Many observers think that prosperity is around the corner and that this recession, like others since World War II, will end as soon as the stock market, as a leading indicator, recovers and people start spending again. This is a myopic view of the current economic big picture.
In fact, since the peak of the housing bubble (in the U.S.) in 2005, the onslaught of the subprime financial crisis in August 2007 and the beginning of the recession in December 2007, the U. S. economy, and to a certain extent, the world economy, have entered a period of protracted adjustments. For sure, there will be some quarters of positive economic growth ahead and the recession may be declared officially over in the coming months, but the radical economic reorganization that is taking place will go on for years to come.
Why is this so?
Essentially, because we are at the very end of the 60-year inflation-disinflation-deflation Kondratieff cycle that began in 1949 when war-frozen prices were liberalized; and that powerful long cycle is ending now. The post 1980s era, i.e. the Reagan era, is over, but the excesses and bubbles of the last few decades have to be corrected, at a time when large population shifts are about to take place. Such adjustments will take years to unfold and this will entail a lot of efforts and a lot of changes.
Indeed, the era of excessive spending and of excessive debt is over. The era of excessive government economic disengagement and of financial deregulation is over. The era of irresponsible Ponzi-scheme finance is over. The era of unregulated derivatives is over. The era of greed as an ideology is over. The era of wild and predatory capitalism is over. The era of cheap oil, of cheap transportation, of cheap commodities and of cheap food is over. The era of excessive concentration of wealth and income is also over. However, the age of political corruption, of incompetent politicians and of destructive wars of aggression is not over. What has arrived is the age of hyperstagflation.
The central driving force behind most of these developments, besides the collapse of the financial sector, the debt pyramid and the derivative products structure, and irresponsible talk of larger wars by loose cannon politicians (as if there were not enough problems!) is going to be demographic. Indeed, we have entered a period during which the largest demographic cohort in the history of mankind, the post Word War II baby-boomer generation, has passed its spending peak. This is not something that can be reversed overnight. This is going to be a decade-long process of adjustment, of less spending, of more saving, and above all, of paying off excessive debt loads. Let's keep in mind that consumer spending represents 70 percent of GDP.
The economic consequences are going to be profound and will affect all sectors of the economy. We only have to consider how the automobile industry, once a major engine of economic growth, is presently going through a fundamental reorganization and downsizing. Even computer-based industries have matured and cannot anymore be considered fast growing industries. The only growth sectors left in the U.S. seem to be the health services industry, as the population is aging, and the war-related industries, as the U.S. military-industrial complex keeps on expanding. But even those sectors will have to slow down, lest they bankrupt the entire economy.
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