Boomer SuperCycle unique in human history – Deutsche Bank

“The 1950-2000 period is like no other in human or financial history in terms of population growth, economic growth, inflation or asset prices.”

This quote isn’t from ‘Boom, Gloom and the New Normal: How Western BabyBoomers are Changing Demand Patterns, Again‘, the very popular ebook that John Richardson and I published in 2011.  Nor is the chart from one of the hundreds of presentations that we have since been privileged to give at industry and company events around the world.

It’s from the highly-respected Jim Reid and his team at Deutsche Bank in their latest in-depth Long-Term Asset Return Study, ‘The History (and future) of inflation’.  As MoneyWeek editor, John Stepek, reports in an excellent summary:

The only economic environment that almost all of us alive today have ever known, is a whopping great historical outlier….inflation has positively exploded during all of our lifetimes. And not just general price inflation – asset prices have surged too.  What is this down to? Reid and his team conclude that at its root, this is down to rampant population growth.” (my emphasis)

As Stepek reports, the world’s population growth since 1950’s has been far more than phenomenal:

“From 5000BC, it took the global population 2,000 years to double; it took another 2,000 years for it to double again. There weren’t that many of us, and lots of us died very young, so it took a long time for the population to expand.  Fast forward another few centuries, though, and it’s a different story.

“As a result of the Industrial Revolution, lifespans and survival rates improved – the population doubled again in the period between 1760-1900, for example. That’s just 140 years.  Yet that pales compared to the growth we’ve seen in the 20th century. Between 1950-2000,  a mere 50 years, the population more than doubled from 2.5bn to 6.1bn.”

Actually, it was almost certainly Jenner’s discovery of smallpox vaccination that led to the Industrial Revolution, as discussed here in detail in February 2015, Rising life expectancy enabled Industrial Revolution to occur’:

“Vaccination against smallpox was almost certainly the critical factor in enabling the Industrial Revolution to take place. It created a virtuous circle, which is still with us today:

  • Increased life expectancy meant adults could learn from experience instead of dying at an early age
  • Even more importantly, they could pass on this experience to their children via education
  • Thus children stopped being seen as ’little adults’ whose role was to work as soon as they could walk
  • By 1900, the concept of ‘childhood’ was becoming widely accepted for the first time in history*

The last point is especially striking, as US sociologist Viviana Zelizer has shown in Pricing the Priceless Child: The Changing Social Value of Children. We take the concept of childhood for granted today, but even a century ago, New York insurance firms refused to pay death awards to the parents of non-working children, and argued that non-working children had no value.

Deutsche’s topic is inflation, and as Stepek notes, they also take issue with the narrative that says central banks have been responsible for taming this in recent years:

“The Deutsche team notes that inflation became less fierce from the 1980s. We all think of this as being the point at which Paul Volcker – the heroic Federal Reserve chairman – jacked up interest rates to kill off inflation.  But you know what else happened in the 1980s?

“China rejoined the global economy, and added a huge quantity of people to the working age population. A bigger labour supply means cheaper workers.  And this factor is now reversing. “The consequence of this is that labour will likely regain some pricing power in the years ahead as the supply of it now plateaus and then starts to slowly fall”.”

THE CENTRAL BANK DEBT BUBBLE IS THE MAIN RISK

The chart above from the New York Times confirms that that the good times are ending.  Debt brings forward demand from the future.  And  since 2000 central banks have been bringing forward $tns of demand via their debt-based stimulus programmes.  But they couldn’t “print babies” who would grow up to boost the economy.

Today, we just have the legacy of the debt left by the central banks’ failed experiment.  In the US, this means that the Federal government is almost at the point where it will be spending more on interest payments than any other part of the budget – defence, education, Medicaid etc.

Relatively soon, as the Congressional Budget Office has warned, the US will face decisions on whether to default on the Highway Trust Fund (2020), the Social Security Disability Insurance Trust Fund (2025), Medicare Hospital Insurance Trust Fund (2026) and then Social Security itself (2031).  If it decides to bail them out, then it will either have to make cuts elsewhere, or raise taxes, or default on the debt itself.

THE ENDGAME FOR THE DEBT BUBBLE IS NEARING – AND IT INVOLVES DEFAULT
Global interest rates are already rising as investors refocus on “return of capital”.  Investors are becoming aware of the risk that many countries, including the USA, could decide to default – as I noted back in 2016 when quoting William White of the OECD, “World faces wave of epic debt defaults” – central bank veteran:

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.

The next recession is just round the corner, as President Reagan’s former adviser, Prof Martin Feldstein, warned last week.  This will increase the temptation for Congress to effectively default by refusing to raise the debt ceiling.  Ernest Hemingway’s The Sun also Rises probably therefore describes the end-game we have entered:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

 

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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.

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