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Two Reasons Why the Global Economy Will Slow and Government Promises to Retirees Will be Broken

Phoenix Capital Research's picture





 

The coming years will be marked by a seismic change in the economic landscape in the US. Firstly and most importantly, we are going to see economic growth slow down dramatically. Jeremy Grantham, an asset manager I respect, believes we’ll see global growth at 2% over the next seven years. Personally I believe it could be even lower than that.

 

The reasons for this slow down are myriad but the most important are:

 

  1. Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce.
  2. Excessive debt overhang.

 

Regarding #1, Europe is the most glaring situation. According to Eurostat, between 2004 and 2050, the number of people of non-working age relative to those of working age will increase dramatically. In the EU in 2004 there were approximately four people of working age (19-64) for every person of non-working age (65 and older). By 2050, this number will have dropped to only two people of working age for every person of non-working age.

 

Over the same time period, Europe will also see a tripling in people considered to be “elderly” (80 or older) from 18 million to 50 million.

 

These numbers alone go a long ways towards explaining why Europe is facing a budgetary Crisis of epic proportions. All of these retirees will be expecting various Government/ private sector outlays whether they are pensions, healthcare, or various other social services.

 

These issues are, for the most part, left out of most current analysis of Europe’s debt crisis. Indeed, while the vast majority of commentators are well aware of Europe’s official Debt to GDP ratios, when we include unfunded liabilities such as the Government outlays or social programs I detailed above, it is clear that the situation in Europe is far, far worse than is commonly known.

 

Jagadeesh Gokhale of the Cato Institute presents the situation with an interesting data point, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”

 

The situation is not quite as profound in the US, though we will be seeing a dramatic increase in the age dependency ratio (the number of people of retired age relative to those of working age) between 2010 and 2030 as the Baby Boomers retire: in 2010 there were 22 people aged 65 and older for every 100 people of working age. By 2030, this number will have grown to 37 people aged 65 and older for every 100 people of working age.

 

However, while the ratios are not as poor in the US as in Europe, the unfunded liabilities the US faces are truly astronomical. USAToday puts the number at $61.6 trillion in unfunded obligations, an amount equal to roughly $528,000 per US household.

 

However, Japan makes both the EU and the US look tame.  In 2009, Japan already had 35 people aged 65 or older for every 100 people of working age. However, by 2050, this number will have swelled to an incredible 73 people aged 65 or older out of every 100 people of working age. This among other things sets Japan as a ticking time bomb, which we will assess in another report.

 

The EU, Japan, and the US comprise $36 trillion of the global $64 trillion economy (roughly 57%). So this debt overhang will have a profound impact on global growth particularly in the developed world going forward.

 

This debt overhang will result in several developments from a political perspective. For one thing, the social contract between Governments and retirees will have to be re-negotiated, as the money promised by the former to the latter simply isn’t there.

 

Governments will try to deal with this in one of two ways: by raising taxes on high- income earners/ any other potential avenue for raising revenues and by reneging on the promises made to retirees.

 

The impact these moves will have on the political landscape will be profound. Among other things we will be seeing more protests both at the ballot box and in the streets (Greece’s riots are a taste of what’s to come for much of Europe and eventually the US).

 

To picture how a cutback in social programs will impact the US populace, consider that in 2011, 48% of Americans lived in a household in which at least one member received some kind of Government benefit. Over 45 million Americans currently receive food stamps. And 43% of Americans aged 65-74 are Medicare beneficiaries.

 

Consider the impact that even a 10% reduction in these various programs would have on the US populace.

 

With that in mind, people will have to make do with less. This will have a profound social impact, as it will force many more traditional values to come to the forefront of American culture again. Among other things I believe:

 

  1. Divorce rates will drop as people cannot afford to divorce anymore.
  2. Individualism will give way to more community focused lifestyles: whether they be food co-ops, neighborhood watches, or simply having to live with relatives, the nuclear family and local community will become increasingly important as an emotional and economic support.
  3. Savings will increase and entertainment expenditures will become more frugal (Netflix vs. going to the movies, camping vs. more expensive vacations, etc.)

 

More importantly, the political process will change dramatically in the developed world, as politicians will no longer be able to promise social benefits and other handouts in order to incur votes. The impact of this will be very dramatic both in terms of campaigning and lobbying efforts in DC.

 

From an economic growth standpoint, these age demographics and their accompanying debt overhangs will act as a drag in the developed world. Regrettably, this will likely lead to increase geopolitical tensions (much as we saw in the Arab spring) as times of economic contraction usually result in increased conflict both in terms of trade (the US and China) and actual warfare (the Middle East).

