The Coming Financial Storm (or - Stealing From Old People Slowly)

I'm going to talk about finance - and yes, this will be about older people (who I think about a lot)

I’m a geriatrics guy and I work in a hospital, but because of the nature of my work I spend a lot of time thinking about demographics, and because I work with a lot of retired people (and because of the fact I’d like to perhaps retire someday myself), I think a lot about demographic trends - and money.

Let’s start with a visual:

Focus your attention on the mildly hypnotic graph above - it’s a time-lapse version of what’s called a “population pyramid” - a handy way of visualizing the distribution of age and sex across a population. Note that in the 1950s, the pyramid starts out looking, well, pyramidal - but as we’ve progressed into the 2020s, the pyramid starts significantly fattening at the top.

In other words - the USA is and has been aging, and rapidly.

And, unless you’ve been living under a rock for the last 50-70 years, you’re more than aware of this:

This illustrates we have a problem on our hands.

Full disclosure - if you’re in the camp of “debt doesn’t matter” or are an adherent of economist Stephanie Kelton’s so-called “Modern Monetary Theory” (MMT)” (which I’ve always understood to be a rewarmed version of chartalism) you may want to stop reading. Simple reason is that I am of the belief that debt *does* matter.

In my opinion, we have reached the point in the USA where debt has exceeded the level to where conventional ways of addressing it are even feasible.

The most conventional route for addressing high debt is austerity, where governments decrease spending and increase taxes to generate more revenue and reduce the budget deficit. Normally - this is an approach that can control debt levels, but it can also have negative consequences for economic growth.

Quite possibly the most underrated US President in American history.

Fun fact - last time the United States Federal Government actually did a true austerity program was in the 1920s, where the Coolidge Administration pushed through spending cuts which by today’s standards would be considered draconian - depending on who you talk to, in nominal terms the cuts were between 40-50% of federal spending. Although the Coolidge administration ended up cutting income and corporate taxes during this time, they ended up increasing tax revenues via the raising of additional trade tariffs, instituting the estate tax, and overseeing a large spike in economic growth and prosperity known as the “Roaring Twenties.”

But - if debt levels are already too high, fiscal austerity measures stop working.

Main reason for this is when the ratio of publicly-held debt to Gross Domestic Product (GDP) gets too far beyond 90% (according to widely respected numbers generated by economists Ken Rogoff and Carmen Reinhart), raising taxes and cutting spending becomes ineffective, if not outright counterproductive.

As taxes go up and spending is cut, economic growth tanks, causing tax receipts to plummet, simply making the sovereign balance sheet hole *bigger.* And - as the economy is thrown into a sharp economic decline - social unrest and disorder take hold. This is what’s known as a “debt-deficit spiral.”

This is the position the USA is in currently, with a debt-to-GDP ratio currently hovering at around 130%.¹

I do believe the US is at the point of no return. Austerity will not get us out of this mess - and there’s nothing historically abnormal about this, by the way.

The other conventional method of addressing high debt is formal default (think of it like a mass ‘chapter 11’ for our debt).

Rest assured, the US will never formally default on its debt. The US government will not be walking away on its debt obligations.

While formal debt default happens from time to time with small, poorly-run third world countries (in 2020, for example, both Venezuela and Argentina did this), it’s considered unthinkable by major, first-world economies like those of the United States, who have a long history of honoring its debt commitments, and a stable economy with diverse sources of revenue.

Moreover, because the USA (for the time being), has the world’s primary reserve currency, this means that the consequences of formal default would be catastrophic for the world economy.

If Austerity or Formal Default Aren’t a Fix - What Is?

I saw an earlier version of this, in the form of a “trial balloon,” whereby the US Federal Government’s nonpartisan Office of Management and Budget, or OMB, had floated the idea of subjecting US military retiree’s disability pension payments to means testing as a way to help plug holes in the US government’s massive (and growing) fiscal budget deficit that is currently projected to clock in at a literally-incomprehensible 1.4 trillion dollars by the end of 2023.

