Outside the Box

A Decade of Volatility: Demographics, Debt, and Deflation

September 11, 2012

Harry Dent gave a speech I listened to a while back, and I got him to transcribe it for this week's Outside the Box. One thing about Harry is, you are never left wondering what he thinks about a topic. He sees inevitable demography-caused deflation in our future and makes some very intriguing arguments that deserve pondering.

At the end is a link to another report and a way to subscribe to his letter, if you are interested in more of his perspective. But first, I suggest you read this straightforward, informative presentation. There is also a link to the actual video of him speaking, should you prefer that.

This evening I am still in Carlsbad, California, where it has been an absolutely marvelous night. Rather than go back to Dallas before I have to be in Palo Alto on Thursday, I am staying in California and splitting my time between resorts in Carlsbad and Palo Alto. Tough life on the road and all that.

I got to spend the evening with my great friend David Brin (Science Fiction Hall of Famer, whose latest book, Existence, is totally a boffo experience – get it!), along with Doug Casey and Doug Hornig (a serious writer of about ten books, including a few sci-fi books, and now works for Casey Research). The topics ranged all over the spectrum. It was one of those nights you live for. And the next few days are going to be solid, as well. I get to see some cool new stuff and some old friends in Palo Alto while waiting to speak on Thursday at the Altegris event there. And then it's back to Dallas on Friday, where I get to write another letter for you. Until then, have a great week!

Your wanting Southern California weather in Texas analyst,

John Mauldin, Editor
Outside the Box

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A Decade of Volatility: Demographics, Debt, and Deflation

To watch a video version of this presentation by Harry Dent,
please click on the following link:

Most of you reading this expect inflation in the years ahead, right? Well, I don't. In fact, I am firmly in the deflation camp.

Just think about it. What…

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Ronald Nimmo

Sep. 15, 2012, 9:22 p.m.

Dent’s thesis no doubt has some validity, but the example of the 1980’s he gives contradicts his own theory. He says that an increase in the labor force is always inflationary, but had had just previously pointed out that in the 1980’s the baby boomers joined the labor force in a big way with increased productivity and reduced inflation resulting from that. I am embarrassed for Mr. Dent that he failed to notice something so obvious in his own article. Robbie Watkins makes a great point about the care of older people being a major cause of deficit spending—which usually fuels inflation.

David Oldham

Sep. 15, 2012, 8:03 p.m.

Yep, I too am gettin fed up with hearing about deflation. This guy sounds like Robert Prechter after the 2000 bull mkt bust—-pedling his deflation theory and he has never stopped since.

I can only speak for the UK where I witness very much higher inflation than the official stats claim. The average working guy (my sons and daughters) has been crippled both ends of the curve with zero wage increases and high inflation. And guess who is charged with subsidising their families, yes right—the baby boomer generation. Most my friends also claim to be the bank of daddy right into their 70’s.

So it’s silly to say the boomer generation do not spend money—-most their money is spent into the economy through the younger generations, their children and grand children. And when we die guess where any remaining estate is bequeathed and that too is spent by our offspring into the economy, after paying further taxes on the estate.

I see nothing but rampant inflation since the 2000 bear mkt commenced. (I blame Greenspan and Brown) This has become even more intensified from the 2007 bust. That’s 5 years ago now so just how long is Mr Dent’s timeframe for a start to deflation?

As for real estate deflation in UK we had a modest correction from 2007 to 2009 at c.20% worst case scenario. Right now prices are almost recovered, 10% down in some areas with London doing extremely well. Young people cannot afford to get onto the ladder at all without the help of boomer bank of daddy.

I listen patiently to JM on this subject and of course a defationary environment for a few years makes infinite sense (possibly as long as 15 yrs in my book) BUT IT SIMPLY AINT HAPPENING.

I say to Mr Dent—- go to the back of the class, you are out of touch with the real world we are living in. Yes the theory is right but the practice is something different. This boomer is working harder than ever at age 68 to ward off the effects of inflation upon his children (and poor returns on savings). Don’t tell me this money isn’t spent into the economy. Why don’t you do something more useful and study the rich/poor divide curve.

Herewith ends the rant.

David Kondner

Sep. 14, 2012, 12:55 p.m.

