There is an inherent problem with most industrial nations and their ‘retirement’ plans. That problem is insufficient human capital. (“Not enough kids”). I’ve mentioned this in the particular context of the U.S. Social Security / Medicare / Medicaid set of ‘entitlements’.
What’s got me thinking about this is the coming “Fiscal Cliff” food fight.
It has bothered me in a generalized way for some time that many other nations have a similar problem. Mostly those that have followed the “advice” to have fewer children “for the planet”… So Europe is below replacement rate and rapidly aging too. As is Japan. China has had the “one child policy” for a while now, and soon will fall off a demographic cliff (as it had onset in one specific year).
We’ve all expected to “invest for our retirement”. Either individually or collectively. The notion is that we can buy our desired consumption in retirement via financial assets. But can we? Does a T-Bill make you breakfast? Will shares of GE (or Sony or Samsung…) drive you to the doctor? They can BUY that service or product, if you can sell them, but they can not deliver the goods. Only a human service provider can actually make and deliver the desired goods and services.
The “fantasy” in the USA has been that immigration would provide the needed labor. ( I suspect a similar idea had currency in Europe). Japan has a fantasy of inventing robots to provide the desired personal services. China has invested heavily in U.S. Debt and is building a lot of capital stock. (But who will run that capital stock?)
So this got me thinking. EXACTLY what “asset” can be transferred from when I’m working ( “now” ) into some future non-working time ( “years to decades later” ) and lead to my having “care” in my old age? Not just me as a single person, but “me” as a generational “collective”?
When “we” don’t have enough kids to change the bed pans, make our food, drive us to the doctors, BE the doctors and nurses, and keep the home repaired, how can those things be done? It will not matter at all if a guy in China has $10,000 or $100,000 of T-Bills if there is no one to make him dinner. It will not matter if a person in the USA has an “annuity” or even a “care plan” if there are not enough bodies to make the system work.
So what IS transferable to that future time?
This further divides into “Productive plant and machinery” (aka “capital stock” or “plant and equipment”). Materials (so metals and collectibles and such. Gold for example.) Land (in all its forms. From timberland to farming land to gold mines.) Real, physical, tangible “stuff”.
2) Intellectual capacity and knowledge. ( The “how to” to do things better.)
So patents, education (and not the political indoctrination kind nor the ‘feel good’ degrees in “social studies” et. al.; but education in how to do things, build things, do more with less)
Those are, near as I can tell, the only things that let the next generation do more with less effort and thus let them have the time to both live their lives AND take care of a very large old population.
All the paper assets and contracts in the world just amount to “promises” and can just as easily become “empty promises”. Either via acts of war, outright repudiation, inflation, or simply via ‘the young’ choosing to live their own lives and not be bound by “our” social contract.
That is, I think, where our western ideas have gone off the rails.
Importing a bunch of foreign workers just means that after we are all retired, they can simply choose not to work for our benefit. Either by simply voting not to do it (as by definition their numbers rise) or by not entering the “desired” labor pools (thus driving prices so high that the ‘saved’ paper assets can’t pay for it), or even just via inflating way our “claims” on their productivity represented by our “paper assets”.
Holding paper assets of a foreign land is just as easily bypassed. Who, in the USA, will be doing the work to pay off our “30 year treasury bonds”? Not me. I’ll be dead by then. My kids will be in their late 50s by then and about to stop working too. Their generation is having even fewer kids than mine did. So how will a Billion Chinese retire based on the work of a few hundred million Americans and Europeans? Just not going to happen.
So that “paper asset” that represents some claim on future productivity depends on their BEING future productivity. And on the contract being honored.
That means a claim on the labor of a group that may simply choose instead to “Go Galt”, or just repudiate the whole deal. As we are seeing unfold in Greece today, as we saw in Russia during the fall of the Former Soviet Union, and as we must see when ALL of the USA, Europe, Russia, China and Japan try to retire at about the same time. Do you really think the Islamic World will be happy to labor long into their middle years supporting us in retirement? (They are one of the few places with excess population growth).
Faced with a choice of following their own dreams, having their own families, living their own lives; or slaving away for folks they don’t know due to a piece of paper they never signed; what will the “20 somethings” and “30 somethings” of today do then?
