Click to enlarge.
Note the retrograde motion in financial assets in recent years. This also occurred during our last consumer recession (as seen in the chart at roughly the $6,000 level).
Early 1990s recession
It soon turned out that the quick recovery was illusory, and by 1990, economic malaise had returned with the beginning of the Gulf War and the resulting 1990 spike in the price of oil, which increased inflation but to less of a degree as the oil crisis ten years earlier.
The following chart shows the difference between the financial assets and liabilities.
Click to enlarge.
An optimist would say that we're now sitting very close to the median line in red. There's nothing much to see here. All is normal.
A pessimist would say that for the past decade we've been following the trend line in blue and that it is not sustainable long-term.
I'm somewhere between the two extremes but I do lean a bit more towards the pessimist argument. I would add that the illusion of prosperity we had in the 1990s has finally come back to haunt us. Note that all the net debt reduction that was done by state and local governments from 1993 to 2000 has been completely unwound.
That said, why should we even consider bailing out state and local governments right now? If adjusted for inflation and population growth, the net state and local debt is just half of what it was heading into the 1970s.
Sorry about that. There I go mentioning the 1970s again. Have no fear. I'm still leaning deflationary though. Why? Here's one reason.
November 1, 2010
Abandon Ownership! Join the Rentership Society!
We woke up in a Rentership Society, and it’s starting to look permanent. And you know what? Thank goodness. Ownership, it turns out, is for suckers.
Since I am retired, my car sits mostly unused in my garage. I picture myself someday using a Zipcar instead. I just need a few to appear near where I live.
I'm also tempted to buy a Kindle if only to comfortably read up to 3 million free online books. No hurry on that purchase though. The Kindle just keeps getting better and cheaper.
Now picture a wave of baby boomers just like me attempting to do the same. That's amazingly deflationary.
Source Data:
FRB: Flow of Funds Accounts
St. Louis Fed: CPI-U
St. Louis Fed: Population
Now picture a wave of baby boomers just like me attempting to do the same. That's amazingly deflationary.
ReplyDeleteIt sure is deflationary. It's going to take more than just low interest rates to kick start inflation. First, incomes are stagnant. Second, people are looking to shed debt, not increase debt. Third, as people get older, demand tends to wane.
That's how I see it in a nutshell. Who can say for sure?
Third, as people get older, demand tends to wane.
ReplyDeleteWhile I'm not 100% sure what you mean by this I'm going to go with my gut and say you're suggesting that seniors slow their spending rate.
I can tell you, in my neck of the woods (55+ retirement communities abound), these people are anything but frugal and they are showing no signs of slowing. These folks are well-endowed with generous pensions and SSA benefits and they don't figure to outlive the availability of these benefits (only time will tell).
Go to any restaurant, grocery store, golf course, or Hallmark card shop and you would never know what seems to be going on in the rest of the world.
What really matters in my view is what's going to happen when the next generations of retirees come onto the scene who do not have defined benefit pensions and the same level of SSA if any SSA at all. At that time, in my opinion, commerce in the US is in a world of hurt. We'll see.
G.H. & mab,
ReplyDelete"What really matters in my view is what's going to happen when the next generations of retirees come onto the scene who do not have defined benefit pensions and the same level of SSA if any SSA at all."
Indeed. I'll need to remember this point for a future musical tribute. I'm patient.