Consumption's Death Spiral

As our populations only get older, can we pay off all our debts? What happens when people stop consuming?

“As is the generation of leaves, so too of men,

At one time the wind shakes the leaves to the ground but then the flourishing woods

Give birth, and the season of spring comes into existence;

So it is with the generations of men, which alternately come forth and pass away.”

Homer, The Iliad

One of the many subjects I wish I had the chance to learn about in school would have been geography and more specifically, the nuance of demographics. As someone who earned a degree in economics, I’m still shocked that my professors treated the importance of demography as passé; it’s almost as if they thought economics was divorced from domestic capabilities. Age, morbidity, and even the psychology of a generation are all important when thinking about economic indicators.

Certainly, there is an economic value that can be attributed to national landmarks – rivers, mountains, and free arable land all possess exceptional value in a world controlled by free-trade. But they become indispensable when the variables shift and the world becomes zero-sum.

In fact, both the map and the territory are essential; regardless of their software innovation, a country like China will need energy that it doesn’t domestically possess: how much they need is a different question however. Yet, China’s demographics allow us to answer that question because people consume at different levels throughout their lives – older citizens don’t spend as much as younger generations. Still, demography is a subject that has predictive power – one can prescribe the future with the information we currently own. When we want to talk about the things hidden since the foundation of the world, demography is a card that has consistently been underplayed.

We’re all Japanese

“The one claim to fame of demographers is this great forecasting capability because demography is like a supertanker ship – you start revving up fertility and it’s going to take at least 20 years before those people can enter the workplace.

We look at how people are shaped by their attitudes by their childhood and their coming-of-age periods along with how those personalities age with those cohorts throughout their lives. Each generation reshapes each phase of life they move through.”

Neil Howe

Japan set unprecedented levels for not only being the first country to pursue negative interest rates, but for harboring the oldest population levels in existence. It’s apparent that most towns in Japan will go extinct by the turn of the century. Don’t be mistaken – that’s the future of the world. Of the largest economies, only America has the population suitable to replenish its population reserves and will be the country that is responsible for consumer spending in the decades to come.

Forthwith, proportional population breakdowns are central to an economy’s level of consumption: Without young people, spending, and thus GDP, plummets. Why is this the case?

When we’re younger, we take on more debt, for school or a house; we start purchasing new goods with disposable income from our first jobs, and effectively flip the switch from liabilities to assets. Yet, the opposite reaction is that when we’re older, spending gradually lessens as we hit retirement age, which is what’s occurring with the Baby Boomers taking record amounts of money out of the pension system. All of this is paid with tax money – future generations are blindly paying into the defunct system of Social Security.

Looking at the rest of the world’s population without America, we can see that the chart is inverted: we have more older than younger people. Without young people consuming products, from factory lines or ethereal software, debt will only aggrandize.

The Consumption Flywheel

Credit can be thought of as a claim on the future. You extend credit when you’re certain growth exists; if not, there’s no chance of you ever getting paid back. Historically, rulers knew this. Before our era, kings who had recently taken the throne would wipe all debts among small holders in what is known as a debt jubilee: debtors rejoiced and were excited for a fresh start. This process first started from the Babylonians; in centuries after their collapse, the Jews integrated andurarum, the ritual of debt cancellation, which later became a staple of Mosaic Law in the edited version of the Bible. This practice continued for generations in the Middle East.

Now, a debt jubilee is on the horizon not out of optimism, but pessimism. The amount of global debt is the largest its ever been and the future at the very least is uncertain. Couple that with the demographic asymmetry and we have a shattering of the consumption flywheel.

The news belies a utopian optimism that the end of the pandemic will return everyone to normal. But that ‘normal’ was built off debt-fueled borrowing in a world seeing the tailwind of population growth. Without it, economic gains would have stopped long ago and economic restructuring would have been mandated.

Cancel All Debt

So where do we go from here?

For years, Soros has been arguing for debt jubilees in the United States. As I put it in the Sober Thought Experiment, the current short position of dollars through debt is the highest in history – $12 Trillion and gaining. After 2008, the US government was very clear in their requirements for domestic banks, but what about those dollars held outside the country? Foreign dollars, called eurodollars, aren’t subject to Fed rules or reserve requirements, which is, of course, highly dangerous when crisis occurs. Lack of regulation meant that one would get a higher interest rate on eurodollars than their native equivalent. But what happens when liquidity dries up? The only reason we’re not seeing a domestic bank meltdown is because of federal regulation forcing American banks to be antifragile.

Yet, the crux of the problem is that the price of the dollar will raise as everyone rushes to pay off their debts and only a few countries and corporations will meet their liabilities. Everyone else will go bankrupt as the death spiral continues. There was a sense of this future bearing fruit; John Connally Jr., Richard Nixon's treasury secretary, in 1971 uttered: “The dollar is our currency, but your problem.”

America has the wherewithal to sustain debt – it’s not clear that any other country does and they know this. Perhaps the new path is to cancel the debt and start anew. Indeed, Germany did this after WW2 and cancelled all debts except for what employees owed their employers. Because the slate was wiped clean (and most of the old debt was owed to Nazis), the economy was on a sure footing and could recover.

But I don’t think the US will follow the path of Germany or Argentina, rather they’ll take the idiotic option of hyper-inflating the dollar, as they’re already doing, hurting everyone to protect the assets of a few by making the debt less valuable. We have to adjust to a world where most people are septuagenarians and the discontents that come therewith; greater consumption has gotten us out a debt disaster in the past, but we just don’t have the population to do so this time. Meeting one’s fate head-on is never a popular choice, but it’s nevertheless a powerful move that sets an example for the ages: “Alea Iacta Est,” Caesar exclaimed as he crossed the Rubicon, “the die is cast!