When I saw this proposal, I immediately started thinking about the following quote by the great macroeconmic thinker, Russel Napier:

“Financial repression means stealing money from savers and old people slowly. The slow part is important in order for the pain not to become too apparent. " - Russell Napier

Yes - this is an example of an austerity approach, straightforwardly. This is an attempt to cut spending as a way to bring our Federal government’s fiscal house in order. But politically - this was immediately shot down. Veterans’ groups as well as lobbyists for older Americans are organized, and can shoot this stuff down.

So what *is* the answer?

The USA Will Steal Money from Old People And Savers via Inflation (Slowly)

Source: Upfina.com

I’ve included the above chart (which is based on publicly available data from the St. Louis Federal Reserve) not so much to make a case about short or medium-term inflation trends, but more about the experience of the typical older person.

According to data from the Social Security Administration, in 2019, Social Security benefits accounted for at least 90% of the income for 33% of elderly beneficiaries (age 65 or older) in the United States. Additionally, Social Security benefits represented at least 50% of the income for 62% of elderly beneficiaries. Any number of these older people rely on other sources of government transfer payment schemes, like state or local pensions, VA pensions, etc. In other words - US retirees rely disproportionately on government benefits to fund their livelihoods. And, older adults rely overwhelmingly on Medicare (since it effectively monopolizes healthcare funding for retirees & seniors).

When inflation bites (as it has been for the last couple of years, and hard) older adults feel it first and more severely. And what the above chart suggests to me is that with hindsight bias firmly in place, they are more likely to project it into the future. Younger people who are still working and earning salaries? Not so much.

Inflation almost *always* hits old people harder. Hence the Russell Napier quote.

Here’s the catch - Social Security, Medicare, state & local pensions, VA pensions, federal employee pensions - they all get “Cost of Living Adjustment” or COLA - which is typically based on the Consumer Price Index, or CPI, right?²

That way, even if prices rise, as they have been, retirees are supposed to get an adjustment at the end of the year to make sure their 'true' benefit levels stay the same, in terms of purchasing power.

Herein lies the problem. If you count all of the various “mandatory” transfer payment schemes the US Federal Government is responsible for, they total 4.8 trillion dollars, or 20% total of our annual gross domestic product. Of that 4.8 trillion, nearly 2 trillion is SS & Medicare spending.

Stealing from Old People Slowly: Enter “Chained CPI”

Photo by Kaley Dykstra on Unsplash

The "chained COLA" approach has been proposed as a way to control the growth of government spending on programs such as Social Security and Medicare by moderating the degree to which the traditional CPI calculates inflation.

This approach supposedly takes more explicitly into account consumer behavior, such as substitutions that people make when prices of certain goods increase.

For example - a more traditional approach to calculate CPI would be to include in a consumer basket the price of, say, sirloin steak, and then use price changes in that same sirloin steak, over time, to arrive at a CPI number.

The “chained CPI” instead assumes that as the price of one item (sirloin steak) increases, consumers will likely switch to a comparable, but cheaper consumer item to maintain their standard of living (say, ground chuck instead of sirloin). If the consumer is paying the same amount of money for the lower-quality (but still arguably comparable, because it’s beef) ground chuck as they were for sirloin, it is assumed that by using this method - people’s cost of living hasn’t necessarily been hurt to the degree assumed by traditional CPI.

If you want to read more about the “chained CPI,” I encourage you to do so - I think it’s not a matter of if it happens and becomes a widespread method for how the US government calculates it’s liabilities, it’s a matter of WHEN. And I think in my mind, there is no question - this will hit older people disproportionately.

The US will get it’s fiscal house in order eventually, and I believe it will be done on the backs of the people least likely to be able to afford it - old people.

Think about it - older adults are a perfect group to “steal from slowly.” They are overwhelmingly on fixed incomes, are overwhelmingly dependent on the government for transfer payments to survive.

And I hate to say it - older adults are less likely to feel much loyalty from Millennials or GenZ.

Not only are these younger generations less likely to have children of their own, these generations feel probably somewhat less than charitable towards their elders who they saw only get richer during the 2007 Great Financial Crisis, and again during the 2020 COVID panic (while they increasingly get smothered by student debt, ever-increasing housing costs, and a declining standard of living).

