Demographic factors and fear of terrorism may drag the US into a recession that will not see its end
Avi Weiss (M.Sc.)
Why a recession in the middle of boom and prosperity? To understand the message, let's start with a joke that explains everything succinctly and clearly. It is said that one day, one of the senior assistants of the late Pinchas Sapir, the mythical Minister of Finance for those who have forgotten, came in and whispered in his ears that the situation was difficult, because there was a drought. "Where is there a drought" Pinchas Sapir asked with great concern and considerable anxiety. "What do you mean where? Here in Israel!" replied the assistant. Then Sapir let out a big sigh of relief and said: "For a moment you scared me, I thought there was a drought in the USA."
The drought we are expecting is already at the gate, and according to some economists and situation analysts, this drought has already begun, and of course it is in the USA. Israel, as a country that is almost completely economically dependent on the US, in addition to its complete political dependence on it, will receive the same symptoms and diseases, even if a little late after what is happening in the US. We even brought the governor of the Bank of Israel from the USA...
Why will there be or already is a recession in the US?
In order to understand the processes of decline and recession that are happening in the USA, it is necessary to lay out a broad canvas of the accumulation of demographic, economic, political, security and sociological processes, all of which lead to one conclusion: the American empire has begun a process of slow decline, which will last one or two generations. The rising new empire is already at the gate, and its name is China, and unless extraordinary things happen, it will become the leading power in two decades, maybe a little less. As with any forecast, caution must be exercised in drawing conclusions from such a forecast, but in my opinion the direction is quite clear.
Unlike the previous recession, which had two clear milestones, the current recession will not be characterized by one clear milestone, and it will be a slow process accompanied by fairly slow waves. There will be ups as well as downs, but the clear direction is of a slow decline. The sunset will be faster if a large-scale terrorist attack occurs in the USA, similar to the events of September 11, 2001. Such a scenario is not unrealistic.
The previous recession, about which I warned and wrote in every column and on every platform since January 1999, precisely at the peak of euphoria, had two clear milestones, and the center of them was in the USA. The first: the monitoring of the "Bug 2000" hysteria. We warned throughout 1999 that there is no such thing as "Bug 2000". We noted that after the regulated world discovers this on 1/1/2000, there will be great disappointment in the IT world, and this will lead, among other things, to a recession, which begins with cutting investments in the IT field. And indeed it was. The second milestone, which gave the final blow to the painful fall, was the disaster of the Twin Towers on September 11, 2001. In our local arena, the second intifada was the specific blow to the State of Israel, which drove away most of the investors, foreign companies, and capitalists, during that difficult period of attacks.
I recognized the exit from the recession in early 2003, and I announced it on every stage, a few months before Benjamin Netanyahu, the Minister of Finance, gave his famous speech about the end of the recession, and was then met with great ridicule and contempt. Today it is clear that he was accurate, and knew what I and many others knew then, that the recession was clearly over, due to the increase in consumption and the increase in the demand side in the US. In Israel, the exit from the recession took a little longer, because of Israel's unique characteristics, and today it is clear to everyone that 2004 was a good year for the economy and companies in Israel, although there are still quite a few sections of the public that did not get to feel the exit from the recession, until today. The year 2005 will also end quite well, for most businesses, but we must go with our eyes open and prepare for the next recession, which will not be at all similar to the previous recessions, because it will come from different directions and for other reasons, and its characteristics will be different from what it was in the past. The main difference: the sunset will be very slow, and with ups and downs along the way. There will not be a one-time fall as in past recessions, unless there is a terrorist event on a global scale, which will change this situation and lead to a faster fall.
