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The Greatest Redistribution of Wealth in History

By
Kyle Murphy
on January 12, 2010 4:33 PM | | Comments (0) | TrackBacks (0)
Only wars, royal marriages, coups and a few other major occurrences have caused large redistributions of wealth over history--think of the American revolution taking wealth from the United Kingdom or the Hapsburg royal family gaining wealth and land through marriage. But a redistribution of wealth on an unparalleled scale will start to occur in about 10 years and last for about 20 years. There will be lot's of dead bodies in this redistribution scenario but there will be no wars or coups. About 77% of the wealth in the US will be redistributed and probably similar amounts in other developed countries. 

What is so earth shattering to cause this major, perhaps once in humankind occurrence...retirement and death from old age. Yes, just plain old retirement and simple death from old age of the largest and wealthiest generation in history--the Baby Boomers. Born between 1946 and 1964, the first of the boomer generation are now hitting 65 years of age. As boomers start to retire they no longer will be accumulating wealth and will be spending it, mostly to the benefit of younger generations. But more significantly, if you assume the average human lives between 75 and 85 years, the boomers will start dying off in significant numbers in about 10 years and most will have died 20 years thereafter, leaving their wealth to be be redistributed.

The boomers benefited from the greatest wealth creation period in history and amassed an disproportionate amount of the wealth. It's estimated boomers have 77% of the financial assets in the US but represent only 28% of the US population. Conversely, boomers also are responsible for authorizing and/or benefiting from much of the national debt accrued by the US government over the last few decades.

While healthcare spending will increase by boomers, most of the cost will be burdened by medicare, thus causing even more debt to be incurred. The voting and financial power of boomers will prevent politicians from making any significant changes to medicare and social benefits, so US government debt levels will probably increase even more over the next few decades (if the global economy can absorb it).

Thanks boomers...you generated more wealth than any generation in mankind but kept it mostly to yourself and you'll leave us with more debt than any country has ever accrued. It seems like the social revolution the boomers lead in the 60's was really a failure--selfish, short-sighted, non-communal behavior became the norm in the 80's that has been and will continue to be an economic nightmare and their children they leave behind (the y generation and millennials) have a high sense of entitlement, poor work ethics, lack of creativity, and short attention spans. Fun times ahead!

So what does this redistribution mean for the economy? Other generations? The government? I was surprised to find so little written about this coming redistribution. Will estate taxes collected from the redistribution be enough to pay off much of the government's debts? What will the younger generations do with the money they inherit? Spend it? Reinvest it? Will the boomers spend most of their wealth before death due to their traditional overly consumeristic behavior? Will the redistribution cause the middle-class to grow again?

Tell me what you think...

Lies, Damn Lies, & Economists

By
Kyle Murphy
on August 26, 2009 10:31 AM | | Comments (0) | TrackBacks (0)
The sky is falling, the sky is falling...if you believe what some economists are saying about future inflation in the US rising exponentially due to the government's large injection of money into the economy. But since most economists haven't really got much right recently, why should we listen to them this time? The fact is, we shouldn't.

First, lets address the accuracy of economists or more specifically lack of accuracy. According to economics Nobel laureate Paul Krugman, "...most work in macroeconomics in the past 30 years has been useless at best and harmful at worst." Economics is not a forecasting science, contrary to the use of most economists by business and finance. Economics is a social science that looks at the behavior of people, groups, and systems for allocating resources (of which governments, money, and finance are players). We generally don't ask anthropologists and sociologists to predict the future, then why are we asking and relying on economists to light the future for us? Social sciences are best used for asking "why" things happen or people behave a certain way, not "how" they will in the future.

Economists look at past behavior and actions to created models of how they think one or a couple aspects of the economic world operates. These models have to simplify the world and make many assumptions to be useful for analysis and prediction. Sometimes they work, sometimes they don't. But it is a giant leap to go from a model that simplifies the world to look at isolated aspects of the economy to predicting real world behavior and market actions with the limitless number of aspects and variables.

