Written by Econintersect
Late last week Charles Hugh Smith and Gordon T. Long had an interesting discussion replete with mutiple graphics that considered what happens when wealth stops growing and starts shrinking. One of the drivers of the American economy has been something called a “wealth effect”. As more and more people in a growing population “grew, mined, and built” things of value across the history of America the wealth of the nation increased.
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The caption graphic above is the very first one of the presentation and sets the stage for a more general discussion. For an individual the financial life cycle is a wealth building process while working followed by retirement with a wealth consumption process. This is offered first because it is an easy example for everyone to internalize. As long as the population is growing the societal net is a continuing ( with business cycle interruptions) wealth building for the economy as increasing numbers of workers are always replacing those who retire.
But, when a population starts declining each retiree over time is replaced by less than one new worker. For the entire economy this can (but does necessarily) lead to a reverse wealth effect if more and more needs for the seniors are imported from outside the national economy.
The discussion above is a gross simplification of the discussion in this video. There are similar declines in production of things that result in growing wealth for a society that have nothing to do with age demographics. Smith and Long delve into these other factors, such as conglomerates squeezing out production formerly distributed across a population, production being off-shored leading to increasing imports and falling exports, redistribution of income producing a “hollowed out” middle class, and a decline in the value of personal assets such as homes.
Source: YouTube
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