Daniel Arnold [Personal Investor - February 2004] has forecast a future depression based upon a correlation between demographics and the Dow Jones Industrial Averages. Although I agree with his conclusions, I disagree with his methodology. Mr. Arnold seems to forget that correlation does not mean cause and effect. The real reason for a possible future depression is multifaceted.
First, we must remember that the economic engine driving the world economy is the American Consumer. If anything happens to this consumer’s ability to spend the whole world economy can go into a tailspin.
Second, middle class American Consumers are getting more and more hard pressed to meet their everyday obligations. They are relying on multiple incomes in households to a greater extent every day. If they cut back their spending economic shrinkage is inevitable.
Third, as manufacturing jobs move overseas we find that the economy is producing less in the way of real (tangible) goods. Tangible goods create real wealth. The service economy, on the other hand, produces only financial or paper wealth. We cannot have a thriving economy composed of Wal-Mart and Mc Donald’s employees. They don’t earn enough to keep even those low cost establishments going.
Fourth, real wealth can be generated through research and development creating new and innovative products. However, America’s best and brightest are not going into the sciences and engineering. They are going to business schools where their financial wealth can be manifested more rapidly. Just look at our engineering and science programs. They are generally populated by foreign students. But, foreign applications to our schools are beginning to fall. While there are many reasons for this, we should ask ourselves if we would want our scientists trained in a country that rejects scientific evidence and instead favors “Intelligent Design.”
Fifth, an integral part of our economy is government spending. However, the engineered deficit which took Social Security surpluses and gave them to the wealthy as income tax cuts has made sustained government spending on worthy programs almost impossible. In the current environment where tax increases are rejected, the credit worthiness of the USA comes into question. This is made even worse by a President who points to the government bonds in the Social Security Trust Fund and calls them worthless pieces of paper. If the world begins to see this as America’s attitude towards its obligations, we may find ourselves unable to refinance our current debt let alone maintain an on-going deficit.
Sixth, any depression would be long and deep because the engineered deficit created a situation where a “New Deal” approach could not be financed. Without the infusion of federal money there would be no way out of a depression.