If this simplification wasn't challenging enough to the practical use of economic models, it gets worse. The real weakness in economics models built in the last 30 years for business and finance is that they are based, at least partially, on two flawed theories--the rationality of humans and the efficient market hypothesis. Without getting into the details of these concepts, the flaws are easy to see. 

  • First and most importantly, humans do not behave economically rational much of the time. If anything, the economic randomness of the last two years provide a good example of that; thus the rise of behavioral economics (combines psychology with economics). Why is this important for this discussion around inflation? Because the theory of high future inflation relies on models that try to predict what will occur when the government injects trillions of dollars into the economic system, as it recently has. What these models neglect to take into account is the psychological aspect of the economy losing $13 trillion in value over the last two years, much of it felt by individuals in the decreased value of their homes and savings (yes, @ $4T in value has come back, but the pain still exists). Also, the money supply as measured by M3, which the government uses as the most comprehensive measurement of how much liquid money is sloshing around the country is collapsing. Unless the government injects enough money into the system to return home and retirement portfolio values back to previous highs, inflation will not increase dramatically because consumer demand and lending will remain low due to non-rational, psychological reasons.
  • Secondly, the efficient market hypothesis falls apart because it relies on the rationality theory and player manipulation, government intervention, and asymmetrical information can never be fully removed from the system, so the market can never act as freely as is theoretically possible.
Lastly, economics is not a blind science. There are many different economic schools of thought that influence the viewing, analysis, and interpretation of economic systems by economics. So no model based on past data can accurately predict the future when economists can not agree on what actually occurred in the past.

So my recommendation is to take every economist's prediction with a grain of salt because they are basing their predictions on simplified models of the world that may rely on faulty theories. I offer this advice as a trained economist, not to bash the field of study put to protect it's future value to society. For as long as history is recorded people have sought out oracles and prophets for insight into the future. There is northing wrong with seeking this advice (I guess), just please don't put economists in this category.


*Note to inflation junkies and your addiction to gold...the gig is up! Unless the world economy completely collapses into another dark ages, gold does not have any real value (and may not have any value then either). Gold has not moved up or down with the economy and government intervention as is predicted in so many "rational" models. The value of gold is mostly a function of behavioral, psychological based influences.

Recovery Does Not Equal Recovered

By
Kyle Murphy
on July 28, 2009 5:08 PM | | Comments (0) | TrackBacks (0)
Now that Wall Street is drinking the kool aid of recovery and dreaming of glory times past, Main Street and Joe American would be wise to avoid the party. Yes, the worst of the recession is probably behind us, but that doesn't mean we're on the fast track back to where we were economically.

The US has collectively lost $13 trillion of wealth in the last two years, but much of that wealth was created on artificially cheap capital. If capital and risk had been priced properly, without the government artificially setting the interest rates too low (thanks Greenspan!) and the over leveraged speculators manipulating prices, the economic bubble would not have occurred. 

Without the bubble, real estate would have followed long-term trends and grown in value somewhere between 2%-5% per year. According to some respectable and mostly reliable economists, it may take at least 10 to 15 years for housing in some markets to reach the prices seen a few years ago, which coincidentally enough, is right in line with the traditional growth rate.

The economic hangover we've collectively felt the last two years is from several years of drinking too much cheap capital, leading us to believe our economy is stronger and better looking than it actually is. So what does this mean? It means, unless we get drunk again on another cheap bottle of capital and over leverage ourselves, economic growth is going to closely match the rate of inflation plus population growth (the historical growth rate since 1945).

What we've been experiencing is a correction (i.e. sobering up) to normal valuations/prices based on historical trends. Therefore a recovery will only be a return to growth in the economy of an annual rate of somewhere between 2% and 4%, not a quick return to the drunken, overvalued days of a few years ago.

What has America learned from this debacle and the tech one before it? Unfortunately, probably not enough, but hopefully we can recognize when we're getting drunk a little earlier next time and stop drinking before we go home with the ugly person at the end of the bar (economically speaking that is).

A full recovery to the prices and valuation peaks from 2007 will take some time, which should be preferred by everyone, because a fast recovery will be just another bubble waiting to burst. We're a mature capitalistic economy that should expect growth at rather conservative rates. So kick back a little, grow moderately, and enjoy life without the worry of an economic  hangover.