To understand the background to the recession in the US, we talked to a number of experts, including Barry H. Minkin, who is considered one of the oldest futures contracts in the US, whose predictions were among the most accurate in the last three decades. The reasons that, in his opinion, will lead the USA to a recession, consist of a number of central reasons, each of which in itself brings about a recession there. The combination of all the reasons together, as is happening right now, is the fatal factor in his opinion that leads to the fact that it is no longer possible today or tomorrow to prevent this recession. The main reasons are (and in no particular order of importance):
A. The rise in oil prices. The rapid increase in oil prices to the level of 50 dollars per barrel causes the free money to be taken out of the pockets of all US citizens, and especially from the pockets of all the operators of the transportation and transportation systems in the country, without which a modern economy cannot function, and transfers this capital to a very small handful of Capitalists, most of whom live outside the US. This capital does not return and does not contribute to growth in the US. Unlike investments in IT, where the capital goes back to local consumption, in the form of hiring professionals and high consumption by high-tech people, the money flowing from the high oil prices does not go back into the American economy for the most part. You can read about what the oil gods do with their money in the global gossip sections. Furthermore, the US has failed to address the energy issue, both in the past and in the present. The main reason for this: the multitude of laws born under the pressure of the green organizations and environmentalists. In the US, no nuclear reactor has been built in the last 20 years to produce energy, which is the cheapest way to replace oil energy, and also the cleanest. There is also no chance that such a reactor will be built in the USA in the next 20 years, as long as the existing system of laws is like this. Even the development of new oil fields (like in Alaska) is met with opposition from all directions. Beyond coal and gas is also stuck. Thus, the USA was left with a few large and isolated farms for producing energy from the wind and the sun, and that's all. Dependence on oil has made the American economy vulnerable, and it is difficult to see a solution to this issue in the near and visible time frame.
B. The deficit in the trade balance and the deficit in the US budget is the biggest today of all time, and it is a real danger to the US economy, and the economy of the Western world. President Bush, who understands this well, encountered many objections in his attempts to correct this situation, among other things because he himself is largely responsible for this deficit. Among other things, in the unnecessary departure from a controlled point of view, for the war in Iraq. The huge investments, which are futile in the opinion of many in bringing democracy to Muslim countries, resulted in a huge deficit in the US budget, and caused huge military forces to be tied up in foreign countries, which negates the future maneuverability of the US government to deal with additional crises, and prevents the ability to cut public spending, which some Greater than that are referred to foreign security and internal security. Many economists write about the problem of the trade deficit and the problem of the US national budget, so it is unnecessary to detail this issue here, and what its effect is on the impending recession.
third. The demographic change in the USA. The increase in consumption in the US in the last four years is not something that cannot be predicted. It originates from the phenomenon of the Baby-Boomers. This is the largest increase in births in the USA, after and as a result of World War II. It concerns the age group of those born between 1946 and 1952. This age group is responsible for most of the increase in consumption in the American economy in recent years. But, there was no second wave of Baby-Boomers, and the American population is getting older. The events of September 11, 2001 also had an unexpected result. For the first time in American history, the USA managed to quite effectively block all its borders, and to act quite decisively against immigration to it. The result: the absence of immigration waves, which fed the younger age groups and the increase in consumption. Here is a table that clearly explains the profound demographic change that the US is undergoing:
This year average life expectancy (men women) population size over 65 (in millions) % of population over 65 of the total US population
1900 47 3.1 4%
1930 60 6.7 5%
1960 70 16.7 9%
1995 78 31.1 12%
2025 85 62.5 20%
The practical meaning: the Baby-Boom children are now approaching retirement age, and the consumer behavior of those of retirement age and above is completely different from that of those aged 20 to 40. Who is expected to flourish (and there is already a flourishing in many areas) in the coming years in the US? For builders of "sheltered houses" and sheltered housing for the elderly, for cruise operators (pleasure cruises), for food supplement manufacturers, for doctors and hospitals specializing in geriatric diseases, for manufacturers of equipment to support geriatric diseases, for operators of types of sports (golf, for example...), for volunteer organizations, for age learning circles The Gold, for filmmakers and nostalgic entertainment, and more. All these are characteristics that do not significantly contribute to growth, and worst of all, they contribute almost nothing to the hi-tech world. Anyone who buys a new house and furnishes it with accessories such as TV, computers, internet, refrigerators, microwaves, DVDs, etc., contributes directly to the consumption and flourishing of the hi-tech world. Those who invest their money in medical care contribute very little to growth. In 2000, for the first time in US history, the scope of the elderly population was greater than the population of children. Accompanying this phenomenon are some rather disturbing effects. The first of them is the huge deficit of the National Insurance there. President Bush is currently trying to correct the situation, and has encountered strong opposition. This situation, if not corrected, could lead to the collapse of the national insurance there. Precisely in Israel, this issue was corrected, in the fight made by the Minister of Finance about two years ago. The second area is the health care situation. All the attempts to reform the health services in the US, and especially in regards to the older populations, have had no real success.