Let’s assume for a moment that our policies don’t change, the economic fundamentals continue to deteriorate over a long period of time, and QE3 becomes the long term status quo.  What would eventually break first and how would that breakage become manafest?  This article seems to suggest that inflation (the easiest way out politically) won’t happen.

Brett Spurr

Sep. 12, 2012, 8:39 p.m.

I’m starting to doubt JM’s judgement.. Harry Dent? When has Harry been right about anything? Answer: never! His work no longer even deserves the benefit of the doubt. Broken clocks have more value. I could go on, but why?

Stephen Bolton

Sep. 12, 2012, 4:51 p.m.

From the description of the Spending Wave chart:

“Here’s how it works: the red background in the chart above is the Dow, adjusted for inflation. The blue line is the spending wave, including immigration-adjusted births and lagged by 46 years to indicate peak spending”

Actually the red is the spending wave, it goes out to 2058 which we have birth data for(2058 - 46 = 2012), and the blue is the Dow, the daat stops at 2012.  Q.E.D.

Steve Bolton

Tom Paine

Sep. 11, 2012, 4:41 p.m.

This is the same guy that predicted Dow 36,000 by 2010. Demographics certainly have an effect on how things have gone but it’s not tradeable. I predict the “peak” spending age is going to change significantly as the echo boomers are lagging their parents in terms of having kids and life in general.

Eugene Mannacio

Sep. 11, 2012, 4:27 p.m.

Unfortunately, Mr. Dent’s analysis treats the U.S. in isolation from the rest of the Global Economy. So, the emerging markets, most notably China and India are entirely left out of the equation.  While they have been principally exporting economies this is changing and China is now an important consumer of American cars.  Another failure of his analysis is a commodity that the older generation consumes in much greater quantities than the younger generation: Health Care.  Is there anyone who sees Health Care getting cheaper?

Perhaps there is a better way to measure the Global directionality than Mr. Dent has chosen and I would argue it is through Energy Consumption.  Generally speaking, the increase in Energy consumption reflects the growth of the world economy.  When the world economy is growing there is ALWAYS inflation and globalization makes it difficult for this phenomenon to be substantially different across international borders for very long lest the cost of foreign goods becomes either too cheap or too expensive.

Whether debt is private debt or government debt it is always in the interest of the debtor to see the debt inflated away. Even when the velocity of transactions has been substantially reduced, activist central banks can offset the slower velocity by increasing the money supply.  In prior episodes of debt bubbles, when Gold was still the universal currency, it was more difficult for central banks simply to print money.  The U.S. certainly couldn’t when it was on the Gold standard.  That situation was naturally deflationary.

We are no longer on the Gold standard, we are now a global economy, and central banks can (if they are not too afraid to do so) increase money supply to the extent required.  For all these reasons I think Mr Dent is mistaken.

Tom Fogarty

Sep. 11, 2012, 2:51 p.m.

This is gibberish.

“Inflation is always and everywhere a monetary phenomenon.”  Milton Friedman

All other price changes are caused by the interaction of supply and demand.  For instance, a pig in the python bulge of young adults entering the labor force is probably more deflationary than inflationary. Just think about what the effect of adding emerging market labor to the global economy has done to wages in the US.  When supply exceeds demand, prices go down.

Robert Watkins

Sep. 11, 2012, 2:02 p.m.

One question, in all of the other deflationary periods, have we ever had so much public debt in the form of entitlements to such a large group of people? Wouldn’t this be a game changer?

Nick Jacobs

Sep. 11, 2012, 12:38 p.m.

Interesting and informative, but the argument about deflation is flawed, because it treats pre-1971 and post-1971 data identically, whereas there was a break in that year: namely, the US government can now guarantee to stop deflation, whereas before 1971 it could not.

Today’s US government can stop deflation by printing money. Before 1971, there were constraints on how much money it could print. Today there are none. Bernanke has stated that the government has the tools to stop deflation, and he is right.

As far as I’m aware (someone please correct me if I am wrong), the only reason the US government doesn’t simply eliminate its debt by printing money to pay it off is that it fears this would cause inflation. It follows that if ever policymakers became convinced that inflation was no threat, and the US was experiencing deflation, the money-printing would start. Therefore there is not going to be deflation.

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