 

However, the fact remains that we will witness a Global Debt Implosion. It has already begun in Europe and will be coming to Japan and eventually the US.

 

Smart investors are already preparing for this by adjusting their portfolios accordingly. On that note, I recently published a report showing investors how to prepare for this. It’s called Surviving a Crisis Four Times Worse Than 2008 and it’s chock full of information on how to not only survive but thrive during if this particular black swan (or any of the others lurking in the system) comes to pass.

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com under the OUR FREE REPORTS tab.

Good Investing!

Graham Summers

PS. We also feature four other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com

 

 

 

 

 

 

 


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Tue, 03/13/2012 - 06:10 | Link to Comment Global Hunter
Global Hunter's picture

global growth of 2% and you say it may be lower than that?  Way to go out on a limb there and stick you neck out you cock.  I stopped reading after that, 2% growth make me laugh my ass off

Tue, 03/13/2012 - 00:04 | Link to Comment Cynthia11640
Cynthia11640's picture

this guy is always selling something - why not say something honest instead of always trying to make a buck from people here, who already know the what he's pushing

Mon, 03/12/2012 - 23:42 | Link to Comment essence
essence's picture

Most recipients of government benefits (especially medicare and SS) don't wish to bother themselves in 'doing the math' so as to compare what they've paid in versus what they pull out in current costs.

The fact is, as soon as one has had a modest medical procedure it's likely they've consumed more in funds than they've ever paid in. The same goes for other programs, (i.e. too many pulling out far more than is being contributed).

Of course the underlying reason for this is crony capitalism and corruption by special interests and in congress. The average citizen recipient is much to blame for not holding Congress feet to the fire and demanding accountability. Instead they're content to just accept the 'bennies' and not question how they came to be. It's a true cluster fuck.

Now it pales in magnitude to the corruption and evil that entails privately owned central banks and their control of issuing "money", but that's a topic for another Zerohedge post.

One last thing,   to all those who disparage this contributor Graham .. I say STFU if YOU are not prepared to surpass him. Graham might not be right on his timing (who is) but his facts are timely and to a large degree correct. He posts often, in a concise manner, on a variety of pertinent topics that encompass the U.S. and Europe. If YOU are not prepared to better his FREE contributions then hold your criticism.

 

Mon, 03/12/2012 - 23:20 | Link to Comment AndrewCostello
AndrewCostello's picture

We can't keep paying all these entitlements.....that's just the plain reality of it.

I work as a Manager for a Medical Equipment company these days, and the amount of money we are spending on the Baby Boomers is just completely unsustainable, and the greedy sods are so god damn ungreatful about it all.  They have such a sense of self entitlement, that it makes me sick sometimes.

They do not care about future generations, all they care about is themselves, and they will happily and purposefully bankrupt America to have everything they desire with no concern for their grand children.

Either we cut costs, or our children will be the paupers and thieves of the 21st Century.

 

Read this if you want to survive whats coming.

http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref

Mon, 03/12/2012 - 22:56 | Link to Comment Paul Thomason
Mon, 03/12/2012 - 22:36 | Link to Comment Heyoka Bianco
Heyoka Bianco's picture

Yep, more communtiy orientation is exactly what happens when resources and government collapse. Just look at Haiti or Somalia, there's a couple of glorious communal paradises. What fucking planet are you living on? Have you even the dimmest awareness of humanity's historical record. Get a mit and catch this clue: it involves a lot of fighting and death.

Who is stupid enough to save worthless fiat? Even if you buy into the lie, the return has been below even the gubermint's wholly false inflation rate?

Lower divorce rate? That whgole notion seems to have wandered in from a different discussion. Who gives a rip?

Mon, 03/12/2012 - 22:09 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

"Governments will try to deal with this in one of two ways: by raising taxes on high- income earners/ any other potential avenue for raising revenues and by reneging on the promises made to retirees."

Wrong.  They'll print and use death panels.

Mon, 03/12/2012 - 21:23 | Link to Comment Rockerchic
Rockerchic's picture

What this article fails to consider is that the number of working people ratio to non-working who collect either penions or social security is much larger than just retirees. The younger baby boomers are going on social security disability in masses. Decades of unhealthy lifestyles such as overeating, alcohol and drug abuse, etc. are creating an entire culture of disability "lifers" in their 40's and 50's. On top of that are losers, lazy people and those with personality disorders are getting on SSI for mental health diagnoses that are exaggerated or faked altogether. I know this because I'm a mental health case manager - probably half my caseload are not really "mentally ill" and are quite capable of working - they just don't like the hassle of getting and keeping a job. 

