Photo: Sophie-Marie Tékian

The Baby Boomer Blame Game

Just a few days ago, Deutsche Bank announced the return of real GDP to the potential GDP growth rate. During and after the Global Financial Crisis, individuals and corporations were feeling the pinch (likely caused by losses or decreased liquidity in the market). This translated into reduced spending, investment, lower interest rates and overall depressed economies. While the return to GDP is good news, it should not overshadow the issues we all face both nationally and globally in regards to employment, housing, levels of national savings and general faith in financial institutions.

I am not going to pretend like I wear rose coloured glasses and think our economic issues are purely circumstantial. I am the kind of person who believes there is a reason for everything. Perhaps I am this way because I am a logical person, and if there are no explanations and no meanings attached to things, then what are we all doing? With GDP growth finally at pre-GFC levels, maybe this is a good time to ask - how did we get here?

This is not a rhetorical question. If you are too tired, too busy, too lazy and want to stop reading now, I am going to be nice and tell you the answer. We got here because of the Baby Boomer generation. This is true in both a literal sense - none of us would exist if it were not for someone born in that generation who decided to reproduce - and an economic sense. I am not going to go into detail as all these topics (employment, housing, public and private savings, and financial institutions) could have individual posts alone. Instead, I will skip across my explanation like a stone over a lake, hopefully providing you with enough insight to get angry at your elders over a Christmas dinner.

Firstly, employment. Australia’s unemployment rate is not necessarily a cause for concern, however it should be noted that there are many who are forced to work in casual or part-time roles as they cannot find permanent, full-time work. What causes such unemployment or underemployment? This may be explained by the remnants of post-GFC revenue belt-tightening, both in the forms of decreased consumption by inviduals but also by decreased productivity within firms. Less employed people leads to less wages being paid, which leads to less wages being spent on consumption or investment, which leads to a further reduction in demand for goods and services in the economy, which leads to more unemployed or underemployed individuals, and so on and so forth. Generally, we may blame unemployment and undermployment on the post-GFC business cycle.

Next, housing. Australia’s housing market has steadily increased in size and value for many years, but it is only in the last five or so that prices have began to boom. This can be attributed to a heightened desire for ‘safe’ property from overseas investors. Remember, the GFC was built on an unsustainable property market in the US. The problem with investors (in Australia’s case, Chinese investors) is that their demand for safe assets pushes up the price. This is especially problematic when supply cannot keep up - a simple fact that is true of all property in general, but especially of those situated in the more established or affluent suburbs of Melbourne or Sydney: we cannot magically create additional land to build more houses (well, Elon Musk may think otherwise with his colonisation-of-Mars idea). The original flock to safe assets was caused by the GFC, and has generated further property bubbles around the world that may not collapse the world economy in the form of mortgage-backed securities, but have the potential to damage local economies in Sydney, Melbourne and Toronto alike (among many other regions).

Another major economic issue faced by all countries with lower population growth rates (typically developed countries) is the issue of the aging population. As people get older and start thinking about retirement, they may adopt “transition-to-retirement” strategies (whereby they continue working and earning a wage while drawing on their retirement savings), or leave the workforce and begin eroding the balance of their lifelong savings altogether. This is problematic as economies lose participating members within the workforce and suffer from the widespread dissaving that is occurring (individuals spending their savings, rather than accumulating them). It can also be seen that those living in a state of dissaving may be less likely to spend, consume, invest, and take financial risks. The economy suffers from the loss of productive members and hence the loss of the consumption and investment of wages that would have otherwise been earned by such individuals. If you think about the current age of retirement in Australia (depending on the year of birth) being around 65 years, it can be seen that these retirees belong to our favourite generation: the Baby Boomers.

Let us not forget the recent announcement of the Royal Commission into Australia’s Big 4 banks. This could be considered proof that Australia’s financial institutions are not as robust and trustworthy as they may promote themselves to be.

Now I will present you with your final rebuttal, your John-Cena-WWE-smackdown-takedown for any Baby Boomer who is mansplaining or patronising you, as they seem to do on a frequent basis.

What caused our employment issues? Well, it may be concluded that it was caused by a loss of confidence in the market due to the GFC.

What is the cause of our housing market bubble? Well, that has been explained by the flock to safe assets, caused by the GFC.

What were the economic implications of an aging population? Well, the retirees spend all their savings, and when we have this phenomenon occurring en masse, it can have significant economic effects.

All signs seem to point to two events: the normal aging process of all living beings, and the financial sector. And who belongs to the financial sector that largely contributed to the GFC? There is not one answer, but if you look at all the fund managers, politicians, Chairmans of the various Reserve Banks, CEOs and CFOs, most have one thing in common: they are of the Baby Boomer generation, who are now retiring at a rapidly increasing rate.

In 2007, we had the oncoming of the GFC. In 2017, we face the beginning of a different crisis: the oncoming of the Baby Boomer retirees.