.
So why do I start this story with World War II? That was our civilization's previous low point. So much was destroyed in the war that it gave the world a fresh start, a blank slate to construct a new civilization, led this time by the United States. From that low point, a new society was built very different from the one before the war. It was an increasingly complex society with more technology, organization and regulations than any one person could grasp. This complexity was also a monster that no government could tame. Even as governments got bigger, they became weaker in guiding the fate of their countries. There was little any government could do about the five layers I just mentioned.
But before I go on, let me nail down my place in history, since you are probably a time traveler listening in the future. This is May 10, 2020. We're roughly a month and a half into the lockdown phase of the Covid-19 pandemic, when people have been told to stay home and nonessential businesses have been ordered to close. The last seven weeks have seen the most rapid job losses in U.S. history. The unemployment has gone from about 3% to something like 20%. It's hard to tell the exact numbers because most of the people not working have ostensibly been furloughed, with the expectation of going back. The problem is, many of the businesses now closed will never reopen, and those that do are going to be faced with plunging demand. Who is going to buy a new car or an expensive vacation right now?
In the month between February 23 and March 23, U.S. stock markets fell about 35%, one of the fastest and deepest losses in history. The remarkable thing, though, is that markets regained about half of their losses in April, in one of the greatest rebounds in history. This is insane when you consider that the real economy didn't get any better in April. In fact, it got much worse. So you have the economy in freefall and markets surging upwards. What's going on here? That's one of the things I'm trying to explain in this little history.
So let's start at the beginning: World War II. By all accounts it was a terrible event. It was especially devastating in Europe, which was wiped out economically and traumatized emotionally. No matter how bad things get in 2020—and they will get bad—they probably won't compare to the physical pain and destruction rained down on Europeans and some Asians during the war. Things were much better in America, where the mainland was completely untouched by any bombs or bullets. Americans endured their own hardships, like the the rationing of food and the loss of their sons in battle, but these could be seen as an extension of the hardships faced in the Great Depression, whose effects were still lingering at the time the war began. From an economic perspective, the Depression and War Years were one continuous era, from the crash of 1929 to VE day in 1945. That's 15 years of deprivation following the Roaring 20s when anything seemed possible.
Coming out of the War was like coming into the light after 15 years in a bunker. Suddenly, America was the economic powerhouse of the world, with all of its industry still intact. With the end of the War, America became the de-facto "leader of the free world", pulling the rest of the non-Communist world out of its pit. America helped rebuild Europe and Japan, which I think was one of the great heroic acts of history. Europe and Japan, in turn, became America's trading partners, and together we started building a colossal world market to the temporary benefit of all.
What really started growth trend, however, were babies. Lots and lots of babies. GI's coming home from the war married their sweethearts and the baby-making began. And the phenomenon was repeated elsewhere in the world. Canada, Australia and eventually Europe joined the baby train. This Baby Boom is my first layer of history. You can't have an economy without people earning money and buying things, and the Baby Boom provided them in abundance.
This Baby Boom was something of an anomaly, because up to that point birth rates were consistently falling in the developed world. As countries industrialized, their citizens had fewer and fewer children, even without reliable birth control. A lot of this can be attributed to better opportunities for women, later marrying ages and maybe choosier marriages, where young people waited for true love, rather than accepting a mate assigned by their elders. In Colonial America around the time of the American Revolution, the fertility rate was something like 7 babies per woman, with many of those babies dying in childhood. By the middle of the Great Depression, fertility had fallen to less than 2.5 babies per woman—which is very close to the 2.1 replacement rate. Again, this was without the birth control pill, although condoms were available starting in the 1920s.
Then, after the war, baby-making exploded in America. The war in Europe ended in May 1945. GIs came home over the summer, and nine months later, in early 1946, babies started popping out of American women, peaking at a fertility rate of about 3.5 babies per average woman in the 1950s. This means that for every woman who had no children, there must have been another who was having 7 or 8. The party didn't end until the 1960s with the invention of oral birth control, the pill. Birth control had a huge effect on society, giving rise to women's liberation and turning sex into a recreational activity. The main economic point is that it ended the Baby Boom, in roughly 1964, and fertility rates resumed their long-term downward trend.