Tue, 03/13/2012 - 01:51 | Link to Comment indygo55
indygo55's picture

The system enables them. It attracts and then inprisons them. Take a rat and give it every thing it needs and you get the same thing. Take it all away and they fight like motherfuckers for the next meal.

Tue, 03/13/2012 - 00:59 | Link to Comment Born-Again Bankster
Born-Again Bankster's picture

Pensions will be paid because the value of the dollar will be crushed.  The obligations will be met, but you will only be able to pay 1/2 months' rent with it by the time you retire.  Buy PM.

Mon, 03/12/2012 - 23:56 | Link to Comment Fozzy Slippers
Fozzy Slippers's picture

I guess we can all be case workers and community orginizers now. And the world will be just one happy place.

 

Tyler you have a bunch of idiot Barry Soetoro supporters in here.

 

You fucking waste of space shills. The Witch Finder General is coming. None of you asshats will be doing any counseling.

Mon, 03/12/2012 - 21:55 | Link to Comment Fozzy Slippers
Fozzy Slippers's picture

case worker is not a real job. Try and get a real job and keep it.

Doing math. Doing Science. Producing something that fuels industry.

You couldn't do it. Quit setting there picking your nose thinking your useless self helps anyone. You fucking dweeb.

Get a real job.

Tue, 03/13/2012 - 02:49 | Link to Comment the tower
the tower's picture

Anything not paid from taxes is a real job.

Anything that we consider valuable is valuable.

Tue, 03/13/2012 - 00:36 | Link to Comment LowProfile
LowProfile's picture

 

Doing math. Doing Science. Producing something that fuels industry.

Yeah, like making cruise missles! 

/sarc

Mon, 03/12/2012 - 21:47 | Link to Comment FreeNewEnergy
FreeNewEnergy's picture

Three cheers! Creative destruction in human form. Bong hits on me!

Mon, 03/12/2012 - 21:15 | Link to Comment Lady Heather...UNCLE
Lady Heather...UNCLE's picture

I think Phoenix capital has lost alot of capital over the past 3 years> What he says is not wrong...but his reading of the investment zeitgeist (and hence timing) has been terrible.

Mon, 03/12/2012 - 21:14 | Link to Comment Dermasolarapate...
Dermasolarapaterraphatrima's picture

Inflation and devaluation of the various currencies is the only way Gubberments can continue all the Handouts and Freebies---free houses, free cars, free food and now, free education:

 

Mar 10, 2012
5:00 AM

Number of the Week: Most Borrowers Not Paying Down Student Loans

 

http://blogs.wsj.com/economics/2012/03/10/number-of-the-week-most-borrow...

It's all free now!!! No more mortgages, no more credit card bills, no student loan payments....

Mon, 03/12/2012 - 20:44 | Link to Comment wesayukcom
wesayukcom's picture

So glad I never bothered with a pension. The government can take my house to pay for my elderly care for all I care.

What I'm not going to do is put money away today for my infirmity to spend on ski holidays that are of no use to me with a dodgy hip replacement.  Or worse still have the injustice of my pension being raided whence I'm too old to do anything about it...oh no not muggins me I have seen the future

Live life now don't worry about tomorrow. Memories are key !

Mon, 03/12/2012 - 20:41 | Link to Comment centerline
centerline's picture

The grind will continue right up until  the last possible option has been tapped out and cash flow literally locks-up.  Will be interesting to see what cracks first.

Mon, 03/12/2012 - 20:40 | Link to Comment booboo
booboo's picture

Long cheap booze and helmets, oh and empty 50 gallon drum fires for keepin warm. EPA will outlaw bullets so give up on that idea, badazz mofo's will hand em over to ten year old Obama Brown Shirts with tin badges.

Mon, 03/12/2012 - 20:32 | Link to Comment non_anon
non_anon's picture

I read the writing on the "Wall" while serving the US Navy in the 1980's and got out after my hitch and did not do 20 years in the gov.

Mon, 03/12/2012 - 20:25 | Link to Comment vmromk
vmromk's picture

Eventually Graham will be right, the problem is that we may all be dead by then.

All of his articles are doom and gloom, yet he has not had a losing trade since July (so he claims).

So, either the doom and gloom articles are a sham or he has been losing money hand over fist.

Mon, 03/12/2012 - 22:04 | Link to Comment FedBunny
FedBunny's picture

Moreover, Graham is an idiot and should be barred from Zerohedge.

