Der USA Bären-Thread

I write this month to condemn the inventor of the  electronic “seeing eye” toilet. Yes, that’s right, I’m talking toilets  here, doo-doo-stuff, some of which I hopefully won’t step in myself over  the next few paragraphs. I know there must be more substantive and less  objectionable topics to bring before you, but I have a sense that many  of you join me in spirit if not common experience and so I devote this  month’s Outlook to another trivial snippet emphasising our  joint humanity and sense of loss due to the recent disappearance of the  hand flusher.

I don’t know where it is located exactly, but there’s  an electronic eye in the plumbing of public toilets these days that can  sense when you get up and down (or is it down and up) and are finally  finished with your “business,” if you get my drift. My doctor says a  proctology exam is a necessary evil but cameras in toilets? Never having  seen myself from this particular angle, it is particularly embarrassing  to turn over the assignment to a camera and in effect say, “Snap away –  see anything that doesn’t look right?” I figure if there’s an eye  there, then there could also be a little voice that says, “Have a seat,”  which of course I do, usually with much haste and a sense that I’d  better get on with it before I attract a crowd.

It’s after the dirty deed is complete, however, that  the real intrigue begins. Does it flush or doesn’t it? Only the computer  chip knows for sure. Sometimes, though, after the paperwork has been  filed, pants pulled up and an attempted getaway initiated – nothing  happens. No flush. Well, what is one to do in such circumstances? You  can’t just leave it there, you know. Sometimes when the toilet’s plugged  and there’s no plunger like in European bathrooms, you can get out of  there quick with conscience in tact, but only, of course, after checking  to see that there’s no one else in the restroom who might be able to  testify against you in court for being a non-flusher. With electronic  eye toilets, however, the conscience is never clear and so you wave your  hand in front of the camera, hoping to convince it by the breaking of  light waves that someone really has used the toilet and that somehow it  just forgot, or maybe the deposit was so minuscule that it just didn’t  merit a flush. Hello in there! Having failed to trick it, however, the  next step is to look for that little button in the back that you  supposedly push in an emergency – sort of like a “break glass in case of  fire” toilet equivalent. But think of all the billions of germs! At  least with an old handle you could kick it with your shoe, hold up your  arms like a doctor scrubbing for surgery and make an exit looking like  you’re auditioning for a part on ER. Finally I suppose you head  for the door, all the while listening for the flush, the flush, that  beautiful sound of the flush. I could have done it myself, you know,  with a lot less hassle. Which is why I support a retreat to the old  days, (not the backyard outhouse), but the good old-fashioned hand  flusher. One push, and presto – you’re good to go!

I really do have a serious message this month, an  adjunct to the New Normal that will likely impact growth and financial  markets for years to come. Our New Normal, to repeat ad nauseam, is  predicated upon deleveraging, reregulation and deglobalisation, all of  which promote slower economic growth and lower inflation in developed  economies while substantially bypassing emerging market countries that  have more favourable initial conditions. In recent months, Mohamed  El-Erian has added a developing corollary that emphasises the lack of an  appropriate policy response to what is a structural as opposed to a  cyclical development, and you should read his frequently published  op-eds for a more thorough analysis as well as those written by Jeffrey  Sachs and others who are constructively suggesting a way back to the old  normal.

