The simple fact is, we are entering a period of protracted deflation. You are watching it in front of your very eyes--look at how much cheaper it is to buy a house today than it was three years ago. The reason for this disflationary period is simple: Baby Boomers have passed their peak consumption years and are saving for retirement. 70% of the U.S. economy is personal consumption. The average American reaches the peak of the spending cycle at age 46. It's all downhill from there. There are 10,000 BB's retiring every single day and this will continue for the next decade. Think about this. 10,000 each day leaving a productive, tax paying occupation now sticking their hands out for government entitlements.
In addition to the inevitable demographic trend, we have done a very poor job of preparing for what we know is coming. Instead of saving and reducing debt, we've been borrowing and spending like drunken sailors. Personal debt in the U.S. DOUBLED between 2000-2008 from $22T to $44T. We've all heard about the U.S. government being $15T in debt, but we really haven't paid much attention to the unfunded liabilities of Social Security, Medicare and the pensions of government workers at all levels. In total, these liabilities represent in excess of $100T in debt that must and will be unwound. We have mortgaged our future which means we will have to sacrifice some of our future standard of living to pay for our past excesses. Couple this with the unavoidable demographic consequences and you have a recipe for a tremendous reduction in demand for products of all kind.
The unfortunate result of all of this will be deflation. Demand will fall dramatically which results initially in lower prices as businesses struggle to survive. Unemployment will likely double from where it is today. Bankruptcies for both businesses and individuals will skyrocket. Foreclosures on homes and commercial property will accelerate. Commodities such as oil will not be immune. Over the next decade, we will see oil return to $25-$30/bbl (and likely lower) and gas prices below $2/gl. The PCMO price increases of last winter and spring are already failing. Notice all the coupons, rebates and other give-backs on the higher priced oil. Demand for these products was damaged. Add in the new found appreciation by the general public for extended OCIs and you can see there simply is not the demand for oil products that there once was.
Is there a light at the end of this admittedly gloomy tunnel? Yes. Once again, we look to demographic trends for answers. The 'Echo Boomers' will come to the rescue. These are the children of BB'ers who have entered the job market, gotten married, started families, bought houses, cars, furnishings, appliances and all the stuff you need to raise children. The lower prices from a decade of deflation will help stimulate a new wave of demographic demand. Debt will be lower and a new generation of earners will be able to borrow again. Unfortunately, this new wave of demand doesn't begin until at least 2023.
So, don't worry about building that stash--oil WILL be cheaper a year from now and two years from now and five years from now. Cash will be king once again as our entire society learns the hard lessons of over consumption on borrowed money.
In addition to the inevitable demographic trend, we have done a very poor job of preparing for what we know is coming. Instead of saving and reducing debt, we've been borrowing and spending like drunken sailors. Personal debt in the U.S. DOUBLED between 2000-2008 from $22T to $44T. We've all heard about the U.S. government being $15T in debt, but we really haven't paid much attention to the unfunded liabilities of Social Security, Medicare and the pensions of government workers at all levels. In total, these liabilities represent in excess of $100T in debt that must and will be unwound. We have mortgaged our future which means we will have to sacrifice some of our future standard of living to pay for our past excesses. Couple this with the unavoidable demographic consequences and you have a recipe for a tremendous reduction in demand for products of all kind.
The unfortunate result of all of this will be deflation. Demand will fall dramatically which results initially in lower prices as businesses struggle to survive. Unemployment will likely double from where it is today. Bankruptcies for both businesses and individuals will skyrocket. Foreclosures on homes and commercial property will accelerate. Commodities such as oil will not be immune. Over the next decade, we will see oil return to $25-$30/bbl (and likely lower) and gas prices below $2/gl. The PCMO price increases of last winter and spring are already failing. Notice all the coupons, rebates and other give-backs on the higher priced oil. Demand for these products was damaged. Add in the new found appreciation by the general public for extended OCIs and you can see there simply is not the demand for oil products that there once was.
Is there a light at the end of this admittedly gloomy tunnel? Yes. Once again, we look to demographic trends for answers. The 'Echo Boomers' will come to the rescue. These are the children of BB'ers who have entered the job market, gotten married, started families, bought houses, cars, furnishings, appliances and all the stuff you need to raise children. The lower prices from a decade of deflation will help stimulate a new wave of demographic demand. Debt will be lower and a new generation of earners will be able to borrow again. Unfortunately, this new wave of demand doesn't begin until at least 2023.
So, don't worry about building that stash--oil WILL be cheaper a year from now and two years from now and five years from now. Cash will be king once again as our entire society learns the hard lessons of over consumption on borrowed money.
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