Although the boom in births ended in the 1960s, the children themselves didn't go away. In effect, the Baby Boom was a huge economic stimulus program that powered economic growth from roughly the 1970s until, let's say, 2011. As they came of age, the Boomers needed homes, so huge subdivisions were built for them, as well as shopping malls, cars, appliances and all the services and infrastructure to support a growing population. The Boomers themselves provided the labor for these projects, so they were a self-sustaining project for a while, powering the US economy through the end of the 20th Century and into the 21st.
You may think the economic growth of the 1980s and beyond was caused by the pro-business policies of Ronald Reagan, but that was the period when the Baby Boomers reached the peak of their economic productivity. In 1986, the Boomers were all between the ages of 22 and 40, which would have been the time when the most people were buying homes and buying new stuff to put into those homes. Although the Boomers didn't have babies at the same high rate as their parents, they did have them, maybe only one or two of them, and this became known as the Baby Boom Echo. All those children needed toys and supplies, and thanks to rising prosperity they got a lot more money spent on them than the Baby Boomers did. In short, the Boomers were a huge engine of growth at just about the time Reagan came along.
The tide started turning in 2011. That was the year when the first Baby Boomers born in 1946 turned 65, or the generally accepted retirement age. Not everyone is lucky enough to retire at 65, but the general trend still holds: more and more people would leave the workforce over the next couple of decades. When someone retires, they start collecting more money from the government than they give. They stop investing and start selling their investments to pay their expenses. They stop producing resources and start absorbing them. That's one of the reasons our economy is in dire straits right now. There are too many retired people and not enough active workers to support them, and with so few children in the pipeline, the trend can only get worse.
Stimulus of any kind always has a bad side, namely what happens when the stimulus ends? It is kind of like an athlete taking steroids to improve his performance. Yes, he races ahead of all the other athletes for a few years, but then the costs kick in and his body goes to hell. The Baby Boom boom was a mixed blessing for the US. Sure, it powered the growth of the late 20th Century, but it also established unreasonable expectations for growth. Even beyond 2011, Americans continued to plan and invest as though continued growth was inevitable, like a roller coaster that only went up. Few of us were ready for the dip on the other side, which is what we're staring into right now.
The natural boom-and-bust cycle of the Boomers growing up and growing old was bad enough for the economy, assuring a painful reckoning right around now, but I see four layers on top of this base layer that are making things far worse.
The next layer of history is the vast improvements in medical care over the past 75 years. Before World War II, the average longevity for an American was about 60 years. Today it's around 79 years. That's roughly 20 years added to the human lifespan. In 1946, if you had a heart attack, you died. Now, if you get medical attention fast enough, you're probably going to survive. Modern medicine might even save you from your second, third and fourth heart attack, as well as countless other serious diseases that would have killed people in an earlier era.
This is certainly good for the people saved—like myself for example, dealing with cancer—but it's not good for the economy, because every life saved guarantees higher medical expenses and pension costs in the future. At the time Social Security system was established in 1935 and Medicare in 1965, the average citizen didn't live very long beyond age 65. Now someone who reaches age 65 is expected to live to about 83, in ever-worsening medical condition. Each additional year carries ongoing pension costs and rising medical costs.
America doesn't have free public health care for all, but it does have almost-free health care for people 65 and older, called Medicare, so the government is committed to paying medical costs for its citizens during the single most expensive phase of life: the dying phase. The government can try to raise the retirement age or the age for Medicare, but ultimately you can't cheat death. If people don't die quickly of a specific disease, they die slowly of an accumulation of medical issues collectively known as "old age". Look at any elderly person in their 70s or 80s, and you'll see that a great deal of their lives revolves around visiting doctors and taking medicine to stave off their inevitable demise. Especially with advanced medical technology, old people absorb a lot of medical resources as the approach their end, and this expense is becoming increasingly difficult for society to bear.
