You are aging. And so undergoing profound change. Imperceptibly slowly. Unstoppably irreversibly.

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Aging impacts everything you do: it changes your consumption and savings habits, your preferences in recreational activities and your needs and desires in relationships to name but a few. Crucially, aging resets your priorities.

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Mastering the challenges of aging is a tall order for individuals. Being our best at each stage of life and so aging gracefully is THE challenge of life.

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But it’s not just you who is aging. The entire society around you has aged. For decades now people have been having fewer kids and living longer. Increased longevity is a giant civilizational achievement. In consequence the median age of people in all developed and most emerging countries has gone up a lot since the 1970s. 

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Now a growing number of countries see their populations already shrinking, irrespective of war, famine or pandemic. This is a first in human history.  It is one welcome remedy for resource scarcity, environmental degradation and climate change. It even holds the promise for a more peaceful world. Something to truly celebrate.

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Mastering the challenges of an aging population is a huge task for society at large. Given that the present aging of societies is a first in human evolutionary history, we are not set up to get it right on the first attempt. We are only human after all.

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Just as societies in developed countries began their rapid aging process in the 1970s, another most powerful force became reality: FIAT money. The end of the Bretton Woods system in 1971 marked a full break from history. Money was no longer tied in even a weak form to a hard asset like gold.

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Before money lost all connection to something finite like gold, there were limits to money creation. FIAT money ended that limitation. Now money could be conjured out of thin air. In any amount desired. The FIAT money system bestowed increased power on central banks. They effectively control how much FIAT money is created in the banking sector through their power to set reserve requirements and the level of the base interest rate. On top, if they find the amount of credit (money) creation by the banking sector insufficient, they can always “print” money outright and hand it to their master, the government. In short, they can create effortlessly what you are toiling for day in and out.

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But central banks’ power was not just increased with the arrival of FIAT money. Starting in the 1980s, central banks such as the US FED began to wield God-like powers. They seemingly could no longer do wrong. No matter how much new money they threw at the financial system in a crisis or handed to the government to splash big, there was seemingly no penalty. The cost of capital stayed low particularly for ever more indebted governments. Inflation didn’t markedly rise. Actually, inflation and interest rates generally trended ever lower over the longer-term. FIAT money held its value. A true MIRACLE.

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Imagine you could borrow ever more money from the bank and spend it frivolously, yet find your creditworthiness improved. And so able to borrow ever more …. at lower cost. Not bad, ey?  This amounts to a suspension of what we are taught in economics.

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As the previous chapters made clear, the MIRACLE is a byproduct of the aging society. Yet that has not been clear to central bankers, and pretty much the entire economics profession. It proved wrong the dogma of Milton Friedman, one of the world’s most famed economists. Friedman claimed in 1963 that “inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. Like Einstein’s view of the “8th world wonder”, Friedman’s statement dated to a time when nobody thought of an aging society and its impact on inflation … and everything else. 

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For good reason. The aging society is a novel development. And its exact impact on all demand and supply relationships in the economy, including those for money, is next to impossible to predict. While people’s consumption and savings decisions are age-specific, they are not rationally driven. So theorizing and “economic modelling” do not get us very far. Best to observe groups of people who have undergone the aging process earlier.

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Japan has been showcasing the impact of an aging society on all aspects of life, including the economy and financial markets. Japan witnessed rapid aging of its society first, fully ten years before other developed countries followed suit. Japan also witnessed the MIRACLE first: FIAT money holding its value over a long period of time. Inflation in Japan had been gradually trending down since the mid-1970s, roughly a decade before the same trend occurred in other developed countries. Japan has shown that disinflation and even outright deflation are the natural states for an aging society.

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Deflation is not an outcome we readily accept. Sure, we love lower prices when we go shopping. But we are not happy to see the size of our paycheck reduced and the value of our investments shrink.

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The stewards of the monetary system, central banks, see deflation as the devil incarnate. They remain convinced that humans cannot handle an environment of gradually falling prices. They believe that deflation would lead people to stop consuming since it would seemingly make sense to wait with purchases until prices had fallen some more. Hence, a deflationary spiral would ensue and economic collapse. But the 19th century is proof that that need not be the case.

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Central banks have not recognized the slow-moving force of aging societies as the root cause of deflation and financial crises since the early 1980s. Every financial crisis since the 1980s involved falling stock and real estate prices, so was deflationary in nature. Just what would have been the natural state of aging societies.

