The clash of generations

Aug 19. Hans Lysglimt - Entitlement expectations just do not add up to what can be delivered. This is true all over the western world. Future pensions and medical benefit expectations are way above the surplus producing ability of the next generations, save a productivity miracle.

What is equally worrying is that savings in shares and real estate does not add up either. There is way too much perceived “value” and “money” in the world. Over inflated asset values from artificially low interest rates created by central banks. Those who have savings believe their houses, shares, IRA’s, mutual funds etc will hold up it’s value and buy them expected goods and services 10-20-30 years from now. It can’t and it won’t. The math does not add up, there is too much perceived money value and to few people to produce the stuff and services. Relative prices will have to adjust. The current fall in house prices is a precursor to what is going to happen, perceived “wealth” will evaporate across asset classes.
Implicitly people have assumed a California house “piggybank” valued at USD 400 000 would somehow be exchanged for say 20 000 future haircuts at USD 20 each or 4 000 professional therapy hours at USD 100 each (or other services, you get the idea). But, on an aggregated scale this just does not add up, there are not enough people to perform all these services to match the money. There is too much “money” and too little service people relatively speaking. Asset prices will have to come down and haircuts prices come up to where things make sense again, it has to and so it will.

As an economist I fully expect capitalization of assets to go down in the next few decades. Inflation will go up, interest rates will have to follow up, one time cost effects from
Asia will end and investors will realize more inherent risk and demand higher interest premiums. The long term stock investing bias will wane; primordial fear might even set in. On top of this the older folks will divest their savings. All this combined will lead to massive reductions in capitalization of assets, world wide. And believe me this is dramatic. If the underlying capitalization rates go from say 3% to 9% this means a 66% reduction in the value of the underlying asset. This illustrates the potential magnitude of reductions we are talking about from peak to bottom. Investors will bleed, it will end in tears. Even though the underlying asset values where never really real anyway, people mentally consolidated and set the bar at the very top and now regard any reduction as a loss. A few, a very few, people where able to get off the madness in time to set aside capital safely, like in gold and like in rental property owned outright – good for you.

10-30 years from now the western world will be overflowing with old people, you can see it happen in the streets before your eyes even today. And they have huge expectations. They expect an ever smaller minority of young people to deliver to them, they don’t just expect it, they will demand it – good and hard. This will work for a while until the levels become unsustainable, and will have to be changed. Our worry is that the entitlements have been to rigidly imposed for there to be a smooth transition into something reasonable. The old will use the full might of the state to enforce their entitlements from they younger generation.

The expectations of the elderly are thus to fully consume the surplus of the production of the younger generation. This is never spoken about explicitly, but must be true by necessity. The dreams of the young will be taken over by the old. “As easy as stealing candy from a baby” will get a new and more literal meaning as this is exactly what they is happening. The nice 2018 convertible the young boy born in 2003, now 5 years old, dreams of buying and driving will forever be just a dream. That nice convertible will not be bought and driven by him; it will be bought and driven by someone else, someone born in 1953. The baby boomers implicitly aim to consume the surplus of what the majority of people born in the 70ties, 80ties, 90ties and 21 century will ever produce in their productive years. The young to be the slaves of the old. The lunches, dinners, drinks, therapies, taxi rides, holidays, convertibles and so on. It will be directed towards and consumed by old folks. The question then becomes; what will the young people be able to save for THEIR retirement?

Fortunately, the baby boomers will eventually die off sometime in 2030-2060. Our baby boy born in 2003 will retire in say 2070. So, when will he be able to save for his retirement? This is the next big question that no one has an answer to. As taxes has to be raised dramatically to pay for the elderly the young will see that there is little left for them today and little in the future. They will demand change. This could happen rather fast once the process gets going past a yet unknown tipping point. This will demand massive changes to how the entire society is rigged.

Our era is going to see a huge friction and tension between the generations, a clash no less. I am born in the 70ties myself, and let me tell you. I have no intention of letting perfectly healthy people in their early 60 ties simply stop working, demand the government tax me more, and literally enjoy eating my lunches. The young people must somehow band together and make this message clear. The old folks have been banding together for a generation towards the young through the political system.

Anyone born after 1992 still has no voting rights, but the baby boomer generation now in charge are already now placing enormous financial burdens on them in debt and entitlements for the rest of their lives. This is not fair, it is not right and it has to be changed. Somehow the young will have to be informed and be able to say “enough already” and make clear that they will not pay the tab from the feast of their parents and grandparents.

It is all decided within a democratic system. And there is the problem, democracy. Democracy might come to the end of the line, in our lifetime. It is after all a very young experiment. It is built on illusions of someone else paying. And now it is about to default on itself by making too many and to big promises to possibly be delivered upon. Will democracy as we know it survive its own bankruptcy? We suspect not. Unfortunately what will replace it will more likely be worse than better. We believe a 1984 scenario is more likely than a massive laissez faire liberalisation. Fukuyama claimed that the current liberal democracy was “The End Of History”, he will be proven wrong. The clash of generations will more than likely leave democracy as we know it in scatters.

August 19th 2008. Oslo, Norway. Hans Lysglimt

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