Shared sacrifice will be the new economic order

(Jerry’s Comments: Here come’s the message of sacrifice that I spoke of in my book, Bankruptcy of our Nation. Governments are going to begin appealing to the long forgotten ideal of “sacrifice.” Much of the global populace will not embrace this easily. I explain how this idea will translate into the American church and how it will literally transform our nation’s approach to “church.” Note my emphasis on the story below with bolds and underlines.)

The next phase of the credit collapse may be a change in the baby boom dynamic of spending to frugality, and that means a prolonged economic slump

David Rosenberg | The Globe and Mail

The laser-like focus on the global financial crisis means investors are back in contingency planning mode while the tools to fend off fiscal Armageddon are again being sharpened by governments and policy makers around the world. But, at times like these, it is important to understand where the real economic power resides, and that is with the people on Main Street.

Economic change occurs in stages. We have been through an intense financial stage of the secular credit collapse but now the fundamental economic part of the crisis lies ahead. It is reasonable to assume that the economic behaviour of the population in general, and the baby boom cohort in particular, is on the precipice of a dramatic change, as Main Street has enough understanding of the situation to start to take action to get its balance sheet in order.

Retirement is rapidly approaching for 78 million U.S. boomers. Remember, this is the segment of the population that sets the fashion and has the real power in society. The rest of society, and particularly the politics, will mirror the actions of these fiftysomethings.

So just as conventional wisdom has concluded that, fiscally, we are about to drive the Thunderbird off the cliff and into the banana republic territory, perhaps the Great Society Lyndon Johnson kicked off with his massive government spending is reaching its bubble peak. Most likely, what happens next is that the credit collapse proceeds on the back of a severe form of the “savings paradox,” resulting in a prolonged economic slump. The good news is that it will ultimately lead to a balance sheet rebuilding process, both at the household and government level, that can sustain the next secular economic expansion.

In the meantime, an enormous amount of shared sacrifice will be required.

Initially, we can expect to see less government, fewer entitlements and higher taxes. The Keynesianism that has dominated fiscal policy since the 1930s is just now in the process of being turned on its head. So instead of having a situation where an FDR followed a Herbert Hoover, Americans may well opt in the next election for someone closer to Ronald Reagan. Less government will require balanced budgets and this will contribute to continued stress in the job market, at least for a while.

Currently, the seeds are being sown for a radical restructuring of entitlements. There is a growing acceptance among public sector unions and civil servants that the way they spend and save is going to undergo some radical changes in the future. Furloughs, layoffs and now less-generous pension benefits for current workers and retirees are occurring for the first time ever. Across the nation, sweeping changes are taking place as pension trustees and legislatures push for higher monthly contributions to pension plans, a later retirement age and lower annual cost-of-living adjustments for current and retired workers. As an aside, this is why the U.S. is not Greece – there are few wildcat strikes taking place on this side of the pond.

At all levels of the social structure, starting with households and followed by unions and governments, the U.S. will be swept up in a sprint to frugality now that the baby boom has run out of time to speculate. They will be saving the old-fashioned way – more into the coffee can.

Out of necessity, the boomer population will be pursuing a strategy of working longer, saving more and reducing their debt obligations in order to secure a comfortable retirement lifestyle, while at the same time the public sector moves in the very same direction toward fiscal probity. In the case of government, solvency will be restored by reducing non-essential services and severely means-testing entitlements while increasing taxes and user fees.

On a more positive note, if the shift toward shared sacrifice is in fact what the next leg of the credit collapse has in store for us, then one also has to wonder if we are finally coming to the end of the bubbles that we have endured for the better part of the past two decades. It makes sense, after all, that there is such a thing as a post-bubble era – and perhaps we are finally entering into it.

Rather than looking at the situation from the lens of a V-shape rebound in inflation, it seems far more likely that what we could well be in for is a prolonged period of price stability or modest deflation. It is reasonable to assume that a resumption of strong GDP and earnings growth in the future and a resumption of inflation and appropriate inflation investment strategies will have to await the end of the rebuilding phase as it pertains to the household and government balance sheets.

David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business.

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