Self Storage Industry is Metric for the Economy's "Wellness"

By
Kyle Murphy
on June 1, 2009 9:18 PM | | Comments (2) | TrackBacks (0)
When you eat too much food, the body stores those extra calories in fat cells. If you keep overeating the body becomes obese and starts to break down with diabetes and other nasty ailments. If those symptoms don't deter the overeating, the body will eventually fail...game over. Our economy and society is like a living body, it requires a balanced diet of saving/investing and consumption to remain healthy. Two much saving/investing (like eating too little) will starve the economy's growth and lead to unemployment. Conversely, too much consumption (like eating too much) will over inflate demand and increase debt leading to economic bubbles (sound familiar). So too much of either and the economy becomes like an unhealthy malnourished or obese body.

While there are numerous metrics to measure the wellness of the economy, I suggest looking at the self storage industry as an ideal metric for measuring over consumption specifically. If we're not over consuming, we shouldn't need excess self storage facilities (like fat) beyond a certain minimum level required to handle things like military personnel, people in transition, and small business inventory/equipment. Since there can't be negative self storage space, the industry is not a relevant metric for saving.

For years I watched with wonderment the growth of the self storage industry. It seems people were storing excess goods (read "unused crap") everywhere in larger and larger amounts; and self storage is not cheap. So not only were we buying much more than we could use and consume, we were spending money on storing it that should have been put into savings. 

According to the not-for-profit Self Storage Association, there are currently over 52,000 self-storage facilitates with an average 45,800 sq. ft. of rentable space (that equates to approximately 2.35 billion sq. ft.) Sales for the industry are estimated at more than $20 billion. Here are some other facts from the SSA:

--At year-end 1984 there were 6,601 facilities with 289.7 million square feet (26.9 million square meters) of rentable self storage in the U.S. At year end 2008, there are 51,250 "primary" self storage facilities representing 2.35 billion square feet -- an increase of more than 2.0 billion square feet.

--During the peak development years (2004-2005) 8,694 new self storage facilities (approximately 480 million square feet of space were added).

--It took the self storage industry more than 25 years to build its first billion square feet of space; it added the second billion square feet in just 8 years (1998-2005)

--There is a self storage space inventory of 20.8 sq.ft. per U.S. household (or an extra closet).

--There is 7.4 sq.ft. of self storage space for every man, woman and child in the nation; thus, it is physically possible that every American could stand--all at the same time--under the total canopy of self storage roofing.

The self storage industry growth trends over the last 20 years correlate closely to our over inflated GDP in the US, which was caused by over consumption (spurred on by lose credit, etc.). This is especially true over the last 8 years. What I find really hard to understand, is while we were building larger houses and buying (consuming) more of them to store stuff in, self storage was still growing exponentially.

While military personnel rent approximately 4% of self storage units, another 4% is occupied by those in transition and a further 5-10% is used for small business inventory/equipment storage, that leaves 80% (1.88 billion sq ft.) for the average American storing excess "stuff" that is rarely used. You can't blame the self storage industry for growing, the industry is growing because of demand to store excess fat--just like our waists.

America's economy is obese and sick, but with a better balanced diet of saving and consumption we can get back to health. I'll know when we're on the right path when self storage facilities start going under (sorry, nothing personal to the self storage industry, but you're a symptom of our over consumption). Now if we can just work on American's personal wellness and get back into physical shape before the healthcare system implodes...but that's a topic for another blog.

Financial System Does Not Equal American Capitalism

By
Kyle Murphy
on March 24, 2009 9:15 AM | | Comments (0) | TrackBacks (0)
"Le laisser-faire, c'est fini." Capitalism is dead, long live capitalism, so declared French president Nicolas Sarkozy. Socialist believers and capitalist naysayers are celebrating the collapse capitalism. If you believe that, then we'll all be farmers soon. The collapse, or really seizure of the credit markets and financial system is real but capitalism continues to survive and thrive. While credit and finance is the lubricant for modern capitalism, it is not capitalism itself. Just like an engine, if you put too much oil in it, it damages the engine. The situation we see now in the economy is directly a result of too much lubricant (credit). As credit is reduced to healthy levels, capitalism will continue to thrive and evolve.

