HOLLYWOOD, Fla. -- Nothing that Federal Reserve Bank chairman Ben Bernanke, Treasury Secretary Timothy Geithner or President Barack Obama can do will prevent the United States economy from coming apart, under the weight of public and private debt.
"No amount of government stimulus will prevent it,'' said Harry S. Dent Jr. in his keynote address Monday morning to the Bank Insurance and Securities Association conference here. That's because additional stimulus, driven by more federal borrowing, will have less and less effect on the economy, much like the dwindling effect of more cocaine on a crack addict.
"Our code word for it, a couple years from now, we think it's going to be Humpty Dumpty,'' said the economics forecaster and author of a 2009 book that forecast that a second Great Depression would hit the United States by the end of 2010.
That depression is still on the way, because of the long-term impact of the country's aging population (meaning less income and more demands on it) and growing debt in all sectors ($102 trillion, from all sources).
"All the king's horses, all the king's men could not put Humpty Dumpty back together again," he said.
The same great fall will come to the United States because of debt that is not being removed from the system. "The government is trying to prevent this,'' Dent said, which is "not good policy long-term."
Here are the sources of debt, in the Dent accounting:
- $15 trillion of federal borrowing (up from $5 trillion when the second George Bush took office in 2001)
- $17 trillion of financial debt (Wall Street buying up mortgage loans)
- $11 trillion of corporate debt
- $14 trillion of consumer debt
- $46 trillion of unfunded federal liabilities, in Social Security and health care
This debt will have to be restructured, Dent said.
Some of it can be fairly easily adjusted, like Social Security. There, the retirement age can be raised and benefits can be cut.
But other debt will have to be wiped off the books, before the economy can regenerate itself. In the Great Depression, this took three years -- and average household incomes started rising thereafter.
In Japan, however, toxic debt has only been slowly removed. And its economy has essentially remained the same size from 1991 to 2011.
The current levels of debt are not sustainable, he said. By 2020, the interest paid on the nation's debt will exceed spending on entitlements or the national defense, he said.
The immediate result will be deflation. Housing prices, which have gone down about 33 percent since the peak of that bubble, are probably going down another like amount, for instance. At the top of the bubble, individuals were borrowing 9.2 times pre-tax income. That's likely to go back toward the 3.3 times that existed in January 2000 and pretty much of the course of real estate lending in the 20th Century.
But, he said, "deflation is not a bad thing. It's just a season" in the course of the life cycle of an economy.
He said he expects the rich to be hardest hit by the new depression, hit by a double whammy of falling real estate prices and rising taxes. Upper middle income households are likely to fair the best, with increasing assets in retirement and investment accounts as they approve retirement.
Historically, he said, individuals spend the most at age 46 -- which, in baby boomer terms would have been in the '90s -- and have the greatest net worth at age 64 ... which is for more and more of them, now.
"Now (economists) tend to think that the government can wave a magic wand and that the greatest financial crisis since the early '30s is just going to go away,'' he said. "We don't see that."
Based on the same basic proposition that the key to economic growth is more babies and aging drives contraction, Dent predicted the boom of the '90s. When the Dow was at 2,000, coming out of the 1987 crash, he predicted it would reach 10,000.
Later, however, he predicted it would hit 40,000, which never happened.
Currently, there is an exchange-traded fund (symbol: DENT) based on Dent's methodology for identifying economic trends through demographic analysis.
The investment adviser of the fund is AdvisorShares Investments, LLC. The sub-advisor of the Fund is H.S. Dent Investment Management, LLC.
HARRY S. DENT JR. ON ECONOMISTS:
- "Economists are people who aspire to be accountants but just didn't have the personality."
- Economists "tend to focus too much on the symptoms and not the real cause of our economic growth."
- "It is actually sex that drives our economy. And if economists had more sex, they'd actually understand that."