These statistics are pretty easy to calculate. Demographers know, in general, how long people will live and what kind of drain they will be on Social Security and Medicare. You'd think that a sensible government would prepare for the coming shortfalls, but there is hardly a sensible government on Earth. Kicking the can down the road is the official sport of politics because there's no benefit to politicians to solve a problem decades in the future. You only get credit for making things better since the last election. Raising taxes or lowering benefits won't win you any votes, so politicians inevitably resort to borrowing whenever they can get away with it.
Here's an example: When America was first emerging from World War II, the population as a whole was pretty frugal and utilitarian. They had just emerged from 15 years of hardship, and they had learned how to get along with very little. When a young couple got married right after the war, they were happy enough to move into a simple tract house in a newly built development in the suburbs. Tons of these simple homes were constructed in the 1950s and 60s. Every house was identical, and they were laid out on a rectangular grid. People were happy with their simple home because it served the basic needs of shelter and providing a safe environment for their children.
But these modest goals didn't last. As prosperity grew, so did the tastes of home buyers. They expected fancier and fancier homes. Whatever your income was, you bought the most elaborate house your income could afford. It didn't serve the shelter function any better than the tract home, but people felt they needed it. They needed it for their ego and to show their status to others. In the end, someone might have been making more money than they would have in the 1950s, but they still felt poor because their debts had committed them to these higher tastes.
In the late 1940s, you had plumbers, heating technicians, pest exterminators and other businesses serving the basic needs of homeowners. By 2019, desires were far more complex, and there was a proliferation of businesses to serve those needs. You had businesses selling marble countertops, curtains, specialty soaps, exotic food and a vast array of entertainments that simply didn't exist in the mid-20th Century. I talked about this in Episode #41 and an earlier video, where I call it the "vanity economy." The vanity economy displays a society's wealth, but it's also highly vulnerable in a downturn, because no one really needs this stuff.
In the beginning of this 75 year period, we had a need-based economy. People were seeking food, shelter, clothing, a safe place to raise their children and not a lot more. By the end of the 75 years, we had a vanity-based economy that was largely dependent on selling people things they didn't really need. This is supportable in times of prosperity, but it becomes a problem in a downturn, when nonessential products and services are the first thing people cut from their budgets. A simple change in the consumer confidence can kill half the economy in an instant, just like it's doing now. The other problem is when people have borrowed to support their inflated lifestyle, like buying an SUV for $600 a month when they could have bought a sedan $300. Those debts don't magically deflate when your income goes down. This leads to defaults and all their ripple effects.
By many measures, people were much wealthier in 2019 than they were in 1950. We have access to goods and technologies that could hardly be imagined back then, but because our needs have expanded to fill our income, we don't feel wealthy. The inevitable trap of taste inflation is borrowing money to support our vanities, which leads us to the next level of our macroeconomic history: excess debt.
So Level #4 is the vast explosion of debt over the past 75 years. In the U.S. and the world at large, governments, individuals and corporations have far too much of it. By any outward measure, adding up the worlds debt and its income, there's more debt outstanding than can possibly be paid back. In 2019, the debtors of the world were barely keeping their heads above water. The crash of 2020 will push many of those heads underwater.
Let's just look at the simplest example: US government debt. At the end of the World War II, the government had a ton of debt, roughly 110% of GDP, but it had a good excuse: It had to borrow to fund a war and save the world. That debt was brought down over the course of the following decades, reaching a low of 24% of GDP in 1974. Since then, the national debt has been climbing, and by the end of 2019, it was back to roughly 110% of GDP, with no war to justify it. There's no real excuse for our current debt levels. It's just that politicians would rather borrow from the future than raise taxes or cut popular programs. Frankly, who can blame them? It could cost them their jobs to plan for the distant future.
There's also been an explosion of consumer debt. This is a 20th Century phenomenon. Before the war, you might have had a home mortgage with a local bank or a credit account with your local department store, but credit didn't become ubiquitous until technology linked banks and merchants together. General-use credit cards weren't invented until the late 1950s, and they didn't reach wide acceptance until the 1970s. Now you can use your credit card anywhere in the world.
Computer technology gave us a dizzying array of other credit instruments. We don't just have mortgages but mortgage-backed securities, exchange traded derivatives and a thousand other credit-based products that investors, banks and corporations trade among themselves. If the consumer is up to his neck in debt, so are corporations with trained economists on the payroll. Hardly anyone can resist the lure of debt, especially when interest rates are low, as they have been thanks to the next Layer of history, which I'll get to in a minute.
