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There's Only So Much Policy Can Do

The government has failed to regulate finance and protect the system not because they didn't have enough power; they chose not to use the power, both parties. Now that both the government and the Fed together have failed to revive the economy, they're back asking for unprecedented power and money. Talks of imminent Armageddon and calls for drastic policy action have once again reached fervent pitch.

But this time it's different. The underlying reason for our difficulty over the next decade or more is so strong and insurmountable, we'd all be better off admitting there's a limit to how much policy can do and focus on realistic policy goals.

It's demographics. No matter how much money Fed prints, a 55-yo will not spend as much as when she was 45-50. She doesn't have as much need to spend, and she's thinking about retirement. It's a statistic certainty (though not at the individual level) that she's not nearly as productive and it will continue to degrade. Although her retirement spending does contribute to GDP, the multiplier is nowhere near that when she was working and innovating in her younger years. Short of a miracle drug already in Phase 4 that restore her vigor back to 30's or 40's, the American Lost decade is a certainty. No policy action can change that. If you think this is over the top, please read Harry S. Dent's The Great Boom Ahead and The Great Depression Ahead; if you still don't believe the argument afterward, then move on.

So what are we to do?

Europeans, especially Germans, are at least trying to do the right thing. The fact that Merkel explicitly cited "aging society" is significant; she's aware of the issue and dealing with it accordingly. By cutting deficits and debt, the would-be retirees can regain some confidence that some minimum social safety net will be there when they retire, as opposed to panicking in the US since nobody can count on social security or medicare will be there in 10 or even 5 years. Actually they will be there, just worthless.

A couple of other possibilities:

  • Target real economy, jobs, and household net asset directly as opposed to bank balance sheet and liquidity.
  • Lower education cost, which has been a significant burden and impediment for middle class spending power.
  • Lower health cost for middle class families rather than forcing younger, healthier people subsidize the elderly and the sick.
Yes, housing will be down and banks will be down. But that's the point!

But I fear US policy makers and their supporters and lobbyists will embark on more heroic bailouts and grab more power. As babyboomers retire en masse in a few years, government deficit and debt will skyrocket. By then we'll have even fewer, harder choices while Europeans will be in relatively much better shape.

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