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May 01, 2009 at 04:00 AM
The recent past was grand. Boomers don’t care for limits. Boomers create excess with everything they touch. Not only do their large numbers create this excess quite naturally, they had to leverage it with the largest amount of absolute and relative debt in recorded history. Total credit market debt may stand at 350 percent-plus of our GDP. Federal entitlement promises and obligations may be even larger that the GDP of the entire world!
The near future will be less grand. Will boomers be the only ones feeling the negative consequences resulting from their narcissistic insanity, their lack of self-restraint, their profound love of self at the expense of all others and all other responsibilities?
The debt balloon has been pricked in many places. The air is coming out. This ebbing tide will strand many. Both the good and the bad will suffer from it, including those who thought they were making good decisions and taking reasonable risks.
Here are some key questions about what we may anticipate:
- Where is the “economic frostbite” likely to be felt first?
- What products, services and businesses are not likely to come back?
- Where is the “economic gangrene” likely to develop?
- Where will the new positive cash flows come from?
- Where will innovation and productivity growth come from?
This article looks at the sources of uncertainty that limit our ability to answer these questions with precision. Remember, in order to survive uncertainty, it is better to be approximately correct than precisely wrong. A lack of precision is not necessarily a bad thing.
So, what are the sources of uncertainty that are factored in our decisions whether we make explicit (and perhaps precise) forecasts of them or not?
Using RIIA’s risk matrix shown (above) in Table 1, let’s examine the three broad categories of risk factors as well as their main features. What risks have moved to the forefront and therefore replaced traditional investment accumulation risk concerns? What risk factors have changed and will materially affect our clients?
- Have new hazards developed?
- Are we exposed to these hazards where we were not before?
- Have the consequences of exposure changed?
- Have our probabilities of experiencing positive consequences dimmed?
- Have our probabilities of meeting negative consequences increased?
Here is a sample of the questions that arise during RIIA’s teleconference calls where the membership convenes to discuss the reality that we see, the trends that we fear and the outcomes that we want to create. Remember that these questions are asked with two time frames in mind: First, what will the answer be for this year? Second, what will the answer be five or 10 years from now?
Political Risks
Do you expect:
- More or less inflation than the long-term average?
- Higher or lower tax rates on those who pay taxes?
- More or fewer taxpayers as a share of the total population?
- A cyclical business recession or a government-engineered depression?
Business Risks
Do you expect:
- More or less global trade?