This ‘demand’ will show up when the “unfunded mandates” and “unfunded liabilities” come due. They will manifest as an astounding rise in the need for tax revenues. ( Something we are seeing start now). At present, between Federal and State, the “tax take” runs about 1/4 to 1/3. The nominal rates work out at about 1/2, but it is hard to actually collect to that level. So, say, we double the tax rates to 100%. ( Or 60% Federal, 40 % State – remember that California has 13+% top income tax bracket and nearly a 10% sales tax right now, plus property taxes and several others) Who will work with a tax rate of 100%? Now realize that we have about $200 Trillion of unfunded liabilities…. Even a 100% tax rate can’t cover that (as 1/2 that today is not keeping up with present expenditures and only a $1 Trillion deficit and $16 Trillion debt.)
We are seeing this happening now. Watch congress as we head toward the “Fiscal Cliff”. They will look over the edge, shudder, and try to move the problem 2 years and one month down the road (just past the next mid-term elections.) The simple fact is that it is not possible to fix.
What we DO have
So the USA has been busy packing up real physical plant and equipment and sending it to China.
Our money is no longer based on metals.
Our patent library was sent over on a set of CDs (and they expire in 18 years or so anyway, so anything invented prior to 1995 is already ‘up for grabs’).
We do have some land and structures, but they are mostly mortgaged to the hilt already.
We have some “know how”. We have some remaining industry (such as mining, transports, chemicals, oil refining, movies and TV production). But do “we” really own those things. Many are already owned by foreign owners. Those “recycled petro-dollars” have not all gone into T-bills…
Mostly we have some fundamental individual skills and abilities, along with our personal property and homes. Perhaps a little bit of personal “metals and stuff”, and some folks will own a bit of land.
Oh, and lots of pretty pieces of paper with promises of future returns… if we don’t all cash out at the same time; despite a lot of us retiring and cashing out at the same time.
How This Goes
I’ve tried to think of a good way out of this, but I can’t.
Does anyone really think that a U.S. young illegal hispanic population will feel bound to pay off our national debts and care for / feed / tend the “old yankees”? Or will it vote for “more stuff for themselves” and tax the old wealthy whiteys? We just had an election that basically said “tax the rich”. That “rich”, is the old white folks with pretty pieces of paper… And we haven’t even begun to hit the wall yet.
Does anyone think that the Chinese and Japanese (who each hold roughly even amounts of our paper) will want to accept more I.O.Us over the next 20 years as THEY retire? Will they be satisfied with our latest ideas on how to build things? When they have an ever shrinking workforce too?
Does anyone think that the ever growing Muslim populations of Europe and Russia will be happy to work long and hard every day to care for an old Infidel population? Just because they have some legacy and pieces of paper?
This is basically the same problem I’ve “admired” here before; but re-cast into specific terms and with specific ‘cast members’ assigned roles in the national play acting. Making it more clear what the problems will be.
Realize, too, that I’m NOT disparaging those future young folks. Heck, were I a ’20 something’ with dreams of a new family, fancy car, nice home… and told that I needed to carry my family and 2 old folk on nice government retirement packages based on my productivity… well, I’d likely say to ‘bugger off’ too. I’d either join a revolt, enter an underground economy, become a ‘bum’ (or the more modern Nini ) or just flat out repudiate the intolerable burden. And make no mistake, it WILL be an intolerable burden. $200 Trillion is $200 x 10^12 dollars. With about 200 x 10^6 workers, that’s about $ Million each. I don’t care how you cut it, nobody is that productive. Just not going to happen.
The only question is HOW the dodge will happen.
put the present level for the Feds only at $62 Trillion and rising at $5 Trillion per year. Add in the States and Local governments, and any underfunded private pensions, and I’d seen a $200 T number (but don’t have a link at hand.)
So IMHO, it’s pretty simple. The Baby Boomers have an irrational expectation. They have worked their whole lives and supported retirements for the much smaller “Greatest Generation” (who, IMHO, deserved it) but now expect the same or better for themselves. Yet they have not produced the labor force in terms of kids to provide for it. Not only that, we’ve put so much in hock already (to other nations expecting to retire on those pretty pieces of paper) that our kids are already obligated to be their slaves, not ours. Add to THAT, that those kids expect to have their own lives…
So for that reason, I can’t see this doing anything but blowing up. And rather badly too.
No, no crystal ball on exactly how it will go down. Wars are typically fought when the debtor figures out they don’t have to pay the debt to the subjugated… but I don’t expect us to take that direct a path. More likely it will just be a nice high inflation rate for a decade or two. But don’t count out some simple repudiation. Companies can go bankrupt and dump their pension costs on to the Government (who prunes them in the process). Cities and counties can go bankrupt too. Nations have done it, but more traumatically.