Bottom Line - Inflation will be the New Normal

I think the next 5-10 years are going to be a period of overall high structural inflation in the USA, with (if I would have to guess), inflation averaging between 4-6% or possibly higher.

Not only do I think it’s because the government has an interest in seeing higher inflation (because it inflates away their liabilities) - I think there’s other reasons:

• Higher energy prices will be the norm. Regardless of what you feel about ‘environmentally sustainable energy policy’ there is no free lunch, and it’s a pretty safe bet that our “green energy future,” if there is one, will cause energy to be scarcer and more expensive.

• Geopolitical issues. Wars are invariably inflationary, particularly if they drag on. Also worth noting that Russia is a major oil and gas exporter. This war will cost us. Also - globalization is going in reverse.

• Loss of the US dollar as the global reserve currency. This is ultimately inflationary, as countries stop using the US dollar as their medium of exchange.

What do We Do?

Photo by Bruno Aguirre on Unsplash

Dear reader, you may be a few years out from retirement - a GenX like me. You might be already retired, an older GenX or even a Baby Boomer. Or, you may be younger and concerned about the direction the financial and monetary world are heading.

If you have financial assets or means of any kind, I would say start having conversations with financial planners and start doing your research now. The days of the “60-40” stocks-bonds, set-it-and-forget it portfolio mix are over, in my opinion (none of this financial advice - I’m just a geriatrics doc).

US Federal Reserve has been winning the fight against inflation… for now

While I think it’s clear this current bout of inflation has been receding, and we might even see a brief bout of deflation in the coming months (where prices may decline), like I said above, I believe inflation will be returning afterwards, and will be higher, and longer - than we have been historically used to. It will be, in my opinion, the new normal.

Photo by Jingming Pan on Unsplash

That means previously unloved asset classes, like gold and silver, may rise in importance in one’s retirement portfolio. Real estate will likely continue to be a good bet over time (although I think we’re in for another sickening correction soon). Industrial and energy commodities, also very unloved for the last few decades as an asset class, will likely shine as well.

Basically - focus on making sure you have assets that can’t be printed or debased, and ideally exist outside the USD-based financial system. These are assets such as:

• precious metals, real estate (already mentioned)

• fine art, collectibles, paintings

• Bitcoin (if you’re into that). Don’t mess with other “cryptos”.

• Commodities (farm, industrial & energy products & producers)

Regarding commodities - consider the below chart that plots the S&P 500 stock index, against commodities. This chart is what some investment gurus have called “the most important chart you will ever see”:

What if I don’t have lots of $$$?

There’s still things you can do. But it’s more challenging:

• Start small. Instead of buying gold, consider buying silver instead. Remember you don’t have to buy an entire Bitcoin, you can buy fractions.

• Cut costs. Downsize where you live. If you have two cars, consider just having one.

• If you’re retired, consider taking on a job for extra income.

• Things like starting a garden, or storing extra cans of food in your pantry when you can (small scale “prepper” lifestyle stuff) can also be a good way to survive inflationary times. Start building these habits now.

Conclusion

This is just me, your GeroDoc, being a worrier. But I do feel like we are entering a new era, where we can’t depend on the government anymore to take care of us. Not because it’s going away anytime soon (unfortunately), but because our relationship with it, for good or ill - is going to be changing in the coming years.

It’s never too late to prepare!

1. https://worldpopulationreview.com/country-rankings/debt-to-gdp-ratio-by-country

2. There’s a lot of people who believe that the CPI systematically underestimates actual price inflation in the economy, but we’ll leave that aside for now. One popular website a lot of people consult for alternative inflation measures are economist John Williams’ Shadowstats website, which purports to use a pre-1980s measure of calculating CPI that is more accurate than the one in current use. Another is the Chapwood Index, which simply tracks the prices of a representative basket of goods in the US and does not subject the data to any adjustments. A particularly interesting one, that I like is called the Trueflation Index - which is a blockchain-based metric which supposedly provides real-time aggregation of a variety of inflation data sources.