The Milken Institute debate that was highlighted in an earlier article, Common Stock Legend Disavowed: Professor Siegel’s Epiphany, brought into focus two opposing views regarding the possible negative impact on stock prices to be caused by the retirement of the Baby Boomer generation.

Michael Milken, the Chairman of the Institute, took an optimistic stance, suggesting that the problem would probably resolve itself through improvements in technology and productivity enhancements.

Linking economic stability and growth to enhanced productivity and new technology is a popular theme among economists, including ex-Federal Reserve Chairman Alan Greenspan.

Productivity and Technology Can’t Save the Baby Boomers

As described in the essay, “Profits and Population“, American economic growth over the last fifty years has had more to do with the expansion of the number of people working in the money economy than with advances in technology and productivity.

The initial impact of productivity improvements and new technology is to put people out of work.

Unless government policy and societal customs encourage education, savings and investment, and entrepreneurial activity, higher paying new jobs will not be created fast enough to employ workers displaced by productivity enhancement and new invention.

More »

The U.S. Congress, with bipartisan support, is considering legislation that could reduce the flow of funds into the U.S. bond market, cut financing for the War on Terror and support for the real estate market, increase long-term interest rates, and slow economic growth.

The purpose of this proposed legislation is to eliminate the trade deficit with China.

The U.S. Constitution gives Congress the prerogative to regulate international commerce,

About 25% of the trade deficit relates to the China trade.

(See: “Is The U.S. Trade Deficit Sustainable?“)

Funds originating from the trade deficit are a major source of financing for the U.S. bond market.

(See: “U.S. Bond Demand Has Exceeded Supply for a Decade“)

More »

The correct answer to this question is, “Of course, the U.S. trade deficit is not sustainable.”

But then, what is? Neither the Roman nor the British Empire endured. Economic and political phenomenon eventually fade and die. Indeed, the U.S. trade deficit, one day, like everything else will be a thing of the past.

A more practical question would be, “How much longer might the U.S. trade deficit last? One year? Ten years? Thirty years?”

Some observers may presume that the demise of the trade deficit is imminent, perhaps by the end of 2006; but, it this reasonable?

The trade deficit has been growing for thirty years — which almost qualifies as a Keynesian ‘long-run’ . Since no clear mechanism exists whereby the trade deficit must end in, say, six months or a year, it could be that in thirty years our children will still fret about a trade deficit that has grown even larger.

The longevity of the U.S. trade deficit is quite germane to Capital Flow Analysis, since it is the dollars earned by foreign exporters that support the price of American bonds.

(See: “Trade Deficits Have Depressed Bond Yields for Twenty Years.”)

It is worthwhile to speculate about the sustainability of the trade deficit.

More »