Sunday, April 24, 2005
Inflation is surging, wages are flat, all sorts of deficits are exploding — how do we sleep at night? Just imagine how we'd feel if the economy weren't doing reasonably well.

Is that underlying reality of a healthy economy about to change? It's an unsettling question, and one that is getting harder to answer. Hence the return in recent weeks of gut-wrenching volatility on Wall Street. The stock market cares little about the past. It strives to predict where the economy is headed, and watching the latest back and forth between bulls and bears is like watching a ballgame in which the lead keeps changing.
The U.S. economy is indeed in for a troubled future, and I really don't think there is any policy that will change that fact. You cannot legislate demographics (at least not in a democratic nation - so I exclude China from that statement).

The driver of the U.S. economy (and probably all economies) is productivity and consumer spending. Our workforce is disproportionately comprise of older workers - the baby boomers - who are starting to retire. As they retire they likely will spend less since they will have lower income streams. They will also start selling off their investments to fund their retirements, they will start selling their large homes to move into smaller ones, and of course they will no longer be working. At the same time, more and more people will be collecting social security income - starting in about 2017 this will require expenditures from the general tax revenue fund in addition to social security tax income - an additional drain on our government. And perhaps more importantly, these same people will need more and more help from medicare and medicade. And in addition to purely medical related costs there is the incredibly expensive, and largely prefunded expense of long term medical care once these retirees can no longer care for themselves.

So what you have is a major reduction in productivity corresponding to massive increases in the needs for government programs to care for our elderly. The economy will tank when this happens. The only real question is how bad it will get.

I for one plan my future with that 2017 date in mind. I will "only" be 42 on that date, but I want to be financial set at that point. Because it could get really, really ugly. I suspect my generation will not be as bad off as those 20 years behind us who will be entering the workforce at that point. Probably with massive school debt too. For them it is a dark future....
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I am an attorney in Chicago. Politically speaking, I am an indepedent that tends to lean conservative on fiscal issues and progressive on social issues. I try to remain as unbiased and open-minded as possible. Please email or post any comments, and especially criticisms. If something I say is wrong, or you disagree - let me know about it!



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