Harry S. Dent | Tuesday, October 23, 2012 >>
As people who follow our books and newsletter know, we have a very different view of what actually drives our economy. We believe new generations, doing predictable things as they age, drive our economy.
When they’re young, they drive innovation and inflation. It’s expensive to raise them and incorporate them into the workforce. As they age and raise their families, they drive massive increases in productivity, income and spending. Then, as their kids leave home and retirement (and death) looms, they save and downsize.
Government policies don’t drive the economic train. They’re more like conductors on the coaches. They’re reactive…
Governments raise interest rates when the economy or inflation overheats. They lower rates and run deficits to offset a slowing economy, which is what they’re doing now.
In real financial crises or emergencies they go one step further: they print money and inject it into the financial system to create liquidity for banks, and they lower interest rates for long-term loans to boost the private sector.
These Keynesian policies, which have become the norm since the 1970s recessions, have given governments and central banks the illusion that they can run and regulate the economy like a machine. This may just be the greatest mistake and misperception in economic history!
Where it Goes Wrong
Organic entities, like our bodies or the economy, are not regulate-able like a machine or motor (or some other inorganic object). You can run a motor continuously at a certain speed or output. You can change that speed or power by manipulating inputs and controls. That’s how they’re designed. But complex, interactive, organic processes follow their own course, depending on their needs.
Our bodies need to wake and then sleep, inhale then exhale, eat and eliminate and so on. If you doubt that then try not sleeping for a few nights in a row and see how you function.
In the same way, our economy needs to grow and expand, but then slow and rebalance, like inhaling and exhaling.
Just like our waking and sleeping patterns, where we tend to be awake and functioning about two-thirds of the time and asleep about one-third of the time, our economy tends to grow about two-thirds of the time and then slow for maintenance and repair, debt deleveraging, cost-cutting and consolidation for the remaining one-third.
“Forcing” the economy to grow and function without that rest period is like depriving the body of sleep. It can only lead to chaos, insanity… and eventually death.
Our last major boom prior to the ’80s was from early 1942 into late 1969. Then we declined into late 1982. When you count it, that was a cycle of 27 years of growth and almost 13 years of recovery (or two-thirds up-time and one-third downtime.)
Economists, who have rarely run businesses, not only don’t understand the demographic dynamics that create innovation, growth and slowing in natural cycles, they don’t comprehend that our greatest innovations come in the very slowdowns that create challenges and force consolidation, cost-cutting and new breakthroughs to survive.
Then those new innovations are adopted progressively in the next boom until they saturate the economy and growth naturally slows down again.
The same occurs with demographic waves of boom and bust, alternating between innovation and growth. Businesses and consumers only tend to get more complacent, inefficient and indebted in good times… so things need to be shaken up again.
My point is this: if we don’t allow the economy to go through natural cycles of growth and slowing, innovation and adoption, investment and deleveraging, then the very innovation process that drives progress winds down and economies become lethargic.
We need to slow and deleverage for several years. Then we can eliminate massive amounts of debt and create new innovations to spur long-term growth and productivity again.
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