For a country to grow, it is necessary for the birth rate to be 2.1 to 2.2 children per family. It is not enough that this is not the case in the USA, the structure of the traditional family in the USA is broken. It is hard to believe that the campaigns of the conservative circles to cultivate family values will be able to correct this situation in the foreseeable time frame. Already today, the scope of single-parent families reaches almost 50% of all families, not to mention the phenomenon of same-sex couples, which arouse sharp controversy there. Japan's slow sunset is due, among other things, to the fact that in Japan there are 1.2 children per family. This is far below what is required to sustain healthy growth processes. The European market recently made a wise step of adding new countries from Eastern Europe into it, with a high birth rate there. But, the economic stagnation of leading countries like Germany, and an incredible increase in the extent of the Muslim population, some of which do not want to integrate into the general population, which is currently happening all over Europe, can lead to continued stagnation there as well.
Facing this situation in the USA, China and India stand, when in each of these countries, the absolute numerical extent of the population strata from the middle to the upper level, is greater by itself and in each country separately, than the entire population of the USA. As we know, not all of the US population is in the middle and upper class, and it is this population that affects consumption and growth. It turns out that both China and India have an economic growth potential that is several times greater than what is available in the US. This, even before the increasing aging processes and the disappearance of the Baby Boomers layer in the USA. Already in 2002, the national product of China (with Hong Kong and Taiwan) reached 9.8 trillion dollars, surpassing in that year the 9.7 trillion dollars of the US economy. Since then the gap has only grown, in favor of China. The call of Bill Gates, the richest man in the world, whose wealth he made from IT, a call made last month to the administration, to open the gates of the USA to good minds from around the world without quotas, is part of the public struggle of those who understand where the current situation is leading.
The impact on Israel
Israel is undoubtedly affected by everything that happens in the USA. Some claim that the recession has already begun here, albeit on a rather small scale, which is manifested in the beginning of layoff processes in high-tech companies, which fail to rise. In Israel we also have the local troubles. Two negative scenarios can have a strong impact locally: the first is the collapse of the fragile ceasefire between us and the Palestinians. The second, related to the first, is the loss of American support, as a result of a lack of progress on the road map according to Bush's vision. Even if everything goes well from a political and security point of view (and we didn't even mention the threat from Iran), there are processes that depend on the US and that we cannot prevent. The decline of an empire, as we learned in the history books, is a very slow and painful process. The Chinese empire will not rise, only if there is a collapse of the communist regime there, as happened in the Soviet bloc. But China's leaders have ushered in a capitalist economy under communist political rule, a combination that for now is holding up, and it's hard to see it collapsing anytime soon. India has a democracy, so there is no such fear. Israel is not sufficiently connected with the bloc of Southeast Asia and China in particular, mainly because of the US demand that we not be connected to China. This is how we entered a trap, which will be difficult to get out of easily in the coming years.
In conclusion:
The recession is not a disaster, it is a process that you can prepare for, and get through it correctly, if you prepare for it. This was also the case in the previous recessions. Many organizations and businesses got through the last recession well, because they correctly predicted the processes concerning the market segments relevant to them. For salaried employees who are not sure if their workplace will survive the recession, it is better to prepare reserves for a day of need. This recession will not be short, and it will have ups and downs. But like any recession, it too will end within a period of several years, which is still difficult and irresponsible to predict.
