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From today's headlines - Fed chairman: Approve bailout plan or risk recession
galadrion
Well, at this point I have to think: maybe it's time.

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Which? To do something really stupid, or to let huge corporations suffer for their sins? ;-)

Actually, I had more in mind a recession.

See, if you examine historic trends, in this country and globally, on average we've had about three recessions and one depression in any given rolling century. Now, in the last hundred years we've had three recessions... but we're coming due for the next depression. (If you look at the long-term data, it's closer to a depression about every seventy-five years, with a relatively wide swing. Since our last depression started in 1929, we're about five years overdue.)

Economics is generally a cyclical phenomenon - something that most people are willing to acknowledge as a general principle, but are inclined to overlook when they examine the specific case of "current affairs" - and, if you're willing to study the past, you can generally get a reasonably accurate overview when you're projecting to the future... as long as you don't get too specific. As an example, I've been predicting a major economic downturn - specifically, I had in mind another Great Depression-type phenomenon - since approximately 1990, expecting it to start around 2010, plus or minus five years. For the past fifteen years, I've geared my investments towards such an event, happening at such a time. I've also been encouraging many of my friends to take such a view and to prepare their own strategies with such a circumstance in mind. (Sadly, I don't really expect many of them have paid much attention - such predictions have generally met with handwaving dismissal. And then again, most of my friends through this period have been about my age, and if you look at the statistics, most of my cohort have made zero or less progress towards saving. I think many of them may actually have a negative net worth.)

How did I arrive at my "target date range" of 2005-2015? Simple: I looked at demographics. The Baby Boom was our single largest generational population increase... and the Baby Boomers are now at retirement age. That means they're stopping, or at least slowing down, their investment behaviors and starting to withdraw their savings in order to live off them. The problem with this is two-fold: first, the Boomers comprise a significant proportion of our population, and second, they represent a disproportionate amount of our investment base. That means that as more and more of our parents retire, money is going to become scarcer and scarcer. As the supply of money (M3 in terms of economics-speak) decreases, it's "price" will go up - basic supply and demand. What this means is that we're headed into a time when credit is going to be harder to come by (and thus, more expensive), the costs of most commodities are going to become increasingly unstable (but will generally trend upwards), and investor confidence is going to drop. And yes, I think that it will continue to drop, regardless of what this or the next administration does in an attempt to stem the tide - government is generally the wrong tool to fix such problems, and most of the time the best you can hope for is that any given government action will balance out in regards to gains and losses.

What do I think we should do? Personally, I don't really think anything is going to stop it at this point - maybe delay it for a few years, but the pendulum has turned and there's not a big enough force available to reverse it. In the long term, I suspect that market forces (the same overall behaviors which got us into this mess) are going to be the driving factors which bring us back out of it... but we're almost certainly going to have to go through some Bad Times before that happens. Also in the long term, I don't think this "economic bailout plan" is going to make a lot of difference - it may smooth out some of the more catastrophic corrections, but $700 billion isn't going to be enough to stop it or to significantly shorten it. If this is the start of the next financial "Big One", expect it to last for at least six years - and the only way it'll be that short is if there's some sort of Singularity in the economy.

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