Demographics

If you think about the future, and I only mean the fairly close future, there are a number of things that are going to happen because of Demographics. The "Baby Boomer" generation has been aging and is reaching retirement age. Now, the sad fact is many of them counted on a retirement based on the money in their 401Ks and homes. A lot of this money has vanished. Real estate especially will take years to return to values it attained in 2007. The stock market is also unlikely to get to levels from that year for a while.

This generation, which has to a large extent been the primary engine in the economy for the last 60 years is now faced with a situation forcing them to try to save. Further, as the grim reality of their situation has sunk in, some will have to work longer, assuming there are jobs for them.

They are going to put demands on health care, and social services that were easily forecast but which are going to be worse as their own resources have diminished. Many of them have seen any traditional pensions they may have expected endangered, companies that at one time promised life time health benefits have either gone out of business or are scaling back the benefits.

The one strength this group still has is tremendous political clout. While to a large extent many of them spent much of their lives living independently, as they find themselves unable to provide for themselves economically, they are likely to demand that the Government do something.

This probably means that budget deficits will continue to grow and the National Debt increase. There is no magic solution to this demographic issue. The other known problem is that the number of workers paying taxes to support this group as they retire and need services is proportionately smaller than it has been in our history. For the next few decades, unless we have a massive immigration of young people, the ratio of people above 60 to those under will set records. As long as we rely on an income tax to finance our social services, we will have a significant problem.

We may see a change in the American lifestyle, and we may be already seeing it, where generations return to living together to reduce expenses. That is one of the reasons that the housing stock in existence is probably excessive and will exceed demand for a good number of years.

They are also going to spend less money. First, they have less. Second, as they age, some things they spent money on will become insignificant to them. Of course they will still buy consumables but some of the industries that relied on them wanting things newer and better will suffer. If we see fewer households there will be less demand for major appliances, automobiles, lawn maintenance equipment and any other items that are discretionary. Spending will not disappear, but demand will decrease and profit margins will be squeezed.

The economy will adjust, but it will become more fundamental. If we do some smart things, such as reform the tax system, increase immigration, and reduce dependence on foreign oil, we can mitigate much of this.

However, the amount of reduced demand that the demographics predict is probably going to mitigate any inflationary pressures for years to come.