I don’t want to make this into an inter-generational war, but I think there is a fundamental underlying issue here that hasn’t been aired fully, and is the biggest driver of what’s happening now. What is it? It’s the baby boomer aging/retirement challenge.

Since the early 1980’s, baby boomers have gone through the peak house-purchase and other (401k etc) asset-purchase years. Because of their size, they drove asset prices up. This increase is unsustainable, because as they age their asset purchases will turn into asset sales to support their consumption.

Now I realize this is just a theory, but it seems to fit very well with observed decades-long patterns in asset prices. If true, then it means that the recent bursting of the house price and equity bubbles is just a very early sign of what is to come over the next several decades, much as the first deflation of Japan’s bubble 15-20 years ago was just the sign of more to come for them.

If true, then all this talk about goosing home and equity and bond prices with various taxpayer programs is really a discussion of how to give baby boomers their retirements and late-life medical treatments. Obviously, this can be done in only a few ways:

1. Baby boomers who did not save* will have to continue working at jobs that pay enough to cover all their needs, including occasional massive medical bills. Accomplish this by letting asset prices (houses, 401ks, dollar…) go straight to their true free market levels.

*Save = spend less than earn. Exclude from earnings all the past capital gains for housing and stocks, since most of this was an illusion, just the result of a temporary imbalance in the supply of, and demand for, assets. In other words, if you are a baby boomer who borrowed while buying housing and 410k stocks, then most of the collective basis for your wealth is illusory, even though your own pattern of purchases and sales may enable you personally to keep the gains.

or

2. Baby boomers who did save* will have to be fleeced to pay for the baby boomers who didn’t save*. Easiest to do this through a combination of inflation and taxation.

or

3. Younger workers will have to pay much higher taxes to pay for the baby boomers’ ability to spend their time as they wish, and for their travel, golf games, chemotherapies etc.

or

4. Foreigners will have to lend the baby boomers vast amounts of money, and then not get repaid.

The last will never be big enough to pay for most of the boomers needs. We owe China maybe $2 trillion, which is less than a year’s worth of the baby boomers’ needs. But the likeliest outcome is a combination of all 4, with lost of fights over how much of each is used.

I don’t want to make this into an inter-generational war, but I think there is a fundamental underlying issue here that hasn’t been aired fully, and is the biggest driver of what’s happening now. What is it? It’s the baby boomer aging/retirement challenge.

Since the early 1980’s, baby boomers have gone through the peak house-purchase and other (401k etc) asset-purchase years. Because of their size, they drove asset prices up. This increase is unsustainable, because as they age their asset purchases will turn into asset sales to support their consumption.

Now I realize this is just a theory, but it seems to fit very well with observed decades-long patterns in asset prices. If true, then it means that the recent bursting of the house price and equity bubbles is just a very early sign of what is to come over the next several decades, much as the first deflation of Japan’s bubble 15-20 years ago was just the sign of more to come for them.

If true, then all this talk about goosing home and equity and bond prices with various taxpayer programs is really a discussion of how to give baby boomers their retirements and late-life medical treatments. Obviously, this can be done in only a few ways:

1. Baby boomers who did not save* will have to continue working at jobs that pay enough to cover all their needs, including occasional massive medical bills. Accomplish this by letting asset prices (houses, 401ks, dollar…) go straight to their true free market levels.

*Save = spend less than earn. Exclude from earnings all the past capital gains for housing and stocks, since most of this was an illusion, just the result of a temporary imbalance in the supply of, and demand for, assets. In other words, if you are a baby boomer who borrowed while buying housing and 410k stocks, then most of the collective basis for your wealth is illusory, even though your own pattern of purchases and sales may enable you personally to keep the gains.

or

2. Baby boomers who did save* will have to be fleeced to pay for the baby boomers who didn’t save*. Easiest to do this through a combination of inflation and taxation.

or

3. Younger workers will have to pay much higher taxes to pay for the baby boomers’ ability to spend their time as they wish, and for their travel, golf games, chemotherapies etc.

or

4. Foreigners will have to lend the baby boomers vast amounts of money, and then not get repaid.

The last will never be big enough to pay for most of the boomers needs. We owe China maybe $2 trillion, which is less than a year’s worth of the baby boomers’ needs. But the likeliest outcome is a combination of all 4, with lost of fights over how much of each is used.

I don’t want to make this into an inter-generational war, but I think there is a fundamental underlying issue here that hasn’t been aired fully, and is the biggest driver of what’s happening now. What is it? It’s the baby boomer aging/retirement challenge.

