Time To Recognise The Economic Impact Of Ageing Populations
Is global economic growth really controlled by monetary policy and interest rates? Can you create constant growth simply by adjusting government tax and spending policy? Do we know enough about how the economy operates to be able to do this? Or has something more fundamental been at work in recent decades, to create the extraordinary growth that we have seen until recently?
- As the chart shows for US GDP, regular downturns used to occur every 4 or 5 years
- Then something changed in the early 1980s, and recessions seemed to become a thing of the past
- Inflation, which had been rampant, also began to slow with interest rates dropping from peaks of 15%+
- For around 25 years, with just the exception of the 1st Gulf War, growth became almost constant
Why was this? Was it because we became much cleverer and suddenly able to “do away with boom and bust” as one UK Finance Minister claimed? Was it luck, that nothing much happened to upset the global economy? Was it because the Chairman of the US Federal Reserve from 1986 – 2006, Alan Greenspan, was a towering genius? Perhaps.
THE AVERAGE BABYBOOMER IS NOW 60 YEARS OLD
Or was it because of the massive demographic change that took place in the Western world after World War 2, shown in the second chart?
- 1921 – 1945. Births in the G7 countries (US, Japan, Germany, France, UK, Italy, Canada) averaged 8.8m/year
- 1946 – 1970. Births averaged 10.1m/year, a 15% increase over 25 years
- 1970 – 2016. Births averaged only 8.5m/year, a 16% fall, with 2016 seeing just 8.13m born
Babies, as we all know, are important for many reasons.
Economically, these babies were born in the wealthy developed countries, responsible for 60% of global GDP. So right from their birth, they were set to have an outsize impact on the economy:
- Their first impact came as they moved into adulthood in the 1970s, causing Western inflation to soar
- The economy simply couldn’t provide enough “stuff”, quickly enough, to satisfy their growing demand
- US interest rates jumped by 75% in the 1970s to 7.3%, and doubled to average 10.6% in the 1980s
- But then they began a sustained fall to today’s record low levels as supply/demand rebalanced
BOOMERS TURBOCHARGED GROWTH, BUT ARE NOW JOINING THE LOWER-SPENDING 55-PLUS COHORT
The key development was the arrival of the Boomers in the Wealth Creator 25-54 age group that drives economic growth. Consumer spending is 60% – 70% of GDP in most developed economies. And so both supply and demand began to increase exponentially. In fact, the Boomers actually turbocharged supply and demand.
Breaking with all historical patterns, women stopped having large numbers of children and instead often returned to the workforce after having 1 or 2 children. US fertility rates, for example, fell from 3.3 babies/woman in 1950 to just 2.0/babies/women in 1970 – below replacement level. On average, US women have just 1.9 babies today.
It is hard to imagine today the extraordinary change that this created:
- Until the 1970s, most women would routinely lose their jobs on getting married
- As Wikipedia notes, this was “normal” in Western countries from the 19th century till the 1970s
- But since 1950, life expectancy has increased by around 10 years to average over 75 years today
- In turn, this meant that women no longer needed to stay at home having babies.
- Instead, they fought for, and began to gain Equal Pay and Equal Opportunity at work
This turbocharged the economy by creating the phenomenon of the two-income family for the first time in history.
But today, the average G7 Boomer (born between 1946 – 1970) is now 60 years old, as the 3rd chart shows. Since 2001, the oldest Boomers have been leaving the Wealth Creator generation:
- In 2000, there were 65m US households headed by someone in the Wealth Creator 25-54 cohort, who spent an average of $62k ($2017). There were only 36m households headed by someone in the lower-spending 55-plus cohort, who spent an average of $45k
- In 2017, low fertility rates meant there were only 66m Wealth Creator households spending $64k each. But increasing life expectancy meant the number in the 55-plus cohort had risen by 55%. However, their average spend had only risen to $51k – even though many had only just left the Wealth Creators
CONCLUSION – THE CHOICE BETWEEN ‘DEBT JUBILEES’ AND DISORDERLY DEFAULT IS COMING CLOSE
Policymakers ignored the growing “demographic deficit” as growth slowed after 2000. But their stimulus policies were instead essentially trying to achieve the impossible, by “printing babies”. The result has been today’s record levels of global debt, as each new round of stimulus and tax cuts failed to recreate the Boomer-led economic SuperCycle.
As I warned back in January 2016 using the words of the OECD’s William White:
“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”
That recession is now coming close. There is very little time left to recognise the impact of demographic changes, and to adopt policies that will minimise the risk of disorderly global defaults.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this ...
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I saw a report recently that claimed 40% of Americans only have $400 or less in bank accounts for a “rainy day” so little is available to be put away for pensions either. And the situation has worsened in the past 20 years because of the squeeze on the middle classes in favour if the 1%. Many other countries are little better because money taken in taxes partly to pay for pensions is squandered now and not invested in funds to pay pensions later. I use the word squandered because there is little of value to be seen - infrastructure and state school systems etc., in many countries are in a sad state through neglect.
Given the rising debt mountains in most of those countries - including the US - the situation can only worsen unless something is done. Maybe some “helicopter” money from central banks could be put into funds to get things started and compulsory deductions made from pay that go directly into those funds. Those funds must be untouchable by politicians!! It will not solve the problem overnight but the benefit would start to show in ten years or so. Then those pensioners can become the assets I mentioned in my first comment above.
The ageing population in some countries like Germany is also showing signs of correcting. Females are having first babies at a much older age.
Yes, I've seen that too! "The richest 1% have as much wealth as the other 99% combined!" www.talkmarkets.com/.../the-rich-the-poor-and-the-rest-of-us
I think I read somewhere that the 1% owns some obscene amount of the world's wealth.
I argued for helicopter money because the derivatives will make debt jubilee difficult. It is amazing that Trump wants to jettison DACA kids when we need more kids. He obviously is clueless when it comes to econkmics. Thanks for the article.
What's helicopter money?
I wrote about a precise and clean definition of helicopter money here: www.talkmarkets.com/.../eric-lonergan-precisely-defines-helicopter-money
Depending on the country and the pensions situation ageing populations can be important contributors to a healthy economy. They go out during daytime, shopping, travelling, having lunch out etc. They are spending at times younger people are working. That spending creates employment and employment means tax income for governments. The time is long overdue for ageing populations to be seen as an asset rather than a liability and pensions system in countries where they are inadequate, fixed and fixed fast.
Very true @[James Hanshaw](user:29525). Unfortunately, as we age, we tend to go out less and less.
Dear Angry Old Lady, my wife and I - she 72 and I 77 - are going out more and more but it is in the daytime that I talk about because age tends to tire us later.
I agree James. What better way to get people to spend than to give older people with time on their hands the opportunity to spend. That was done in the 70's and 90's when social security was generous. Now it administered by skinflints.
Some countries have sovereign wealth funds devoted primarily to honour the promises made by politicians that we oldies voted for. Norway and Singapore are examples and those funds are protected from the sticky fingers of politicians who would squander them. Their pensioners are wealthy! The US and most of the rest of the west must get the message and do the “unaffordable” and invest! Invest the tax money taken on the promise of goodies later but then squandering it today.
Yes, it worries me that Social Security is set to be depleted by 2034. Some of us hope to still be around by then.
One of the shocking things about this is the expectation that today’s young and unborn will pay. And they don’t even get a vote on the matter!
Yes James, this is quite sad and some thing I often think about.
Very sad indeed. Too many retirees didn't save enough for themselves, and are holding back on their own spending to help their children and grand children. Times are not what they used to be.
Too true, Susan.