What I find ironic, is that you didn't hear these countries complaining about American capitalism during the boom when they were receiving benefits from it such as increased exports, investment profits, etc. If France didn't have the very successful capitalistic companies such as Carrefour and many small businesses paying taxes, they probably would be a failed state.

I say, "Long live capitalism, excess is dead...for now."




Our Addiction to Growth

By
Kyle Murphy
on March 10, 2009 5:25 PM | | Comments (0) | TrackBacks (0)
The first step is to acknowledge our problem...America, we're addicted to growth. I started writing this entry over a year but never finished it, until now. Now I find myself feeling some level of personal satisfaction as the U.S. convulses and hemorrhages as it begins detoxing itself from it addiction to growth and debt. No, growth and debt are not bad, but the debt and growth abuse we put our economy and culture through was unhealthy and was going to eventually kill us. Thank goodness the credit market seizure served as a wake-up call and intervention in one shot. 

No economy or business can grow forever, quarter after quarter. At some point a company or economy (measured as GDP per capita) hits a size the is optimal--that is, it is using its resources most efficiently. After this point there is diminished returns and ultimately a forced contraction (recessions and earning decreases). If we focused our businesses and society on using our resources the most efficiently, we wouldn't take on huge debt loads, make business decisions towards growth for growths sake, and try to keep up with the Jones'

We're addicted to growth for growths sake. Was life really so bad 10 or 20 years ago that we needed to take such risks. We had nice cars, houses, TV's, took vacations, etc. Quality of life was no worse, and possibly maybe better back then than it is now. Now we just have more debt, more stuff, and weaker companies.

Wall Street's obsession with quarterly numbers and our neighborly keeping up with the Jones hasn't made us any happier and has made the economic future much darker for the next few generations. It's time we all learned to enjoy life more, having less stuff, and focus our economy and businesses more on keeping our quality of life not exceeding...it's not worth the risk.

Why the Latino Immigration Wave is Different

By
Kyle Murphy
on November 4, 2008 10:44 AM | | Comments (0) | TrackBacks (0)
The US has received wave after wave of immigrants over its short 400+ year history. From the first English, French, and German waves to the Irish in the mid-1800's and the Italians and Polish in the early 1900's. The most recent and largest wave is that of Latinos; those from so called Latin America (Mexico, Central and South America). Like the immigration waves before, they have come to the US seeking a better life and the American Dream. As with the waves before, they have faced discrimination and backlash from some indigenous groups. And like most previous immigrant groups, many of the Latinos melt into the American Melting Pot adding their unique culture to the country. But there is something different about this wave that may have lasting social and/or economic ramifications. 

I've identified two economic behaviors that mark a distinct difference between the recent Latino immigration wave and that of previous immigration waves. One, of the 18.9 million Latinos in the US, between 50-75% of them send money back home to their families (source: New York Times). This contrasts to the very small amount of money transfers (<5%) back to home countries by previous immigrants. While technology may account for enabling most of these transfers, the fact is there is a significant transfer of wealth from immigrants back to their home countries that has not occurred in the past.

The second behavior is that of short-term versus permanent immigration to the US. The vast majority of immigrants in the past came to the US to stay permanently and become Americans. The current Latino wave shows a shorter-term horizon where at least half of the immigrants, by some estimates, are only here for less than 10 years in order to earn some wealth and move back to their home countries.

The recent Chinese and Indian immigration waves are showing similar tendencies as observed in the Latino immigration wave. This trend shows flaws in our immigration policy and perhaps our culture.

I did not make these observations to incite any anger or discrimination towards immigrants. I believe our country was built by immigrants and the future success of the US will continue to require new waves of immigrants. What I identified is economic differences in immigration waves that requires a better immigration policy from the government; one which encourages immigrants to both remain in the US permanently and to keep their wealth here.

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