Mon, 03/12/2012 - 21:13 | Link to Comment Taint Boil
Taint Boil's picture

 

 

Just kill all the old people with a plague or something - problem solved. Need direction? No biggie, EvilBible.com got that covered for ya.

I am being sarcastic - of course.

Mon, 03/12/2012 - 20:17 | Link to Comment Buck Johnson
Buck Johnson's picture
  1. Divorce rates will drop as people cannot afford to divorce anymore.
  2. Individualism will give way to more community focused lifestyles: whether they be food co-ops, neighborhood watches, or simply having to live with relatives, the nuclear family and local community will become increasingly important as an emotional and economic support.
  3. Savings will increase and entertainment expenditures will become more frugal (Netflix vs. going to the movies, camping vs. more expensive vacations, etc.)

This is totally wrong and I think he knows it.  When he makes the comment that Divorce rates will drop, I counter that people will for one not get married and two forms of prostitution and mistresses (with or without the significant knowing) will be the norm.  For community it won't happen if anything if it does it will be along racial lines when people are fighting over the crumbs that are left for them to share.  Crime will increase because people will be desperate.  Savings won't increase because unless more jobs are made with better salaries and/or debt relief of some form is done with deflation of items and services people will still be robbing peter to pay paul. 

 

Mon, 03/12/2012 - 20:40 | Link to Comment non_anon
non_anon's picture

for what is it worth, for the first time in US history, more people are living together without getting married vs married, WTF is there a marriage tax? Read about the "Jacobins", "Voltaire", and "Adam Weishaupt" and the three pillars that they desired to remove in civilization, one, but I believe nearly two have been taken out.

 

Mon, 03/12/2012 - 20:14 | Link to Comment Seasmoke
Seasmoke's picture

COLA is the first to go, after that its anyones guess

Mon, 03/12/2012 - 21:02 | Link to Comment Optimusprime
Optimusprime's picture

It has already basically gone, when you consider the monkeying with the "inflation" rate indulged in by our bureaucracies.  Cost of living for real people involves food and fuel.  But no according to our dear Zionized leaders.

Mon, 03/12/2012 - 20:04 | Link to Comment eddiebe
eddiebe's picture

I think number 1 reason the economy will slow is diminishing oil supplies. The number 1 reason promises to retirees will be broken is because of true inflation vs. government statistical inflation, and with that insufficient cost of living increases to keep up with rising prices of necessities. Along with that of course is the whole Zirp issue which is really screwing the elderly along with anyone that is trying to save a buck for retirement.

Mon, 03/12/2012 - 21:20 | Link to Comment Chuck Walla
Chuck Walla's picture

@eddiebe, sadly, you are not alone in not getting it.  If he can slowly, surreptitiously kill lots of old people, the Ponzi pyramid base is re-inflated with the indoctrinated young.  They want the gov in every facet of their lives for a pittance of a fee.  Off the Seniors!

Mon, 03/12/2012 - 22:16 | Link to Comment eddiebe
eddiebe's picture

Can't argue with you Chuck, lots of things I don't get. I'm not sure though what you are trying to say. Are you in favor of killing off seniors once they reach a certain age, and is it the old people or the indoctrinated young that want government in every facet of their lives?

Tue, 03/13/2012 - 00:32 | Link to Comment LowProfile
LowProfile's picture

Here we were thinking it was going to be like 1984, or Brave New World...

...Turns out it's going to be like Logan's Run and Soylent Green!

Mon, 03/12/2012 - 22:15 | Link to Comment aphlaque_duck
aphlaque_duck's picture

You're right but I don't see how this contradicts eddie's observation about peak oil. With unlimited natural resources there would be no need to kill off the old voters. Most of them by now are perfectly on board with big govt too. 

Mon, 03/12/2012 - 20:01 | Link to Comment max2205
max2205's picture

Two posts in one day?!

Zzzzzzzzzzzz

Mon, 03/12/2012 - 23:06 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

The government breaks pension promises in Peru as well.  

My wife's father is a leader of a grassroots protest group ("FONAVI") down there.  He just got his picture on the FRONT PAGE of a Peruvian newspaper.  He is 91 years old and a is great-great-grandfather.  He works the protests about once a week.  Our daughter loves her grandfather to death!

Read all about it (and see the picture) at my blog ( article title: "PMMFM..."),  Gmail me at my name if you would like the link, or just use Google creatively...

Tue, 03/13/2012 - 03:23 | Link to Comment Sudden Debt
Sudden Debt's picture

You have a cool family! :)

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