Since the early 1980’s, baby boomers have gone through the peak house-purchase and other (401k etc) asset-purchase years. Because of their size, they drove asset prices up. This increase is unsustainable, because as they age their asset purchases will turn into asset sales to support their consumption.

Now I realize this is just a theory, but it seems to fit very well with observed decades-long patterns in asset prices. If true, then it means that the recent bursting of the house price and equity bubbles is just a very early sign of what is to come over the next several decades, much as the first deflation of Japan’s bubble 15-20 years ago was just the sign of more to come for them.

If true, then all this talk about goosing home and equity and bond prices with various taxpayer programs is really a discussion of how to give baby boomers their retirements and late-life medical treatments. Obviously, this can be done in only a few ways:

1. Baby boomers who did not save* will have to continue working at jobs that pay enough to cover all their needs, including occasional massive medical bills. Accomplish this by letting asset prices (houses, 401ks, dollar…) go straight to their true free market levels.

*Save = spend less than earn. Exclude from earnings all the past capital gains for housing and stocks, since most of this was an illusion, just the result of a temporary imbalance in the supply of, and demand for, assets. In other words, if you are a baby boomer who borrowed while buying housing and 410k stocks, then most of the collective basis for your wealth is illusory, even though your own pattern of purchases and sales may enable you personally to keep the gains.

or

2. Baby boomers who did save* will have to be fleeced to pay for the baby boomers who didn’t save*. Easiest to do this through a combination of inflation and taxation.

or

3. Younger workers will have to pay much higher taxes to pay for the baby boomers’ ability to spend their time as they wish, and for their travel, golf games, chemotherapies etc.

or

4. Foreigners will have to lend the baby boomers vast amounts of money, and then not get repaid.

The last will never be big enough to pay for most of the boomers needs. We owe China maybe $2 trillion, which is less than a year’s worth of the baby boomers’ needs. But the likeliest outcome is a combination of all 4, with lost of fights over how much of each is used.

One other reason prices have not dropped is the marketing campaign the gov’t, NAR and others have been on.

For example, it was reported that Feb. existing home sales were up I think it was ~4.5% – but that was only compared to the previous month as I recall.

But from the previous year, existing home sales were down ~41%.

But people will pick up on the headline that existing homes sales were up in Feb and think: Am I going to miss this bottom, I better go out and buy now while I still can.

One other reason prices have not dropped is the marketing campaign the gov’t, NAR and others have been on.

For example, it was reported that Feb. existing home sales were up I think it was ~4.5% – but that was only compared to the previous month as I recall.

But from the previous year, existing home sales were down ~41%.

But people will pick up on the headline that existing homes sales were up in Feb and think: Am I going to miss this bottom, I better go out and buy now while I still can.

*********************

2. Baby boomers who did save* will have to be fleeced to pay for the baby boomers who didn’t save*. Easiest to do this through a combination of inflation and taxation.

or

3. Younger workers will have to pay much higher taxes to pay for the baby boomers’ ability to spend their time as they wish, and for their travel, golf games, chemotherapies etc.

**********************

I know the AARP will never allow this to happen, but… we can solve the social security/medicare funding issues with one change: Raise the age at which folks can start claiming benefits to 70. Problem solved. Taxes can remain where they are. It’s amazing that this whole funding issue could be solved by merely raising the “retirement” age by 5 years, but dem’s da facts. Again, the AARP will fight it tooth and nail, so… it’s a tough sell. Also, imagine the increased productivity from turning millions of older folks into net producers, as opposed to net beneficiaries, for five years. It would be meaningful. So, let’s get all of these old farts off their asses and working for a few more years before their benefits kick in.

*********************

2. Baby boomers who did save* will have to be fleeced to pay for the baby boomers who didn’t save*. Easiest to do this through a combination of inflation and taxation.

or

3. Younger workers will have to pay much higher taxes to pay for the baby boomers’ ability to spend their time as they wish, and for their travel, golf games, chemotherapies etc.

**********************

I know the AARP will never allow this to happen, but… we can solve the social security/medicare funding issues with one change: Raise the age at which folks can start claiming benefits to 70. Problem solved. Taxes can remain where they are. It’s amazing that this whole funding issue could be solved by merely raising the “retirement” age by 5 years, but dem’s da facts. Again, the AARP will fight it tooth and nail, so… it’s a tough sell. Also, imagine the increased productivity from turning millions of older folks into net producers, as opposed to net beneficiaries, for five years. It would be meaningful. So, let’s get all of these old farts off their asses and working for a few more years before their benefits kick in.