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The Secret Our Govt. Doesn't Want You to Know (Part II)

Friday, December 9, 2011 | Dylan Jovine

Note to readers:  This is Part II of a 3-Part Series.


“The aging of our population [has] changed the backdrop for the budget in a fundamental way.”
– Congressional Budget Office (CBO) 9-14-11


Last week I publicly discussed the concept of a “demographic collapse” for the very first time. 

Judging by many of your comments, it appears the concept was as disturbing as one could have expected.

This is especially true considering that nobody in public office ever would – or should – discuss the next twenty years in such bleak terms. Not only would it be political suicide, it truly would be bad for our country.

But as investors, we aren’t in the business of selling false hope. That’s the job of politicians. We’re in the business of looking at the facts with a dispassionate eye and making decisions based on those facts. Nothing more, nothing less.

And make no mistake about it – population changes of this magnitude are serious business.

That’s why, in last week's article, I highlighted the little-known report issued by the San Francisco Federal Reserve this September predicting a 50% drop in equity valuations.

Yet if our problems just ended with the decline of the stock market, it might be a problem we could handle…

But remember, our core problem has nothing to do with the stock market. Nor does it have anything to do with Social Security, the Dollar, Medicare, our Debt or our Budget Deficits.

None of those are the problems. They’re all just symptoms of the problem…

The real problem is the economic collapse that comes whenever any population ages as rapidly as ours is.

Let me explain…

Ever since the financial crisis began in 2008, our government has been running annual budget deficits of around $1.5 trillion dollars.

Given that the size of America’s economy is $15 trillion, that means that our budget deficits are already 10% of GDP.

And running a budget deficit that’s 10% of GDP is already, by far, the largest ‘fiscal stimulus’ in US history.

So, whether you agree with the stimulus or not, one thing is certain…

Without the stimulus GDP would likely collapse by 10% at least, sending us into another Great Depression.

A 10% collapse in GDP is a significant problem and there are no good answers in the short-term.

But unfortunately whenever half of any country’s workforce retires, it could get worse. Much worse…

For example…

As you recall the total GDP of the United States is currently $15 Trillion dollars.

And consumer spending represents about 2/3 of total GDP, or roughly $10 Trillion dollars.

Not surprisingly, baby boomers are responsible for roughly $8 Trillion of that, or 80% of total GDP.

Now keep in mind that there are now 4.3 million boomers retiring each and every year.

Naturally, the vast majority of these people will begin living on a fixed income.

Even if they do work, it won’t likely be for the kinds of wages they earned during their careers.

That alone will turn consumers into savers, as they plan to live on a fixed income based on both their savings and Social Security. 

But let’s stop for a moment to consider what that really means…

With 4.3 million boomers retiring each and every year, that means that we risk losing about $500 billion each year in economic activity.

$500 billion in economic activity is about 3% of our total annual GDP.

That means the United States economy risks losing a little over 3% in GDP each and every year for the next 18 years.

Now I’m in no way shape or form saying that’s going to happen.

It would be nearly impossible for us to lose 54% of our GDP over the next 18 years. Without question, there will be some population growth to offset the baby boomers leaving the workforce. 

But it certainly helps you understand why some economists have suggested that the demographic collapse could lead to a 25% decline in GDP.

“Global aging could trigger a crisis that engulfs the world economy [and] may even threaten democracy itself”
(Peterson, 1999).


The Real Reason S & P Downgraded Our Debt

August 8, 2011.

Most Americans will forever remember that day as the first time in history the United States lost its AAA credit rating.

Publicly, credit rating firm Standard & Poor’s (S & P) said the downgrade was because of “our high debt load” and our “ability to pay it back.” 

But the real reason S & P downgraded our credit had little to do with the size of our debt load or our ability to pay it back. 

There have been several times in our great nation's history that we’ve had higher debt loads in relation to GDP than we do today.

Most recently this happened after World War II…

And it was well-known back then that a large portion of the money we owed to our creditors would be paid back with printed money. 

Indeed, if there were one fact most economists would agree on today it would be this: fully 60% of the money we owed after WWII was paid back by printing money.

That’s the reason a dollar in 1950 is worth only .18 cents today.

And for the record, the United States isn’t the only country that does this - every government on earth does it. Reserve currency or not, any country that manages its own currency can devalue its own currency.

Some do it over time by slowly printing a certain amount of money each and every year. This is the “preferred method.”

Others do it by waking up one morning and announcing to the world that their currency is simply worth less today than it was the day before.

Of course, I am not condoning any of this. In fact I think it’s absurd. I’m simply trying to explain how every government bureaucrat on earth thinks at one point or another when thinking about their currency.

In other words, governments we borrow from know the game and government’s we lend to know the game. Every economist in every financial center on earth knows the game.

And finally, of course, Standard & Poor’s knows the game.

So what was the real reason S & P downgraded our debt?

The real reason S & P downgraded our debt in August is because it was in August that a record 300,000 baby boomers retired and joined Social Security for the first time. 

In other words, August was the first month the baby boom retirement wave hit its full stride by crossing the 300,000/month mark.

Let’s take a moment to think about what that means…

During the month of August alone we added 300,000 new beneficiaries. Now according to the Congressional Budget Office (CBO), the mean Social Security benefit per person is $28,000 each year… 

What does that mean? It means that…

Each and every single month for the next 18 years the United States adds:
  • Another $100 billion in Social Security obligations it simply can’t afford to pay and;

  • Another $100 billion in Medicare obligations it simply can’t afford to pay.

Now every one of these people has been paying into the system their entire lives. And every one of them has the right to expect the government to honor its agreement…

The deal was clear:  You pay into the system when you work and get a certain amount of money when you retire.

So I totally understand why retirees are fighting so hard to make sure the government doesn’t cut any of the benefits that were promised to them.

(Especially since most retirees are smart enough to know that “Obamacare” was a direct attempt by our government to re-direct their benefits to the poor.)

But whether Washington ever finds the political will (doubtful) to make meaningful cuts doesn’t really matter.

At the end of the day they’ll end up printing so much money that inflation alone will decimate the value of any benefits boomers expect to receive. And of course, that will have dire consequences for the rest of us.

In the last two weeks I’ve discussed how the demographic collapse could impact the stock market, our economy and our currency. 

Next week I’ll discuss what you can do about it.


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Dylan Jovine
CEO, Founder & Director of Editorial Content
The Tycoon Report
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