Tick.
Tick.
Tick.
No, we’re not ticking off a checklist. That’s the steady beat of an important event that’s about to hit the world.
Unfortunately, most people can’t hear it. The noise of day-to-day life muffles the noise of the demographic time bomb. But in time the blast will echo throughout society.
Nearly three decades of unprecedented credit expansion (1980 to 2007) created (abnormal) expectations about economic growth. Rob Arnott and Denis Chaves wrote in the Financial Analysts Journal:
‘Until recently 3-4% growth in real GDP was considered "normal." So it should come as no surprise that the economic performance of the past few decades has strongly influenced expectations about economic growth. However, when optimistic expectations get detached from reality we risk creating a significant expectations gap – a disconnect between what we take for granted given our recent experiences and what we should anticipate given simple arithmetic.‘
‘Recentism’ is the extrapolation of recent past events into the future. If markets have been down for a long period, then the consensus view is that the depressed conditions will continue, and vice versa.
The boffins charged with treasury computer models (that politicians and senior bureaucrats rely on) factor in 3-4% real GDP growth because that’s the 30-year average. The name for this is ‘rear view mirror’ forecasting.
But the economic drivers of the past 30 years aren’t relevant to what lies ahead.
Baby boomers (the largest demographic in western society) were ‘long and strong’ credit funded consumption – homes, furniture, luxury goods, travel etc. The boomers consumption ethos is best summed up as, ‘We bought things we didn’t need, with money we didn’t have, to impress people we didn’t like or know.’
Don’t Bank on Gen X & Y Bailing Out the Economy
The debt crisis that confronts the world is largely (but not entirely) due to boomer consumers, boomer bankers, boomer bureaucrats and boomer politicians.
This ‘boomer’ generation is an apt name, because that’s the sound you’ll hear when the demographic time bomb explodes.
After the GFC, the central banker mandate has been to raise the needle on the economic tachometer back to the 3-4% range.
The Fed, ECB, POBC, BoJ, BoE, RBA et al have all stepped on the gas as they try to rev up the economic engine. They’ve supplied an abundance of fuel in the form of printed money, but the tachometer barely moves.
Anyone with even the most basic knowledge of the combustion engine knows that spark plugs must ignite the fuel. And therein lies the problem. The boomers credit-fuelled consumption spark is gone.
And the economy can’t rely on Gen X & Y. Tax bills and high housing costs are burdening them. They’ll never get to take up where the boomers left off.
The purring V8 of the past 30-years is now a coughing and spluttering Morris 1500.
Worsening demographics are destined to produce vastly different outcomes in the coming years.
Rob Arnott and Denis Chaves identified Australia along with the US, Canada, Britain, France, Germany, Italy, Japan, India, Russia, China, Brazil – all boosted GDP growth by at least 1% per annum (over the past 60 years) due to the power of demographics.
Boomers moving from consumption to retirement are about to throw the global economy into reverse.
The Demographic Nightmare Revealed
The ‘Dependency Ratio’ is the number of non-workers (children and elderly) compared to the number of workers. The lower the ratio the better.
The following chart shows from 1980 to 2010 (the same period as The Great Credit Expansion) the numbers were all going in the right direction.
From 2010 (the first wave of boomer retirees) onwards, the Dependency Ratio goes in the wrong direction.
You can see the difference between the next 30 years (to 2040) and the last 30 years.
The other major negative to consider is the level of welfare entitlement built into the system over the past 30-years of credit-fuelled prosperity.
With boomers going from taxpayers to tax receivers (via health and pension entitlements), you don’t have to be a whiz with a calculator to work out that the numbers don’t add up…
What’s that noise? Tick, tick, tick goes the demographic time bomb.
Based on the demographic shift in the Dependency Ratio, Rob Arnott and Denis Chaves produced the following chart on forecast economic growth:
If Arnott and Chaves are right, the economic tachometer for all 12 countries goes into negative territory for the next 40 years.
Real GDP growth of 3-4% will be nothing more than a freaky period in history – one at which future economic students will shake their heads in disbelief.
Negative economic growth colliding with a larger number of retirees living longer is more than a policymaker’s nightmare. It will profoundly change the administration and distribution of age pensions and other welfare entitlements.
This demographic time bomb is ticking, but its real impact is still at least a decade away.
In the meantime huge amounts of newly printed dollars, yen, euro, yuan and pounds are hiding the truth that’s embedded within our societal structure.
This deception will work…until it doesn’t. But by then the majority of boomers will have become a victim of the demographic time bomb they helped construct.
Vern Gowdie
Editor, Gowdie Family Wealth
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