Tonight I drove past a “Motel 6″. They are one of my favorite trivial inflation gauges. They were named during the time of the Gold Standard. They charged $6 for a ‘good enough’ room. It takes a nice blend of labor, land, capital stock, energy, etc. to run a hotel, so costs are representative of broad price changes. They have added a nice computer driven changeable marquee to keep up with price changes. Tonight the price on the local Motel 6 was $62 so we’ve had a nice roughly 90% repudiation already, just over the time from Tricky Dick Nixon to now. No reason we can’t do double that rate (i.e. 25 years instead of 50 ). So that $10,000 30 year bond will be “worth” about $1,000 at redemption (or less). And likely we will take over 1/2 of that as tax on “profit” and “capital gains” taxes anyway…
Yet while I expect that to be the major pathway in ‘the civilized west'; there will undoubtedly be some cases settled via wars and such. Especially between countries with historical animosities.
Furthermore, expect the “class warfare” politics to enhance the abrogation of the “Social Contract” via rewriting the terms in keeping with the (then) current largest voting block. We’re already seeing that in the USA. Medicare being raided for Obamacare. Abrogating the promise to the old retired folks to pay for votes and ‘services’ to the younger group. Yes, dressed up in obfuscation. So claims that the old folks will still have ‘care’ but just more efficiently… yet that is just another way of saying rationing, higher co-pay (i.e. less payment), fewer choices. NOT the same ‘contract’ as the one prior generations had. Expect more of that kind of thing ‘going forward’.
Is it because these folks are evil? Nope. Not at all. It is the tyranny of numbers. There just isn’t any way in hell the contract can be honored. So we’ll put as much lipstick on this pig as possible, but in the end, folks will do what they must to survive. And nobody can survive with a $Million monkey on his back. Even if inflation cuts it down to “only” a few hundred thousand…
So the Political Ponzi Scheme will come to an end. It will be messy. It will be hidden as much as possible behind a veil of lies and deception. And it won’t be pretty (lipstick or no). When? My guess is about 2020 to 2025 (when the last of the baby boomers retire) in the USA and Europe. In China, the one child policy started in about 1978, so a parent 20 years old then becomes a burden about 45 years later. Call it 2022.
Can we play ‘kick the can’ for 10 to 20 more years? I doubt it. My best guess is about 4 years for the EU and the USA at a maximum. Maybe a dozen for China. During that time expect to see major efforts to import loads of new population to support the Ponzi scheme. Latin America and Muslims are two places with high birth rates, so likely candidates. (We’ve already tried that in the USA a time or two. As evidence, see our last election results). IMHO that will not lead to a more stable outcome, nor will it lead to a financial solution due to the shift of voting power to those who would be harnessed to pay the debts. (Also as seen in the last election results).
What to do for the individual?
While it needs more analysis, I think the best thing is to have ownership of “stuff” and productive plant and equipment. That’s land, facilities, metals, and some stock ownership (preferably in countries with more stable demographics and lower debts / entitlements). Bonds only from countries NOT afflicted with these problems. (Though for a few years TIPS in the USA ought to still work, until eventually abrogated or eliminated in some way when they become too much of a government expense.)
Also be on good terms with your own kids ;-)
What not to do?
Don’t expect government bonds to be a long term stable store of value, nor expect that of fiat currencies. Don’t expect pensions in shrinking industries nor from local governments to necessarily be honored (after about 2020 ) and Federal pensions some time later (though more likely to be nominally honored while inflated away). Do expect and prepare for ‘social strife’ (so ‘don’t expect everything to be peaceful and nice’…) Don’t expect ‘immigrant labor’ to fix the problem, it won’t.
There will likely be lots of pops and drops, so trading into and out of such instruments can be helpful. Just don’t buy bonds and put them in the mattress…
There are two key concepts in Economics. One is that it is called “The Dismal Science” precisely because it looks at such demographic issues as this. And typically sees the problems. The other is that “demographics is destiny”. We can not make a batch of 20 year olds in the next decade no matter what we do. It’s all, already, a ‘done deal’. Importing a batch will not fix the problem, it will change it. From not enough labor, into voters saying “screw you, I want my own life”. (And I don’t blame them as I’d do the same thing.)
How to fix it is likely “we can’t” and at best it can be mitigated a little bit by early action to cut government (and the entitlements it is heaping on the ‘to be blown off’ stack) and recognizing that the Boomers and Gen X & Y folks are likely not going to have a decent lazy retirement (so neither ought our ‘masters’ in congress / Fed jobs). Unfortunately, the political winds are blowing exactly against that. So absent mitigation, prepare for a ‘bubble busting’ of astounding size. Mark your calendars, hide your wealth in “stuff” and practice ‘duck and cover’. It’s gonna be a bumpy ride ahead…