numbers that matter

Forget about can-do spirit, yankee ingenuity, free markets, democracy, and other reasons often invoked to explain economic prosperity. Take a look at the real data. When Europeans arrived in North America, they found a continent that was virtually empty -it wasn't really but the diseases they imported quickly made that happen- full of goodies that the locals were unable to exploit.

North America was a continent where conditions were rather unfavorable for those living there, but very favorable for new intruders with more advanced technology. North America was by far the most favorable continent for exploitation. Africa, while closer to Europe, had too many nasty diseases and other competition, and even today Europeans have a hard time surviving in Africa. Australia, was simply too extreme and the landscape cannot support large numbers of people regardless of their technology.

Such geologic, ecologic, and other basic facts can explain most of the variability associated with a population's success or failure. This premise is not new, and Jared Diamond has based his best-selling novels, "Guns, germs, and steel," and "Collapse," on it. 

Population data can also be used on a smaller scale to explain otherwise curious events. The current economic downturn for example is mainly due to demographics. So was the preceding expansion and the series of bubbles that followed. But now things are changing. Here is some change you can believe in, my friends.

With an aging baby-boomer generation, and not enough young people to replace them, the economy of 21st century America is in for some serious downturns. The process has already started and it is very likely not going to end before 2025. There may be brief upswings, but overall the trend is down and down we go.

The baby-boomers grew up in good times. Their net worth is higher than that of their parents. They never experienced a serious downturn or a major war. Consequently, they did not save. With more money to spend, times were wild. Now those same baby-boomers are deeply in debt but they still have many years to live.

First they spent their cash, and then they borrowed more. All of it went into luxury goods, travel, McMansions, spas, V-8 cars, trucks, boats, jetskis, etc. Now those baby boomers are getting older. They can no longer afford their life-styles, either because they overspent or because their old age limits what they can do. There are excess oversized houses on the market and no buyers. The rush to monetize assets to cover debt is leading to a huge deflation of value. There are not enough young buyers and too many elderly owners.

It is a disaster that can be postponed, but ultimately the reckoning will come.

As for the current crisis, I stick to my prediction, made weeks ago, that the Dow won't hit bottom until we hit 7,000 or less. Despite a recent drop in gold prices, I still think gold is the best way to go to weather the upcoming storm.