The way to make money in stocks, said the old-timers, was to buy
solid companies that paid good dividends. You make money by
reinvesting the dividends, thus letting the new money breed with
the old. Over time, you’d get an expanding population of dollars.

The idea of buying stocks in hopes that they would go up in price
seemed reckless and absurd. Stocks were risky; they might just as
well go down in price as up. And the companies they represented
might go out of business. So stock investors wanted a ‘risk
premium’ — a little extra dividend from stocks, as compared to
bonds, to make up for the risk of losing money.

But in the Great Boom of the last 25 years of the 20th century
changed attitudes. People began to think that the old fuddy
duddies were wrong; the new way to make money was faster and
easier. All you had to do, they said, was to buy stocks…and then
sell them later (when you needed the money for retirement) to some
Greater Fool who would come along at just the right moment, his
pockets bulging with lucre.

The Dow crested in 2008 at 11,722. It dropped as low as
7,286…and now seems to be on a modest rebound. Three years into
a Great Bust, people still believe in the promise of the boom.
They buy stocks at an average P/E that would have made the old-
timers gasp. Investors still believe that someone will come along
to buy them at higher prices. But where will the greater fools
come from?

Foreigners have taken huge losses from their dollar-based assets.
Europeans, for example, are down 25% since the beginning of the
year because of the dollar. And the pool of buyers in the U.S. is
threatened by two things: demography and economics.

The worldwide boom has turned into a worldwide slump. Incomes are
barely rising. And overseas manufacturers are undercutting prices.

Meanwhile, people in the developed countries are getting older. As
the years pass they become less willing to wait for the next fool
to come along, no matter how great he is; they need income.

Not only that, people facing retirement strain the entire boom-
time financing system. Instead of borrowing, spending and
investing, they turn to saving. Believe it or not, savings rates
are edging up — even in America.

Before he joined the unemployed, Paul O’Neill, then U.S. Treasury
Secretary commissioned a study of how much it would cost for the
government to keep its promises to the baby boomers. Now
completed, the Financial Times, had this comment:

“The study’s analysis of future deficits dwarfs previous estimates
of the financial challenge facing Washington. It is roughly
equivalent to 10 times the publicly held national debt, four years
of US economic output or more than 94 per cent of all US household
assets. Alan Greenspan, Federal Reserve chairman, last week
bemoaned what he called Washington’s “deafening” silence about the
future crunch….”

The studiers concluded that an immediate tax increase of 66% is
needed.

The fuddy-duddies would be shocked again. How can you expect a man
to stomach a huge tax increase when he is already up to his neck
in debt and living paycheck to paycheck, he would want to know?

The baby boomers who are buying stocks might pause for a question
too. Where will the greater fools get the money to buy their
stocks? Why will they want to?

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