Stimulate This: Immovable Object (Entitlement) Meets Unstoppable Force (Boomer Deflation)

The problem with our society and economy really comes down to three things: entitlement, entitlement, entitlement.

You see, the wealth game is over and our standard of living has seen its greatest day. It will not increase from here -- it won't even stay the same. The sooner we can come to grips this with as a nation, the better. Only our sense of entitlement stands in the way.

For the past 25 years our incredible economic prosperity and resulting wealth creation was driven by the surge of the Baby Boomers. The Boomers are the greatest ponzi scheme of all time. They have moved through our economy like a rat through a snake, resulting in too much infrastructure and astronomical asset prices that haven't correlated with underlying economic fundamentals for years. Like every bubble, people thought this growth was going to persist forever. Irrational exuberance at its best.

But Americans feel as if they are entitled to wealth and a resulting ever improving standard of living. The problem is that wealth is a residual function of economic growth and capital allocation. You can't create wealth out of thin air, particularly when you are reliant upon external capital to support it (and your consumption). As a general rule as it relates to stimulus, anything the government does to directly support wealth (e.g. buying mortgages or preventing foreclosures), will be throwing good money after bad. It's a classic case of the tail wagging the dog.

"Stimulus" should be directed toward fixing the structural anomalies that have emerged in our economy. Financial services have become a huge unproductive bubble in our economy driven by the equity bull market, ridiculous concept of retirement (to be addressed in another post) and the financing of assets (which have mistakenly been assumed to always go up in price). The government needs to help transition people that leave financial services into other parts of our economy that will drive real economic growth (and wealth) in the future. Trying to keep the finance game going will also wrongly entice people to try and stay in the game.

Wealth creation through assets and investments will only resume once our infrastructure and asset prices have reset to a post-Boomer equilibrium and a new demographic group starts to pressure our infrastructure. This should happen somewhere after 2020. Until then, expect deflation and plenty of it.