More and more people are lining up to support our argument that central bank stimulus programmes are damaging the economy, not helping it. The latest is bond guru Bill Gross, who wrote yesterday:
“Zero bound interest rates destroy the savings function of capitalism….(whilst companies) have plowed trillions into the financial economy as they buy back their own stock with a seemingly safe tax advantaged arbitrage.
But more importantly, zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society…..
“Do central bankers not observe that Detroit, Puerto Rico, and soon Chicago, Illinois cannot meet their promised liabilities? Do they simply chalk it up to bad management and inept governance and then return to their Phillips Curves for policy guidance? … The developed world is beginning to run on empty because investments discounted at near zero over the intermediate future cannot provide cash flow or necessary capital gains to pay for past promises in an aging society.
And don’t think that those poor insurance companies and gargantuan pension funds in the hundreds of billions are the only losers. Mainstream America with their 401Ks are in a similar pickle. Expecting 8-10% to pay for education, healthcare, retirement or simply taking an accustomed vacation, they won’t be doing much of it as long as short term yields are at zero. They are not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive while central bankers focus on their Taylor models and fight non-existent inflation.”
The chart above, based on new US Census Bureau data confirms Gross’ argument. Today’s central bankers are essentially modern-day alchemists, whose policies simply do not work in the real world. It shows:
- US per capita income since 1967 on the vertical axis (in US$ 2014 to adjust for inflation)
- US total population by year along the horizontal axis
It confirms the dramatic changes in demand patterns caused by the BabyBoomers (born 1946-64) from 1971 onwards as they entered their Wealth Creator period (25-54 age group), when most people’s income and spending peaks.
Median US incomes rose from $18k in 1971 to a peak of $31k in 2000 as the eldest Boomer reached 54, whilst the total population rose from 205m to 280m. Since then, incomes have plateaued and were still below 2000 levels in 2014. The US BabyBoomers were indeed the largest and wealthiest generation in history.
This plateauing is inevitable as more and more Boomers enter the 55+ generation, when incomes and spending start to decline quite sharply. Since 2000, 92% of US population growth has come from minority groups – mainly Hispanics and Blacks. In turn, this matters for economic growth, as consumer spending is around 70% of US GDP, and Hispanics earn 25% less than Whites, and Blacks earn 20% less.
Central banks simply cannot reverse the impact of these trends via printing money and cutting interest rates to zero. All they achieve via these policies is to artificially increase prices for financial assets, as Gross describes, whilst destroying the savings on which the Boomers depend to finance their retirement. The one-off wealth effects created by their policies cannot compensate for income stagnation. As Gross concludes:
“The time has come for a new thesis that restores the savings function to developed economies….Near term pain? Yes. Long term gain? Almost certainly. Get off zero now!”
US companies preparing to budget for 2016-2018 need to ensure their Scenarios take account of the potential for such “near term pain” to impact consumer markets.