Sunday, April 26, 2020

41. Casualty of the Crisis: Things You Don't Need (Demographic Doom Podcast)

This is the script for my Demographic Doom podcast episode (#41) released on 26 April 2020. It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including PodbeanApple Podcasts and a video version on YouTube. See the description on the YouTube version for annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is

I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations. I'm trying to view the world from the widest possible angle, as aliens would see us from space, so I am interested in what large groups of people are doing, rather than individuals.

Today, in the midst of a worldwide economic crisis, I want to rewind to an earlier, simpler time of one year ago. Today is April 26, 2020, about three months into the COVID-19 epidemic outside China and about one month into widespread lockdowns in the U.S. where "nonessential" workers are expected to go home and stay there. Exactly one year ago today, April 26, 2019, I put out a video entitled The Vanity Economy: The First Casualty in the Next Recession.

This was back before I started my podcast, when I was still making live-action videos around the world. This video was made in a cypress swamp in Florida, and I'm standing ankle-deep in the muddy water. I've got two cameras running and am cutting between them. Every video was a big production taking a lot of time to produce and edit, which is why I gave up the whole visual element and started doing podcasts instead.

At the time of the video, I knew nothing about any pandemic, but I did know a massive crash was coming. Even a year ago, it seemed a foregone conclusion to me. Although I didn't know what would trigger the crash or when, I knew that the current economy was unsustainable and had to fall sooner or later, and that's exactly what's happening now. What this videos give you is some perspective on what will fail first, and it's basically all the things you don't need, all the vanity products and services that each of us knows we can live without.

