Economic immorality: Living off the sweat of future generations

In these benevolent economic times, I risk coming across as a sourpuss writing a headline like the one above. After all, as economist Alan Beaulieu told a sold-out audience at the Denver Association For Corporate Growth luncheon last winter, “We’re in a good place.” But I’ve had time to reflect on what he said.

We are enjoying record high gross domestic product, manufacturing, employment and retail sales, Beaulieu noted, adding, “This is an economy that’s going to be on the plus side until 2019. 2016 is going to be a golden year. Look how much fun you’re going to have through 2017 and the first half of 2018. You’re really going to enjoy life.”

The world is economically calm. The situation in Greece is a yawner. Europe is not going to fall apart over Greece. What do they make there that can’t be replaced? Islamic State and the war in Syria doesn’t matter in the economic sense. Ukraine? Its economy is about the same as Kentucky’s. Sanctions against Russia don’t impact us because we don’t do a lot of business with Russia.

So economic life is relatively upbeat for Americans. Yet as I sat listening to Beaulieu, I couldn’t help thinking about the factors that he points to as the underpinnings of our success: We are living on borrowed money. Based on the administration’s own forecasts, the national debt will keep rising until more than a fourth of U.S. expenditure will go to servicing the public debt by 2030. Because that level of debt is unsustainable, we will enter into a massive depression sometime after 2030 and will default on our obligations in a way similar to the debacle in Greece. No past, present or future Congress will likely embrace an austerity program that would throw us back into recession, not after suffering through the Great Recession of 2008.

We are robbing our children blind. They are the ones who will pay for all of these good times.

“Who cares? We won’t be around anyway,” Beaulieu said, sardonically.

Good times ahead and how to capitalize

Once the audience digested that comment, it focused on the rosy scenario of the near future. First of all, everyone except those employed in the oil patch is enjoying fantastically low oil prices. Beaulieu said economics has been unexpectedly trampled by politics. The Saudis believe they can outlast other producers, including the U.S., because their oil is cheaper to produce, so they have not cut back production. While the U.S. oil industry can live through these prices because it is not a petrochemical state, countries such as Iran, Venezuela and Nigeria will suffer. Nonetheless by the latter half of 2015 prices will normalize into 2016.

New extraction technology has made the U.S. energy independent, the economist said. We have cheap energy that will last us hundreds of years. If we really wanted to we could tell the Saudis, keep your oil; tell the Canadians and Mexicans, no thank you. It might take getting serious about efficiency and finding more oil here. When you do that you no longer care about the Middle East or projecting economic power there. As you save on the budget, you can give the taxpayers a break, or spend it on health care or where you need it in other areas. We have hundreds of years of natural gas in this country compared to Europe’s 28 years. Who wins? We do. We have a faster growing population and fertility rate than Europe.

Beaulieu’s cyclical scenario is economic expansion, with a breather in late 2015, until rising interest rates in response to a tighter labor market and rise in real income cause a mild, “manageable” recession in 2019. Then the economic picture looks bright until the predicted disaster post-2030. The next few years is a time you can really create something. It’s the perfect time to relentlessly drive efficiency, hire and train well and borrow for your business: “If interest rates are going up, what should you do now? Borrow as much as you possibly can from a friendly banker, and all bankers are friendly right now. They have more money than they know what to do with. Borrow from them, pay them back with inflated dollars. Then refi in 2018 as rates will be coming back down again.”

Some negatives: National debt

On the consumer side, debt is manageable and the delinquency rate is as low as it has been for decades. Student loan debt is driving rising personal debt, however. The average $25,000 student loan debt will cost a borrower about $300 a month, with wage growth being the only salve. Fortunately, wage growth is coming, a relief to the 60% of Baby Boomers who are still supporting their children though they are legally grown.

The Chinese debt situation is a dark cloud on the world economy, Beaulieu said. China has a massive debt problem that the world is ignoring, both in its shadow and official lending system. The government suppresses discussion of it in order to stave off a financial collapse and massive civil unrest.

Health care is a major concern. Middle-class Americans are making tough decisions about higher copays and deductibles. High health care costs are cultural because Americans want to cheat death as long as possible and are willing to spend a lot of money so they can live another three months. Paying for health care could bankrupt the government and we’ll find ourselves in an impossible situation until the Baby Boomers die, which Beaulieu calls the only solution. But then, a t-shirt that reads, “Baby Boomers Must Die” is a lousy one.

The economist’s take on how we Baby Boomers are behaving is the most troublesome to me. Regardless of which party controls Congress, it won’t attack the deficit because there is no appetite for austerity and the recession it would bring.

“The national debt will go up and up and it will be a crushing blow on our children and grandchildren, but hey you and I will be fine and that’s the important thing here,” Beaulieu said. “Government projections are for the budget deficit to climb until 2038. Interest rates will take up 25% of the federal budget until we get to the mid-2030s. That’s an unsustainable level. That’s like Greece. It’s crazy levels of debt.”

Generation X – younger than 50, older than 35 – is in for the worst time of it. There’s not enough of you to matter, and you’re right between a large generation and the Millennials. Responsibility for the system is going to rest on the shoulders of the Xers for about 10 years. You’re going to have a fairly miserable existence until you are ready to retire into a system that isn’t as nearly as good as the one we have now. But hey at least you’ve got your health.

If you are reading this, you are likely a Baby Boomer. If Beaulieu is right, you can build enough equity to help out your kids after you, the Baby Boomer, retires. Invest your profits in some safe municipal bonds. If you don’t and blow it all before you croak, you’d be doing so on the backs of your kids. And that is immoral.

 

 

 

 

 

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