So we've got four processes going on in the first four layers of history since 1945: the rise and fall of the Baby Boomers, increasing lifespans, the rise of the vanity economy and the explosion of debt. These things were sufficient in themselves to bankrupt the economy and lead to a massive crash. I contend, in fact that the crash should have happened in 2008. We certainly had a massive downturn, but it wasn't massive enough. Governments and central banks rescued us, using tools that only set us up for an even worse crisis later.
Layer #5 in modern economic history was the desperate attempt by governments and central banks to rectify all the problems caused by the other four layers. In 1971, Nixon took America off the gold standard. There were legitimate reasons for this, and you can argue that he had no choice, but the net effect was to detach the dollar from any kind of fixed value, like a certain amount of gold per dollar. Instead, the value of the dollar would be managed by a central bank, the Federal Reserve, which would set interest rates and control the amount of money in circulation. Turns out, this is far more power than any human or human organization can manage.
I'm going to skip over 37 years of monetary policy to the last financial crisis in 2008 and 2009. This should have been the time when all the problems of those other four layers came to a head. The economic stimulus of the Baby Boomers was starting to run out; people had reached the maximum longevity benefits of health care; the vanity economy was in full swing, and debt had already reached unpayable levels. This should have been the start of the Great Collapse. Indeed, the economy was in horrible shape, and governments and central banks tried desperately to save it. Banks were bailed out; interest rates were lowered and new money was printed. These efforts were effective in the short term, but didn't resolve the underlying issues.
If I were to give you a year when the economy ran out of gas, I'd say it was 2008. Since then, it has been running on fumes. The economy appears to have been prosperous, but this is an illusion supported entirely by Federal Reserve manipulation. In particular, the Fed and other central banks lowered interest rates to near zero and kept them there for almost 12 years so far. Instead of promoting true economic growth, this created an environment of speculation and asset inflation. It discouraged people and institutions from conventional "safe" investments like savings accounts and government bonds and pushed them into speculative ones like stocks. The more money poured into stocks, the higher the prices went, resulting in the still astronomical stock indexes I see at this moment.
Since you're a time traveler, I want to describe for you just how insane stock market prices are right now, May 10, even after the economy is at least seven weeks into its worse downtown since the Great Depression. Although US markets dropped by some 35% from Feb. 23 to March 23, they have since rebounded by more than half. As the news got worse and worse in April, the stock markets did better and better. Two days ago, on the morning of VE Day, the U.S. Labor Department released the worst job-loss report in American history, indicating unemployment has jumped from 4.4% to 14.7% in a single month. This is terrible news, especially since some economists, including those at the Fed, think the real unemployment figure is much higher, at least 20%. Later the same day, major stock market indexes rose by about 2%. It's astounding to me, an exercise in antigravity and perpetual motion. Bad news is being treated at good news.
I shouldn't have to remind you that unemployed people don't spend much money. Neither do people who fear they might become unemployed, which describes most of the other 80%. Businesses that are closed for the virus don't generate any revenue and don't buy much from other businesses. Industry after industry, from oil to cruise lines to sit-down restaurants, seem close to collapse. This all adds up to horrible corporate profits, perhaps for years to come, and profits are supposed to be the basis for stock prices. So why are stock prices still flying relatively high?
One stock market index, the NASDAQ has regained all of its losses for the year. The latest index price is 9121, compared to 8972 on Dec. 31. It's like the virus and the resulting shutdowns never happened. Why would anyone buy a stock right now at the same price as 2019 with the absolute certainty of a devastating recession?
The answer is anyone's guess, and I have two of them: My Guess #1 is that Investors are stupid and are in denial. They think the economy is going to bounce right back as soon as the shutdowns end. Keep in mind that markets are driven mainly be the people who buy a stock, not the people who don't, so only the true believers are driving the market. Those who don't believe have already withdrawn from the market altogether. The smart money has left the building, so only the stupid money remains to determine stock prices.