I find the video so relevant today that I'm going to play the whole thing for you. It's about ten minutes long. If you are listening to the video version of this podcast, you can actually see me speaking, standing the swamp, but there's nothing important in the visual field. I'm going to play the whole thing for you right now, then I'll come back afterwards and talk about it in light of the current crisis.
If you want to know how bad the next economic crash will be, you just need to walk down the street of wherever you live, especially if you live in America. Just walk down the main street and look at all the businesses along the road and in shopping centers. You might see a florist, and here's a home renovation center, and here's a martial art studio, and all these other things, all these other services, and ask yourself are those businesses essential? 
And all these products and services I call the "vanity economy". You might think of this as the luxury economy but we usually think of luxury as yachts and sports cars and mansions. The vanity economy, as I define it, is something that we all participate in, in that we buy things that we know we don't really need, but we feel we need them. These are the first things that are gonna fall apart in a big economic downturn. 
You might see these businesses as a mark of prosperity, because people seem to have enough disposable income that they can they can buy these vanity items, and you might see this as good. Okay, we're a rich society so we can do these things, but the other side of the coin is whenever things go bad, we don't need to do those things, so we're gonna cut them out, and it just means that we have much further to fall. 
Now we all know that a crash is coming. We may disagree on why it is coming or when it is coming, but we can agree based on past history that every once in a while there's a big crash. My personal theory is that this crash will be powered by demographics, by the fact that there are so many old people, so many retired people, so many people leaving the workforce and not many people coming into the the workforce, but this isn't the time to talk about that. You may not agree with me, but you can agree that there's going to be a crash, and when there's a crash people get laid off or they feel at risk of being laid off, and what's the first thing they do? They're going to cut their expenses, and the expenses they're gonna cut first are all of these vanity items. 
They're gonna cancel their gym membership, and they're not gonna do any home renovation, and they're not gonna be buying any flowers. So when this happens, all those vanity businesses are going to be in deep trouble, and they're gonna start laying people off, and when that happens even fewer people have money to spend on these vanity services and it becomes a self-reinforcing cycle, what physicists call a positive feedback loop. 
Now a positive feedback loop is not "positive" in that it almost always results in some kind of disaster. A positive feedback loop is when there's a change in a system, that change feeds back to accelerate the original change. So the more people that are laid off the less money they have to spend on flowers, and the more the florists lay off workers, then there's fewer people to buy stuff. So this can be a cycle that economists call a deflationary spiral, and the best example was the Great Depression. After the stock market collapsed, people had no money, so they stopped buying cars so the price of cars went down. So in the modern world this can happen perhaps without any actual deflation, without anybody cutting prices, but it's still a spiral, a death spiral that takes everything down. 
This is exactly what happened in 2008. No one was doing anything; no one was buying anything; no one was initiating new projects. That's when the central banks lowered interest rates and the government's pumped a lot of money into the economy to get it restarted again. The trouble is, in the next economic crash, they don't have those those tools anymore. They're so deeply in debt that they really can't pump a lot of money into the economy without jeopardizing their credit rating, and they can't lower interest rates because interest rates are already close to zero, so we're going to get the same thing again where nobody buys any vanity products and things just accelerate down to the bottom, down to some base level where people are just surviving and just buying the products and services they need to survive. 
The trouble is that's an extremely low level. If the economy is in the dumps for six months, people are going to cut their obvious expenses, cut their gym membership, but they basically want to keep the same lifestyle they had before. If the downturn lasts for years then people are going to start modifying their lifestyle and cut their costs even more, which is going to further accelerate the decline. 
For example if you have a dog and you lose your job you're still going to feed your dog. You're still going to take your dog to the vet when the dog gets sick because those are seen as essential products and services. Two years later, your dog dies as dogs tend to do, and this time because you're in economic stress, you don't get a new dog. So now you can cut your your expenses even more. You're not held down in terms of where you live by your pets. You can you can cut your expenses to even lower, 
And that's good, in that people should be economical. It's good for the soul to use your resources well, but it is horrible for the economy, especially an economy over the past 50 years or so which has come to depend on all of these vanity products and services. You kno1w the steel industry seems like it should be immune to this, but it isn't because the steel industry feeds the auto industry, and if you're under economic stress you're not gonna buy a new car, so that means no auto industry and no steel industry. 
So this is all gonna come down. Sooner or later, it's gonna come down. It came down in 2008. The government temporarily rescued us by pumping a lot of credit into the economy so people were able to buy more stuff because they borrowed more money. If you see a big beautiful SUV on the highway, you know people didn't pay cash for that SUV. They got an auto loan, so all this prosperity we've known since 2008, it has been fueled by debt that is gonna collapse when the vanity economy collapses. Eventually the debt economy is going to collapse because what happens when you lose your job or you fear losing your job is you're gonna cut your expenses, you're gonna cut out all the vanity items that you don't need. 
And when that doesn't work that you still don't have enough money you're gonna cut out your debt payments. In other words, if you've got a student loan now and the student loan is a big burden every month, you might just not pay that that. You might stop paying that student loan. A lot of people are already doing it. If enough people do it and it gets out that nothing really bad happens when you don't pay your student loans, a lot of people are gonna do it. So you've got a whole economy full of people who aren't buying things they don't need and who are refusing to pay make their debt payments. 
They're not making their payments on their SUV. They're saying, "Just come and take my SUV," because you if don't make your payments on your car, well you still got three months of free use of that car before they catch up with you. So this is the kind of disaster we're facing once we get into this cycle into this these feedback loops, these positive feedback loops that just drain everything. Then eventually the government can't function, because government taxes depend on people being employed. Over time, the government can't function. The government can't repair the roads. It can't maintain basic services, and you've got big governments collapsing.
So what we're looking at in some future financial crash is essentially a Dark Age, an age where everything that we've come to depend on, all the institutions we've come to depend on collapse. Governments collapse. Banking systems collapse. This doesn't people mean people are going to die. It just means people are going to be lost for a while, and they'll have to restructure themselves in some way without these institutions. I can't say in advance how they're going to restructure themselves. That's something to be determined, but just like the Dark Age of the Middle Ages, there's going to be a Renaissance at some point where people pick themselves up, group together in some way and find a new way to structure themselves without the excesses of the old days. 
So all of this flows from you walking down the street in your hometown or wherever you live, looking at each of those businesses that you see and asking yourself, what's going to happen to them in an economic downturn? And I'll bet you for 80% of those businesses, they're not going to survive because they're not essential. 
I'm gonna go for a walk. Hope there aren't any alligators.
So we're now back in 2020 again, and I'm still pretty happy with what I said a year ago. Right now, we are trapped in the same sort of deflationary spiral and positive feedback loop that I talked about back then. All sorts of vanity products and services are collapsing right now, but the collapse is being masked by the lockdowns. If you work for a florist or a martial arts studio or a carpet store or some other nonessential business, you've been told to go home and isolate yourself to try to save lives. On the surface, this seems like a temporary thing, but it's easy to see that many of those businesses are never going to reopen again because demand has collapsed.

Grocery stores will always have customers, because everyone needs food, but not many people are going to be in the mood for high-end restaurants, even if they reopen and we resolve the social distancing issues of sitting down to eat. The whole population of the planet has gone into bunker mode at the same time, not just to protect themselves from the virus but to protect their finances. If you were thinking of buying a new car a few months ago, you're probably not going to do it now, even if you have the money or the credit, because the future is so uncertain. You're not going to fly somewhere on vacation even if the travel restrictions were relaxed, because it is money you don't need to spend if you don't feel secure in your income. Maui can wait. You know it will still be there five years from now, so there's no compelling motivation to visit this year or even next.

It's hard to say how much of our economy is "vanity", because it's a matter of definition, but it's not unreasonable to say that 50% or more of the products or services we buy can be delayed, maybe even for years, and we're now at the point where virtually the entire world population is doing exactly that. Putting things off. Not spending more money than they absolutely have to. Even if the economy fully reopens and people can do anything they used to do, confidence is now shot. 50% percent of the economy, at least in rich countries, has essentially vanished, and this has started a feedback loop that is just going to get worse and worse.

The virus didn't cause the financial crisis. It just triggered it, and now that the collapse has been set in motion, even a complete resolution of the virus—like a perfect vaccine or perfect cure—won't bring the economy back. Humpty-Dumpty has fallen off the wall and can't be put back together again. Now we're dealing with all the structural problems that were building up for years, like all the humongous debt that was unsustainable in even the best of times.