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Instead, central banks have done everything to prevent prices from falling. With the best of intentions, they swooped in to stop asset prices from falling by bailing out banks, companies and the government in every financial crisis. With every crisis in the new millennium, their money-printing became more large-scale and frenetic. The balance sheets of central banks have ballooned as a result.

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(FED – US Federal Reserve; ECB – European Central Bank; BOJ – Bank of Japan; PBOC – People’s Bank of China)
Source: Yardeni Research

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Their actions have contributed to warping the economy and societal landscape: hugely elevated asset prices, not just of stocks but also of debt instruments and real estate. In contrast, the capacity of economies to generate income has diminished. Aging societies are, by definition, doomed to be slow-growth economies. Call them “asset-rich, income-poor” as a hedge fund tycoon did[1].

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Unfortunately, the giant stock of wealth is very unevenly split. Wealth inequality is at an extreme. Stocks, bonds and real estate are concentrated in the hands of a small group of super wealthy, mostly elderly. Uber wealthy Elon, Jeff and Mark are some of the exceptions to the rule.

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Worse, there is a negative feedback loop at work. Demographic decline has accelerated as young adults cannot afford larger homes required for a family. So they don’t start one. Birth rates have plummeted to new depths in most of the developed world since the Great Financial Crisis in 2008.

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The “successful” policies of preventing deflation in asset prices such as stocks, bonds and real estate have made a mockery of free market capitalism. The function of markets to give honest feedback – capitalism’s most redeeming feature – has been curtailed for decades now. Present day capitalism has degenerated into a game where investors are only seeking to front run the actions of central banks, foremost the FED. Central banks are, after all, setting prices. Prices in turn have become rather meaningless pieces of information as they are not the result of supply meeting demand in a free market.

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What lies ahead?  DISRUPTION. Of the severe type. We know this from history.

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The Soviet Union is a case in point. It did without markets altogether as part of its foundational creed. Communists figured that markets were a waste, their feedback inferior to centralized decision-making by technocrats. Lesser known, Soviet society also began its aging process long before Western countries followed suit. The combo of an aging society and lack of free market is crucial to understand the collapse of the Soviet Union. Eventually the collapse led to increased liberty for most and an improvement of living standards for all. But the initial cost of the collapse was huge for the majority of the population. The economic meltdown led to high unemployment, poverty and alcoholism. Life expectancy dropped precipitously.

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This combo of aging society and lack of free market has now been at work in the developed world for decades too. The outcome will be the same – severe disruption.

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Do not despair. And don’t get angry. We may take comfort from the fact that evolution has not prepared us for the challenges of an aging society.

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In the contrary: the process of aging holds the beauty to remind us of our shared humanness, including our many imperfections. As we grow old and struggle with reduced capacities, we may find comfort in the fact that others of similar age undergo the same. Anywhere in the world. Of any creed or skin color. Aging creates a bonding experience. We may look at each other less as competitors or even enemies than as fellows on the journey of life, where some of the highest prizes – internal peace, lasting relationships, and enjoyment of nature – are often held out for late in life. As we come to see and accept our own limitations, we hopefully develop love for all forms of life which all come with their own limitations and imperfections.

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But in order to master the massive challenges ahead we must get ourselves in “good shape” first.

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Getting into and maintaining “good shape” requires an understanding of the “economics” of our lives. Yes, money matters. It makes the world go round …

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…. even if may briefly stop it when disruption comes. In order to not fall prey to messages of hate towards others, the standard human “response” in a crisis situation, we need to understand the root causes of the disruption and regime change ahead. A profound comprehension of the demographic, economic and financial forces at work will help us develop strategies to deal with the mayhem and build resilience. The strategy to cope involves all key areas in life including where to live, how to work, what to study, how to save and invest and how to build relationships.

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Building on the Guiding Principles laid out in these 10 chapters, my blog translates the insights from the linkage of demography, economics and finance into practical lessons for your life. 

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Come and see my blog!

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References

 

[1] Warsh, K., & Druckenmiller, S. (2014, June 19). The Asset-Rich, Income-Poor Economy. Hoover Institution. Retrieved February 26, 2024, from https://www.hoover.org/research/asset-rich-income-poor-economy