My other guess is that stock markets are rising on bad news because investors believe that bad news will assure Federal Reserve intervention. Over the past 12 years, the Fed has created the expectation that it will always step in to rescue markets. In the past, it did this by lowering interest rates. Today, it is buying corporate bonds and printing new money. In other words, the Fed has created an artificial world where earning don't matter anymore; the economy doesn't matter anymore and borrowed money is always cheap. This may prop up the market in the short term, but it can't work forever. Now, with the Covid-19 crisis shutting down businesses, the Federal Reserve is locked into massive money printing scheme with no end in sight. The government is spending money on a unprecedented scale, and the Fed is effectively printing the money to make up the shortfall.
A few days ago, I received a check for $1200 from Donald J. Trump. I didn't ask for this money; it was simply handed to me for having been a taxpayer in the previous year. It is called helicopter money: money just dropped from the air onto average citizens in the hope that it will stimulate the economy. Now don't get me wrong: I'm not going to turn away free money, but you have to wonder where it's coming from. The answer is that it was conjured into existence out of thin air. It's magic money supported not by tax revenue, which is collapsing, but by suckers around the world willing to buy U.S. bonds. It's like no one has to work anymore because they can just receive money from the government, no strings attached.
But there are strings. There always are. The government can't just print money indefinitely. There's always a breaking point. As discussed in Episode #39, I think the result will eventually be significant inflation, even hyperinflation. I just don't know when. For now, in May 2020, the world is soaking up US bonds and US dollars as fast as the government and Fed can produce them. For various technical reasons, the world outside the US desperately needs dollars right now, but This can't go on forever. There has to be a satiation point where investors say, "That's enough. I already have enough bonds and dollars." That's when the price crashes.
A price crash for US bonds means a rise in the effective interest rate, which is devastating for a government that has become used to low interest rates. Right now, the US Government can borrow money from a gullible public for 10 years for an annual interest rate of about 6/10s of one percent—that is, less than 1%—which is insane for a debtor who obviously can pay his bills. Compare this to the historic norm of something like 5% for a government that was much more solvent. An interest rate of less than 1% tempts politicians of both parties to borrow and spend even more, because the annual interest cost is so low, but if the interest rate rises, say to the norm of 5%, the government would be spending almost half its annual tax income on interest payments alone. This is the sort of nightmare scenario you can expect when there are more bonds than buyers, and in one way or another, it means the collapse of the whole government.
The Federal Reserve can't let the US government collapse, so it is obligated to buy any excess bonds to try to support the price. The money it uses to "buy" these bonds is conjured into existence, just like the $1200 I got from Donald Trump, increasing the supply of US dollars. Although foreign investors currently love dollars, this too will eventually reach a breaking point where there are more dollars than buyers of dollars. A crash in this market means inflation. The amount of goods each dollar can buy is going to decrease. As I discussed in Episode #39, I think the inflation is mainly going to hit the things you really need, like food, while the things you don't need, like luxury cars, may actually decrease in price.
If inflation rises then eventually interest rates will, so there's really no way out. As more businesses fail and more people move from "laid off" status to full "unemployed", the pressures will build on politicians to increase their bailouts and stimulus payments for individuals and businesses. Since the tax base is now shrinking, this money can only be borrowed. In 2019, the US government spent $4 trillion while taking in only about $3 trillion in taxes, leaving a deficit of $1 trillion, which was bad enough. Now the deficit is shaping up to be around $4 trillion in 2020, with a lower tax income, so the government is borrowing and printing far more money than is making in taxes. This is a stunning development that would cause massive hyperinflation in any other country, but the dollar's special status as a reserve currency is keeping it afloat for now. It just can't go on forever.
You know Wile E. Coyote in the Roadrunner cartoons? He runs off a cliff while chasing the Roadrunner, but it will take him a while to realize it. He has to look down first, hold up a sign that says, "Yipes!" and then he falls. That's what's happening to the economy. It's still suspended in mid-air after running off the cliff some time ago. I contend that the Coyote's feet left the solid ground back in 2008. The whole economy has been supported by cartoon physics ever since.
When the Coyote finally falls, he's gonna fall hard.
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Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.
