As we near the two-year mark into our Democratic president's term, more Americans are seeing red -- or at least, that's how they're voting.
A Washington Post/ABC News poll showed 53% of likely voters leaning toward the Republican candidate in their district, with only 40% in favor of the Democrat. Meanwhile, a Wall Street Journal/NBC News poll showed registered voters split down the middle when asked which party should control Congress. But the voters most likely to turn out on Election Day favor a GOP-controlled Congress, 49% to 40%.
Wanting to boost approval ratings, President Obama just announced plans to expand tax cuts for businesses and boost federal spending on the nation's transportation system. The hope is that these steps will create jobs ahead of the midterm elections -- but critics are unconvinced.
For one, demographic forces are working against the president.
The Baby Boomers are retiring in droves, and they've already started withdrawing their spending dollars from the economy, numbing the impact of economic stimulus efforts. The government can use stimulus programs to offer credit to U.S. consumers, but the Baby Boomers won't take it -- for them, it's time to save, not spend.
This is an important factor, since Baby Boomers control most of the wealth in the country.
"For the first time in American history, we don't have favorable demographic winds at our back," writes Brett Owens at ContraryInvesting.com. "During previous recessions, the government could float easy money out into the economy, and eager consumers would grab it and spend it -- because they were in the upswings in their spending patterns."
In other words, Americans were more eager to capitalize on past stimulus incentives because retirement wasn't a concern. But now that the Boomers are retiring, the tables have been turned.
The government "can't get the baby boomers to take on more debt because of where they are in the spending cycle," Owens explains. "Want a mortgage at record low rates? No thanks -- we're already choking on debt! And we hope to retire someday."
How the U.S. government reacts to this will be key. Austerity appears to be the most responsible solution -- but it's also a major buzzkill. Who wants to vote for the guy declaring that the party's over?
The outlook for the bond market
Even if the American public doesn't rise up against the government's stimulus plans, the bond markets inevitably will.
According to Barclays Capital, unfavorable demographic trends (i.e., retiring Baby Boomers) mean that long term-yields in the U.S. and U.K. will double from current levels over the next 10 years, moving up to around 10% by 2020.
Rising interest rates on Treasury bonds will make it more and more expensive for the government to borrow money, meaning that they're going to have to cut back on spending.
The era of low and stable long-term interest rates is over, according to the bank. "Shrinkage in the high savings population cohorts and an expansion in the retired population will alter supply demand dynamics in the debt capital markets in a profoundly negative manner."
In other words, an enormous segment of the population is about to abruptly stop spending, pushing us from an "era of capital abundance" into an "era of capital scarcity." And as savings dwindle, government debt burdens will rise, as will the risk premium demanded to cover default, outright or due to inflation.
So if stimulus packages don't work, then how do we treat our ailing economy? Even the experts can't say for sure, but for now there doesn't seem to be a magic cure-all that can get us out of this economic mess. Well, aside from making drastic cuts to the government's budget.
But for us spend-happy Americans, perhaps that pill's just too bitter to swallow ...
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