When Does the Demographically-Related Pension Ponzi Scheme Blow Up?

Reader "GM", an actuary student in Malaysia pinged me with an accurate observation on demographics, but missed the boat on a solution.

GM writes ....

I thought I would point out the reason for this monetary madness, which I believe you had brought up before.

Aging populations consume less, and have different consumption patterns to working populations. Retirees consume less food, autos and real estate compared to young working couples. They use more healthcare instead. Also, aging populations take on less debt. These factors combined make the economic effect of lowering interest rates and printing money less pronounced than they would be in different circumstances.

As a student actuary who is also doing my CFA I believe that demographics has a far greater impact on the economy than current economic models allow for. I live in Malaysia, where civil servants receive pensions based on their basic (not final) pay. But even this is unsustainable - The Edge newspaper earlier this year reported that nearly 40% of government operating expenses goes to pensions and emoluments, hence a need for pension reserving arises.

Perhaps governments and corporations alike may want to encourage higher birth rates to avoid destroying the monetary pinnacles they have built for themselves?

Singapore, for all her freedom, cannot seem to encourage more births. There is an unwritten understanding in Singaporean corporations that a woman joining corporations cannot give birth within 5 years of joining, and later if she does, there are little or no maternity benefits.

They now have a TFR lower than Japan, and are facing a real estate bubble collapse.

Maybe we could investigate this for the sake of asset prices?

Cheers!
GM

What's the Solution?

Demographics are indeed a problem, but what's the solution? To encourage more births when housing prices are sky high, asset bubbles exist everywhere, and education costs in the US are totally insane?

Central bankers greatly contributed to this mess by cheapening interest rates to a point the BIS started screaming loudly (See BIS Points Finger at Yellen, Draghi: Warns About "Unthinkably" Low Interest Rates, Bond Market "Dislocations").

The best thing to do is let the free market work, something Bernanke had the chance to do in 2009, but didn't.

He called the collapse of Lehman his biggest failure. I propose it was his biggest success.

Actually, Bernanke did not "let" Lehman fail as he describes. Lehman had failed and Bernanke let the market pronounce a proper death burial.

Now that Bernanke has successfully re-blown the property bubble, millennials cannot afford houses.

Demographic Time Bomb

The solution "GM" proposed (to have the government encourage more kids) cannot work. Government has no idea what the birth rate should be.

What if the number of jobs is too low? What if the cost of housing too high? What about food stamps and other handouts for those with no jobs? And what happens down the road (way down the road when someone argues "we need more kids")?

Bear in mind by the time the kids born today reach a working age where they can help the elders, many of those elders will already have died!

Besides, the only way to encourage more births is to throw money at the problem. But what would that do? It would punish everyone else via taxation and bigger property bubbles.

The solution as always, is to let the free market economy decide on its own what the supply of credit should be, what housing prices should be, what the birth rate should be.

European Demographics Problem

I discussed the European demographics problem in Population Deflation: Spain Joins Germany with Negative Net Birth Rate; Italy on Threshold; Who's to Blame?

So Who's to Blame?

1. Central banks and their inflationary tactics are at the head of the list. 
2. Fiscal stimulus, including a myriad of "affordable housing" programs that failed also contributed. 
3. Corrupt politicians in bed with union leaders handing out untenable pension promises is right at the forefront as well.

How the hell is a policy to encourage more births going to fix those three enormous structural issues?

And what about debt? Student loans? Millennials taking care of their aging parents?

The bottom line is the monetary actions of central banks, and the fiscal stimulus and protectionist actions of governments are for the sole benefit of the already wealthy, to the detriment of the shrinking middle class.

Fewer and fewer millennials can afford to bring up kids in this environment.

Economic Madness Spreads

Yet, here we are with more economic madness. Finland heads up the fool's parade with a Helicopter Drop Free Money Proposal For Everyone.

Last week the ECB Cut Interest Rates to -0.3 Percent.

The market expected more. Currently the Bank of Japan is monetizing 100% of new debt issuance. Has it helped?

Canada Joins the Negative Interest Rate Watch Group

Canada reacted to its recession just today with an absurd proposal to lower interest rates to -0.5 percent.

Negative interest rates did not work in Europe, nor have zero interest rates solved anything in Japan. And even the BIS note the ridiculousness of the idea. But here we are.

In regards to negative interest rates, Bank of Canada governor Stephen Poloz commented "should the need arise, we’ll be ready. The effectiveness of each tool will depend on the situation, making it more a matter of choosing the right one at the right time”.

This was my response to Poloz's "right tool at the right time proposal".

Right Tool at the Right Time

I have a very simple question for Poloz: If you know the right tool for the right time, why is Canada in or flirting with recession?

If the Fed knew how to use tools, why was there a global financial collapse?

If the ECB knew how to use tools, why can't the eurozone hit inflation targets?

It may be a "matter of choosing the right one at the right time" but don't expect central banks to come close.

In practice, central banks pull tools out of their collective asses, making them up as they go along, hoping to cure the messes their policies created. The results speak for themselves: a series of asset bubbles of increasing amplitude over time.

There is one and only one tool that will work. It's called the free market.

Expecting a bunch of economic illiterates who do not understand the irreplaceable role of the free market is like expecting an idiot to divine the theory of relativity.

Proposals for the government to do something about the birth rate are 100% guaranteed to do one thing: make matters worse.

Finally, what cannot be put off forever, won't. The demographically-related pension Ponzi scheme that expects 8% returns with 0% or negative bonds and fewer contributing workers is one of those things.

Mike "Mish" Shedlock