A Generational Tide Has Crested
The baby Boomer economic tide is going out. Boomers have been a major economic force for the past half a century. This population surge, composed of the 78.2 million Americans born between 1946 and 1964 has virtual control over the U.S. economy, which currently accounts for almost 25 percent of worldwide gross product. Beginning after the Second World War, the generations that followed have transformed the economic landscape of the world. Spawned with a keen desire for education, growth, and opportunity, the Boomer generation rebuilt the world, and brought it into the twenty first century. It was always understood that this generation would mark a high tide someday. What has become clear in the past few years is that this high tide was artificially made higher by a credit boom and bubble cycles. And this tide is now going out with a vengeance. This fact – the baby boomers bust cycle – will be a dominant economic factor for the next several years.
After Unimaginable Tragedy – Boundless Growth
Most people agree that the Boomer generation has been an economic force since they were conceived at the end of the most devastating half-century of war in history. This was the generation of American opportunity, an expansive time buoyed by the Marshall Plan and the ascendancy of a U.S. flush with victory and eager for expansion. With much of Europe and Asia devastated by war and only one industrial power left standing, this was a uniquely favorable moment for the U.S. in world history.
The Boomers were the first generation in American history to have significant numbers college-educated, with many advanced degrees fueled by programs like the G.I. Bill. As the first generation to have such access to education, the Boomers invented and expanded the boundaries of everything. They also bought what they wanted with their increased earning power and when that wasn’t adequate, they borrowed, especially in recent years. Boomers felt they had no boundaries and they changed the world in ways unimagined by previous generations.
A Generation of Expansionist Monetary Policy
The economic and financial landscape of the Boomer generation was a Keynesian one, wherein interest rates were quite effectively manipulated to produce high employment rates and consistent growth. Savings became passe; everyone knew that the inflation rate exceeded the interest rate on a savings account! The tax subsidies to investment, begun under the Reagan administration, quickly changed how people “saved” for the future. Responding to government policy, Boomers shifted from savers to investors. ‘Savings’ became at-risk investments in the stock market. This was a strategic and fundamental shift, and it propelled world economies forward for a few decades after the flush of post-world-war growth abated.
As Boomers headed into their peak earnings years, they poured money into 401(k)’s and mutual funds and bigger and better housing . Housing was was an “investment” too – all done in hopes of “selling high, and retiring someday”. Investment became less about long term growth and more about “leverage”. Leveraging someone else’s savings to overcome shortfalls of one’s own.. In the past decade, Boomers ran pell-mell into the leverage game, until the bottom dropped out. Real incomes stopped growing, and Boomers couldn’t borrow to cover the difference between what they earned and what they spent. The fundamental assumption that growth could continue indefinitely was now under serious challenge.
Buying Power Implodes
The end of an uptrend is never as clear or easy as its beginning, and this is true of the Boomer generation as well. In the case of the Boomers, the attempts to continue the upward trend have clearly led to our current bubble economy. But bubbles are always unsustainable, and the massive contraction in spending that happened when the debt bubble finally began deflating has been devastating. We have seen a crash in home prices, asset price volatility, a secular bear market, and deleveraging on a massive scale. For many it has shaken their entire economic foundation, and many people are realizing that their dreams of retirement have vanished – they may not be able to retire, ever! Boomers have lost a large percentage their on-paper wealth. Many have lost over 50% of home values and 40% of portfolio values.
Why Buying Power Collapsed
Before we examine the effect of the Boomer’s plight, let’s make sure we’re not exaggerating it. In June of 2008, the McKinsey Global Institute published a report before anyone realized the extent of the housing slump and before the stock market crashed. Boomers were already in serious trouble. By June 2008 less than a third of Boomers had enough savings or equity to even contemplate retirement. Since then things have gotten much worse.
Another, more recent report which corroborates and updates the McKinsey report was released in February 2009 by the Center for Economic Policy Research. This report presents the Boomers’ financial situation in early 2009 and projects that situation into the coming decades. This research shows most Boomers don’t have enough savings to even contemplate retirement, and that only about ten percent have adequate resources to maintain their current lifestyles into retirement. Many retirees will live well below the standard of living they enjoyed while working. Over half will only have social security to live on.
The result of this huge loss was an immediate demand retrenchment. Take a look at the recent contraction in spending. This is a graph sourced from CalculatedRisk Blog, depicting the annual change in retail sales over the past 15 years.
Surely someone will say “but that contraction is due to global sentiment. The Boomers are a U.S. phenomenon”. Surely you’ve heard of the concept of “coupling”? By that expression, we mean the close-coupling of global economies, and the unfortunate reality is that the U.S. consumer provided most of the demand for export products from around the world, so long as the Ponzi-Economy Myth remained un-contested.
Now the Boomers’ wealth-effect consumption has stopped, cold. The world economy may well take decades to recover from the sudden removal of this demand. Whatever the effect of the Ponzi-collapse on the world economy, the effect on the Boomers themselves has been shattering. For many it has shaken their entire economic foundation, and many people are realizing that their dreams of retirement have vanished – they may not be able to retire, ever!
The Future of the Boomers – the Bust Generation
No matter what happens in the economy, Boomers will need to live and will have the political influence to impel other generations into supporting them, in some way or another. Boomers are aging, and that means they’ll need ever increasing health care. This is an interesting paradox for Boomers and the entire country. The common assumption is that aging Boomers will cause the health care system to expand and there will be lots of money to be made. The reality is that Boomers may drive up the demand but have few resources to pay for all this demand. Where is the money going to come from, especially when governments are already running huge deficits that will have to be repaid by the younger generations? How can the advanced economies governments take on ever more entitlements in a time of decreasing tax revenues and spiraling deficits. Something will have to give, and it will.
Many Boomers are relying on pensions and government Social Security programs. They face longer life spans, but this also comes with increased costs in later life. They will be collecting, not contributing. And why shouldn’t they – they built the economy and they feel they deserve to bask in their twilight. Unfortunately, the economic realities are very different from the way it should be.
The Boomer’s demand has been severely curtailed, much earlier than many of them expected. With 401K’s and home equity gone, with pensions suspect and Social Security a ticking time bomb, Boomers are cutting back. A natural part of aging – the desire to simplify, has been brought front and center into the Boomer’s consciousness. They realize their jeopardy and they are reacting. The transformation is not an unnatural one. Aging people naturally want less and less to take care of. Less yard work, less responsibility, fewer consumer goods, less gadgets, more simplified lives. This is a normal part of aging for most people. We have seen it happen in all generations as they age. Retirement villages will grow or families will go back to multi generational configurations like in past generations and in many other countries.
What Does It Mean for the Economy of Tomorrow?
The trend for the Boomer’s economic tide is clear – it’s going out. The trend of the underlying economic math is also clear – it doesn’t work. When economists build their projections for future growth assuming trendlines will move as they have in the past, they risk missing this important generational wave. The Boomer bubble will not be reflated; our nation’s current economic policies are pushing on a string. The assumptions of economists and policy makers will almost certainly prove to be too optimistic. As in other things that need ‘fixing’ in the global ecomony, the fixes will have to come, bottom up, from the next generation and from Boomers working from a new foundation with an entirely new set of assumptions. The future is not going to look or act like the recent past because the Boomers are now bust. Now we must deal with the consequences.
Originally published at the RealEconomy.Org blog and reproduced here with the author’s permission.