Demographics Rule Everything (2021)

“We see the obvious and visible consequences, not the invisible and less obvious ones. Yet those unseen consequences.., generally are more meaningful.” - Nassim Nicholas Taleb

“Demography is the key factor. If you are not able to maintain yourself biologically, how do you expect to maintain yourself economically, politically, and militarily? It’s impossible. The answer of letting people from other countries come in…that could be an economic solution, but it’s not a solution of your real sickness, that you are not able to maintain your own civilization.” - Viktor Orban, Prime Minister of Hungary, 2012

Sometimes we need to look at the bigger picture of things to decomplexify the world around us. My father was always great at this. In 2017, I was faced with the task of writing a 15 page research paper for my English course, and was having trouble deciding what to write about. My Dad handed me the book, “What To Expect When No One’s Expecting” by Jonathan V. Last. He told me, “read this, it’s the most important thing you need to understand”. I asked him what it was about and he said, “well let’s put it like this. The Chinese have 3 options in the coming years. One, they can cut their whole military budget down to 0 and allocate that budget towards taking care of the elderly. Two, they can decimate their rising middle class with taxes pushing the whole country back into poverty. Or three, they can send the elderly off to the hills to die.” None of these options seemed reasonable without massive public discourse, or leaving the country extremely vulnerable. I took his advice, and read the book. I wrote a 15 page paper using many different sources to explain how it is not only China, but most countries globally who are facing a massive problem. A shrinking population. China did it through the one-child policy, but we have done it in many other not-so-obvious ways, like replacing children with dogs (the numbers on this are staggering). I forgot about that book, and that paper, right up until Covid-19 hit. I heard that it originated in China, suspiciously close to a level 4 lab facility in Wuhan. I will leave my own personal theories out of the equation (related to which of the 3 options above was chosen), but let’s just say I began thinking about demographics again. And what I discovered is that they uncover everything. I believe my Father sent me down that rabbit hole for a reason, and the many discussions we had together about demographics helps shape my current state of mind. Whether you look through the lens of monetary and fiscal policy, political discourse, the economy, or your own financial future, they are all a function of demographics. Demographics are the tectonic plates moving below everything.

To understand the present state we are in globally, you have to take a good look back on history. This is recent history, though many seem to forget. And those who are my age were never taught unless they had a Dad as brilliant as mine. I will try my best to follow a historical trendline, and give credit to my father’s book shelf, Raoul Pal, Mark Moss, and many others in the past year as a guide to connect everything in one line. This isn’t a history lesson, but it all ties into today, and so must be acknowledged.

It starts with the peak of the British Empire in the late 1800’s. Like all great empires, they have to compete with other rising powers in the world to retain dominance. In Europe, that competing power was Germany. The British began wars with the Germans, and in 1914, an event happened which everybody still faces the consequences of today. June 28th, 1914, Archduke Franz Ferdinand was assassinated, sparking the first World War. This war saw the end of the Ottoman Empire, which had ruled for over 600 years. It also saw the death of 20 million people. After WW1 came the Treaty of Versailles. This treaty required the Germans to pay an astronomical amount in war reparations, which would be the equivalent of about $300 billion today. Of course, they had just expended almost all of their resources fighting a war. So, the Germans began printing their currency to pay it back, devaluing the Deutsche Mark at an incredible rate. Hyperinflation ensued, melting their economy and causing a massive depression.

Germany collapsed, and from the ashes came a source of hope, which was Adolf Hitler. World War 2 begins, and almost every country globally falls off a gold backed monetary system to fund their war efforts, including the British and the French. Historically, nations had to be very strategic on who they fought and when, mostly due to the inability to fund the war efforts. WW2 had no constraints, as countries could use fiat currency to fund all of their war efforts whenever they ran short on reserves. 70 million people die during the war, and it comes to an end.

After the last world war came complete euphoria. The whole world went back to their homes and celebrated as anybody would. Everyone had sex, and a lot of it. The global population grows at the greatest rate in history. A 30% increase in population globally in 20 years. The U.S. grew about 40% in the same time period. During the 1940’s, the U.S. was in a lot of debt from fighting the war, and so used fiscal stimulus and yield curve control to get our debt/GDP levels back down. This was a period of devaluation in the currency. We had periodic bouts of inflation where the U.S. just let it run hot while capping interest rates at low levels. The dynamics look very similar to today. For the next decade I expect a devaluation period much like the 1940’s. 

        This created the boom of the 1950’s which extended into the 60’s. During this time, real (inflation-adjusted) wages were rising, and the standard of living for the average American family skyrocketed. The industrial base we grew to fight the war was used to boost the standard of living for all Americans. We no longer needed the technology to create things for war, so the average family was able to purchase their first washing machines, cars, etc. in the post-war era. The transfer of power globally was from the British empire to the United States. It was a transition which led the U.S. to being the richest country the world had seen, from top to bottom. People in this era were truly living the “American Dream”.

