This week I wanted to discuss some of the financial reasons behind the race riots in the US. There is something really big going on in the financial markets today that no one is talking about, and it has to do with demographics. WATCH NOW!
VIDEO SUMMARY
There is a central concept in finance that is very important to understand. Every answer in finance depends on who is asking the question. The answers to questions change based on your specific set of circumstances. For instance, what is the best capital structure for a company? That depends based on the company. What is the right proportion of stocks vs. bonds to invest in? That depends based on the individual? Almost every financial question is really about understanding a particular scenario and determining the optimal solution. The outcome can be different depending on the scenario.
Charts from Pew Research Center
One of the biggest drivers in the financial world today is demographics. In the US, the finances of young people look very different from older generations. This chart illustrates the different major generations, based on births per time period. You can see the Baby Boomer generation, has by far the largest number of births, which is the defining feature of this group. Births during Generation X drop down, and then start to rise again in the Millennials.
Now these numbers are always changing, as time goes by. In 2019, for the first time ever, Millenials became the largest generation according to the US Census Bureau. You can see in this projection into the future, how the population of Baby Boomers decreases over time.
Why is this so important right how? We are about to experience a huge spike of retirements of Baby Boomers in the US. Here is a chart from the St. Louis Fed of retirements expected in the coming years. Specifically, this will happen with a big spike in the next three years, and a continued high level over the next ten years. This will have a huge impact on financial markets as people switch from wage earners to fixed income.
This is a big demographic shift. It is causing abnormal behavior in financial markets. Here is a chart of wealth distribution in the US be demographics. You can see that Baby Boomers hold well over 50% of the wealth in the US. The older generations have all the money. The younger generations have very little, even though we saw, that Millennials now outnumber the Baby Boomers. This is quite unusual historically, to have such a large discrepancy between the older and younger generations. It is normal for generations about to retire to have more money than younger generations, but the gap is not normally this big. It is so large because of the large spike of retirements to come. The older generations are all saving their money for retirement.
This is a major driver in the US economy, and why it is so difficult for young people. Young people don’t have any money. There is not enough jobs. There is not a lot of growth. The jobs that do exist do not pay well enough. The young people do not have any money, because the older generations have all the money, and they are planning on keeping it because they need it to survive retirement. All of these statistics about demographics is creating a war in the financial markets. To show you this, let me ask a simple financial question. What is the optimal rate of inflation for the United States? As we discussed earlier, it depends on who you are asking. For young people with no wealth, inflation (within reason) is not such a bad thing. Inflation creates lower unemployment, more growth, more money in the system, and easier credit. If you ask the same question to the older generation, with a lot of assets, on a fixed income, they want zero inflation. They want to maintain the value of their assets. So we currently have opposing viewpoints, in an abnormal environment with a huge discrepancy between these two groups of people. There was a research paper released by the Federal Reserve in 2012 looking at this exact question. Looking at different demographics historically, younger people preferred higher inflation, while older people preferred lower inflation. And when older people have more influence on social policy, the economy has lower inflation.
So what does this mean for financial markets? There is a lot of factors that contribute to inflation. However, all these retirements and longer life expectancy is going to drive deflationary pressures in the US over the next ten years. This will frustrate the younger generations more and more.
Chart from Pew Research Center
This conflict is going to play out in setting social policies for the US. There are things that can be done to stimulate the economy and contribute to growth for young people. We have already seen this in the vote. In the 2018 US elections, we saw the younger generations surpass the older generations in voting for the first time ever. And this happened in an enormous jump. This excitement to vote in young people is being driven by the lack of economic opportunities. And as of two years ago, young people control the vote in this country, which is a trend that is likely to continue into the future.
I should end with the one lesson we always learn from economics. Economics teaches us that all things will work themselves out with time. So we may be in an abnormal demographic situation right now, but it will eventually resolve itself. In the meantime, this will likely be one of the primary conflicts that is driving financial markets over the next ten years.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.