Demographics and Unemployment Deflate Consumer Based Economy and Slow Recovery

I have argued for at least several months that a recovery without the foundation of American consumers is highly unlikely and attribute this to two reasons:

1) The boomer generation has been financially decimated in this economic crisis and must bootstrap themselves as best they can out of this mess. This explains why the personal savings rate has climbed to 6.9%. Consumers newly adopted frugality will be a long-term behavioral trend instead of cyclical. Only the reflation of another bubble (plus more abundant jobs) will lift Americans out of their spending funk. The Fed is giving it the college try at the risk of devaluing the U.S. dollar and robbing consumers of what purchasing power still remains of their currency. How crazy is that? The stock market bubble was deflated in 2000 and real estate bubble is still being deflated. What’s next, commodities?

2) A prerequisite for engaging in sustainable discretionary consumption is that one produces a goods or services in exchange for currency. This is called having a job. Stimulus checks and other economic policies are not sustainable or as effective as the high self-esteem and peace of mind that results from good stable employment. This "Matrix-like" perception of financial serenity is what empowered millions within our middle class, i.e. that segment of the population with discretionary income, over the last two decades to live from paycheck to paycheck and borrow credit to live above their means. With unemployment approaching almost 10% (or 16% plus if one uses the U-6 figures), it is a stretch of the imagination to see GDP growth north of 2% to 2.5% in the near term future.

Since I do not have the financial pedigree of some of the more prominent investment gurus in the media, I bring you Pimco’s Bill Gross who elaborates in greater detail a thesis somewhat similar to mine.

If you did not catch this interview with CNBC on Thursday morning, here is a video replay which lasts @ 7 minutes. Enjoy…

Source: CNBC.com