That return journey will be all the more difficult to  accomplish, however, because of demographics, an influence that much  like gravity is hard to see but whose effect is all too powerful.  Demographics – or in this case population growth – is so long term in  its influence that economists and observers are inclined to explain the  functioning of economic society without ever factoring in the essential  part that it plays in growth. Production depends upon people, not only  in the actual process, but because of the final demand that justifies  its existence. The more and more consumers, the more and more need for  things to be produced. I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population.  Our modern era of capitalism over the past several centuries has never  known a period of time in which population declined or grew less than 1%  a year. Currently, the globe is adding over 77 million people a year at  a pace of 1.15% annually, but slowing. Still, that’s 77 million more  mouths to feed, 77 million more pairs of shoes to make, 77 million more  little economic units of demand – houses, furniture, cars, roads, oil –  more, more, more. Capitalism, I would assert, thrives on more, more, and  more, but not so well when there is less or an expectation of less. This  is not the Malthusian thesis, which maintained that at some point the  world would run out of food to satisfy a growing population; it is an  assertion that capitalism depends upon final demand and that if there  ever comes a time when population growth slows, then the world’s most  efficient economic system will be tested. If anything, my thesis is anti-Malthusian in its assertion that there will always be enough production to satisfy a growing population, but perhaps not enough new people to sustain growing production.

Observers will point out, as shown in the following  chart, that global population growth rates have been declining since  1970 with no apparent ill effects. True, until 2008, I suppose. The fact  is that since the 1970s we have never really experienced a secular  period during which the private market could effectively run on its own  engine without artificial asset price stimulation. The lack of  population growth was likely a significant factor in the leveraging of  the developed world’s financial systems and the ballooning of total  government and private debt as a percentage of GDP from 150% to over  300% in the United States, for example. Lacking an accelerating  population base, all developed countries promoted the  financing of more and more consumption per capita in order to maintain  existing GDP growth rates. Finally, in the U.S., with consumption at 70%  of GDP and a household sector deeply in debt, there was nowhere to go  but down. Similar conditions exist in most developed economies.

europe.pimco.com/NR/rdonlyres/...4F6/9332/chart1ioAug2010.gif" style="max-width:560px" alt="" />

The danger today, as opposed to prior  deleveraging cycles, is that the deleveraging is being attempted into  the headwinds of a structural demographic downwave as opposed to a  decade of substantial population growth. Japan is the  modern-day example of what deleveraging in the face of a slowing and now  negatively growing population can do. Prior deleveraging periods such  as what the U.S. and European economies experienced in the 1930s  exhibited a similar demographic with the lowest levels of fertility in  the 20th century and extremely low population growth. Things did not go  well then. Today’s developed economies almost assuredly offer  substantially less population growth than the 1.5% rate experienced over  the prior 50 years. Even when viewed from a total global economy  perspective, population growth over the next 10–20 years will barely  exceed 1%.

The preceding analysis does not even begin to discuss the aging  of this slower-growing population base itself. Japan, Germany, Italy  and of course the United States, with its boomers moving toward their  60s, are getting older year after year. Even China with their previous  one baby policy faces a similar demographic. And while older people  spend a larger percentage of their income – that is,  they save less and eventually dissave – the fact is that they spend far  fewer dollars per capita than their younger counterparts. No new homes,  fewer vacations, less emphasis on conspicuous consumption and no new  cars every few years. Healthcare is their primary concern. These aging  trends present a one-two negative punch to our New Normal thesis over  the next 5–10 years: fewer new consumers in terms of total population,  and a growing number of older ones who don’t spend as much money. The  combined effect will slow economic growth more than otherwise.

PIMCO’s continuing New Normal thesis of  deleveraging, reregulation and deglobalisation produces structural  headwinds that lead to lower economic growth as well as half-sized asset  returns when compared to historical averages. The New Normal will not  be aided nor abetted by a slower-growing population nor by cyclical  policy errors that thrust Keynesian consumption remedies on a declining  consumer base. Current deficit spending that seeks to maintain  an artificially high percentage of consumer spending can be compared to  flushing money down an economic toilet. Far better to create and mimic  other government industrial policies aimed at infrastructure, clean  energy, more relevant education and less costly healthcare services. Until we do, policymakers will continue to wave their hands in front of  the electronic eye – waiting for the flush, waiting for the flush,  waiting for the flush, with very little success. Try another way,  Washington. El-Erian, Sachs and other 21^st century policy thinkers have a better way to push the handle.

William H. Gross
Managing Director