Our Declining Lifestyle
There is a major socio-economic trend in development. It has been going on for several decades and has accelerated to the point of serious transformation. This involves a metamorphosis of cultural behavior. We are now in an era of social disintegration where many citizens perceive other citizens as the enemy. The constant engagement in attacks, manipulated and hidden information and outright propaganda indicates a move away from respect for each other and the subterfuge of democracy. As Lincoln said “A house divided against itself cannot stand”.
Do not be distracted and confused by recent events. Immigration, the Dept. of Justice, Iran are not the beginning. They are the evolution within the trend. President Trump is not the beginning, he is a consequence. The social factors and the support for someone like Trump is the trend. If not Trump, someone like him. The trend continues.
The magnitude of change in cultural behavior forecasts the changes in our society and the economics governing our society. This has a dramatic effect on the dynamics of investing.
To put this in historical perspective, the zenith of America by economic progress and personal wealth would be 1945 to 1971. The lifestyle represented during that period is unlikely to be replicated. The current generation is the first in our history who will be facing a relatively lower standard of living than previous generations. In addition, we have the greatest wealth gap in our history. Past societies that have experienced that situation have had serious social problems. The overall rate of Gross Domestic Product has been declining for years. Recently, U.S. debt surpassed total economic output. Consumer debt is at the highest level and the savings rate is falling. All this is a sign of decline not growth.
Economic progress is generally a function of population growth and the training and education of that population. Due to a significant decline in birth rates, America, demographically is barely at replacement ratio. Interestingly, the only reason we have been able to hold that ratio is due to immigration. Now within any large group of immigrants there will be a few real criminals. However, the overwhelming majority are workers and consumers who contribute to economic growth. They will be missed and the effect will be significant. As for education, student achievement is mixed at best and the value of higher education is questioned. We are falling behind other countries especially China.
The origin point for the trend occurred in 1971 when President Nixon, due to national fiscal mismanagement, closed the gold exchange window used for international transactions. This was to be temporary but no President since has reopened it. It broke the dollar support system. There was a reprieve in 1974 when the U.S. negotiated a deal with the oil producing nations of the middle east. They agreed to sell their oil in U.S. dollars instead of their own currency. We offered royal protection in return. By the way, that is why the Prince was able to get away with directing the assassination of the journalist Khashoggi. This financial arrangement created what became known as the petro dollar and allowed the U.S. dollar to remain the reserve currency to the world. As the oil producers invested their profits into U.S. Treasury bonds and other American assets, it created the mechanism for America to accumulate huge debt. The petro dollar system is now being dismantled which is one of the reasons for the middle east conflicts, both historically and currently. It is a slow process but the negative effects will be dramatic. There are presently attempts to renew dollar dominance but those are unlikely to work as the BRICS consortium pushes forward.
The trend is inexorable. The impact on lifestyle should not be underestimated. The trend will profoundly effect your financial plans and investments making them unproductive in trying to solve problems with your lifestyle and wealth. Standard strategies could even be dangerous. New approaches will be needed. There will probably not be a collapse. There could be a temporary phase of deflation or disinflation. The longer term outlook will be greater instability, asset repricing and dollar devaluation.
I will discuss possible strategies in the near future.