In a sense, the virus is promoting a sort of false optimism. Investors are thinking, "Things will be fine as soon as the virus is brought under control," and this has encouraged them to reinvest in the stock market. To recap the US stock markets over the past two months: They dropped by some 35% in late February, while in April, stocks recouped more half of those losses. As of today, the Dow and S&P are down only about 16% from their highs, which is insane given the absolutely stunning job losses and business closures during the past two months. Looking at the actual economy and the overvaluation of stocks before the virus, markets ought to be down 50%, and I think they will be, but the market hasn't figured that out yet.

The bulk of investors, the ones actually participating in markets right now, seem to believe this is a one-off problem that is likely to be resolved soon. In their view, as soon as the virus is "fixed", everything will go back to normal, as if the stock markets before the virus were sanely priced to begin with. They weren't. Since 2008, there has been very little real economic growth. It has all been false growth, or the false appearance of growth, generated by loose monetary policy.

In my video a year ago, I said that governments had run out of ammunition to fight the next recession, and I still think it's true. There is no ammunition left. There is only the appearance of ammunition, which takes the form of money printing. The US government and Federal Reserve are essentially the same agency now. The government spends as much money as it wants, and the Fed is obligated to print more money to pay for it.

Every stimulus program, every bailout, and virtually every response the government has to the virus  involves printing new money to pay for it. In 2019, the Federal deficit was $1 trillion, which was seen as huge back then. Now the best estimates for the the 2020 deficit are at least $4 trillion, or more than the government collects every year in taxes. The only way for the government to generate this money is by selling more bonds, and this ultimately leads to the Fed buying the bonds to keep the system stable. In essence, the government is just printing money to pay its bills. This has happened many times throughout history, and it always ends badly.

Right now, this doesn't seem to be a problem, because investors of the world want US dollars and government bonds as fast as they can be issued, because US instruments are somehow seen as "safe". This is the attitude right now, but it won't always be true. At some point, the government will have issued so many bonds and the Fed printed so many dollars, that the market becomes saturated. That's when we'll see inflation, serious inflation, because that's always the result of exponentially expanding the money supply. Whatever dollars you have in your wallet right now, they are going to be worth a lot less. I can't say exactly when, because I don't know the saturation point of the market, but inflation has to happen. That $100 bill in your wallet will hardly buy what $50 buys right now, and it can only get worse from there.

I talked about inflation in Episode #39, so let me shift gears back to the issue in my original 2019 video: the vanity economy. If the market for vanity items like marble countertops or skiing equipment hasn't already collapsed, it soon will. Businesses providing these services will collapse and even more workers will be laid off. In the meantime, the market for essential products and services will go on. Everyone needs food. Everyone needs medical and dental care. Maybe dental offices are closed right now, but when they reopen, people will still have cavities that need filling.

There's going to be a growing gulf between things you don't need and things you do, and it's going to get easier and easier to define, because businesses in essential fields will continue while those in nonessential fields will fail. I predict also that there will be inflation in essential products and services, while nonessential goods might even drop in price. If you're trying to sell luxury real estate right now, you can expect to get lower prices than before the virus, if you can find a buyer at all. Meanwhile, the price of food is going to rise. Everything you truly need is going to go up in price as inflation takes hold.

In a sense, the collapse of the vanity economy is good. Nobody needs this stuff. It's wasteful of resources, and no one's life is really improved by it. Does it make any difference to your nutrition if your kitchen countertop is marble or linoleum? No, it doesn't. It doesn't hurt your life personally if you get rid of all that crap. The only problem is that our economy has grown increasingly crap-dependent, and it can't go cold-turkey on its crap addiction without a devastating crash. Everyone in crap-related industries is going to lose their job, and there won't be enough new jobs in essential industries to make up for it. Food production, for example, will continue, but it's not going to increase, because people can only eat the same amount they're eating today.

So what we'll have as the fog of the virus lifts is only about half of the economy we used to have, and it's going to be stuck there for some time, maybe even forever. Governments are furiously printing money to make up the difference, rescuing industries and supporting families, but it's going to end badly. The US dollar is going to drop in value, and everything valued in dollars is also going to drop. You may still own a million-dollar home, but that million dollars won't be worth the same. Maybe it only buys you a hamburger, who knows?

So my position today isn't all that different from my position a year ago. The vanity economy is now collapsing, just as I predicted it would, and that's going to bring down everything else. Governments can print all the money they want, and it will seem to fix things for a while, but the fix won't last. There's going to be inflation. There's going to be desperate poverty like we haven't seen since the Great Depression.

With all the stimulus programs now in place or coming down the line, the government's going to be giving away a lot of free money, even though there's no such thing. Free money isn't really free. There's always a bill to pay. I'm not willing to say when the bill will come due, but I think it's going to happen quickly, like within a year. Everything you thought was stable about the world is going to be called into doubt. Will the dollar be worth anything a year from now? Will be even have a functioning government?

I'm not willing to bet it. I'm not willing to bet on anything. The only thing I'm willing to bet on is that there's going to be a lot of chaos in coming months and that things won't be getting better anytime soon.


Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.