        In 1967, the first of the baby boomers began to hit the workforce, and they were the lucky ones. They came into the workforce at the peak of productivity and prosperity. By 1975, the average boomer entered the workforce, and with them came the highest increase in the history of the workforce. This had some major unintended consequences. During the 1970’s, prices exploded. Think about when you first get a good paying job, what do you do? Rent an apartment, buy some furniture, a car, and in general consume much more. This was the largest demand shock ever created.

        Most of the population was concerned the U.S. had too many kids, and that there would never be enough resources for all these people. This was a spectacularly foolish view. In 1968, “The Population Bomb”, is published by Paul Ehrlich, where he predicted overpopulation was going to ravage the Earth.

“The battle to feed all of humanity is over. In the 1970s the world will undergo famines-hundreds of millions of people are going to starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate.” - Paul Ehrlich

His book went on to sell 2 million copies, and became a reference for politicians, government planners, and academics throughout the 1970’s. They all began working on policies to discourage Americans from having more children, or else we’d all starve to death. What makes this viewpoint so fascinating is that not only did none of Ehrlich’s predictions come close to being true, the complete opposite was happening. We weren’t having enough children. And technology was moving at such an incredible rate, the global population was able to use it to farm more food, for much less cost. Still today, there is a massive excess of food available due to the rise of technology.

The U.S. can’t run deficits while maintaining a gold standard, and so Nixon closed the gold window in 1971. The gold standard couldn’t handle the massive population boom, rising prices, etc. because it was being drained of its gold supply by other countries. Basically, the other countries globally saw what was happening and said, “this won’t work, give us our gold back”. We turned to a fiat monetary standard, forcing the world to accept our paper dollars as the world reserve currency, backed by nothing except the richest empire the world had seen. The superiority of the U.S. military was enough to keep any other country from pushing back. It had a monopoly on violence, and the money. Milton Friedman would say “inflation is always and everywhere a monetary phenomenon”. But I would argue that the inflation of the 1970’s was as much a monetary phenomenon, as it was a demographic phenomenon. It was simply the largest supply shock the world had ever experienced. The inflation of the 1970’s and 1940’s are much different from each other for this reason. For some reason, probably due to recency bias, all of the “experts” seem to keep pointing at the 70’s when talking about inflation today.

In 1986, the last of the baby boomers entered the workforce. At this point, wages have stopped going up in real terms, and in fact have never gone up again since then. This began the decoupling from productivity growth. The baby boomers who were promised the American Dream of the 1950’s and 60’s, didn’t get it. What they got was a fiat monetary system where asset prices rise, but wages don’t. This is a problem in and of itself because when wages don’t grow at the same price of assets, it puts more and more people behind.

This time in history is where political discourse begins to really divide into “left” and “right”. Nobody knows why the American Dream is no longer possible, and so they begin to blame each other for the problems. They are living in the world’s most prosperous nation, and aren’t getting any of it. A good way to describe what began happening is from a study on lab rats. When you have one rat in a cage, and shock it, it will curl up in a ball and stop moving from the pain. If you put 2 rats together in a cage and shock them, they’ll fight each other, thinking it’s the other rat who must be shocking them. This is the same fighting we still see between groups in the present day. The political divergence was ultimately caused by people having too many children after WW2. And fertility rates have dropped to extremely low levels ever since then.

With the rise in asset prices, comes the rise of debt. People must take out loans to buy houses, cars, and other assets. In the 80’s came a massive rise in credit. This turned all poor people into debtors, or slaves. Reagan sees the mess broken demographics have created, and sees the solution as credit. This is when the rise of Wall Street happens. Property prices rise in price, stocks rise, and everyone is on the hamster wheel fueled by debt. Remember that wages are not going up in real terms, but assets do, so everyone begins taking on debt because the assets they purchase will offset stagnant wages. This is the period where 401Ks, index funds, etc. gain in popularity and are commercialized. Healthcare costs skyrocket as the baby boomers get older, which results in more debt. The game has changed, and the economy of the U.S. is increasingly financialized. To reach the “American Dream”, you must use debt. The fiat monetary system created in 1971 is perfect for this, because it allows borrowers to use something that’s depreciating (the USD), to buy something that’s appreciating (property).

In the 80’s, the credit boom exploded through property and the liberalization of Wall Street. Wall Street now becomes the epicenter of the global economy. The Berlin wall falls, and with it the fall of communism. China opens up their markets to become a free market capitalist economy, bringing countless millions of their people out of poverty. On October 19th, 1987, the Black Monday stock market crash occurred. Greenspan cut interest rates to prevent it from being systemic. Now the Fed realizes it has a tool. They can use this tool whenever anything goes wrong. And history since then shows that's exactly what they've done, every single time.

In 1996 came the WTO (World Trade Organization). This made it so that everybody across the world would trade with each other for no tariffs. The American workers are now competing with global workers, who are much cheaper, especially in Asia. This stacked on top of all the other problems the baby boomers have faced. All these boomers are facing a massive debt burden, the rise of technology, and cheaper workforces. Not to mention too many boomers in the workplace who are already competing with each other. James Goldsmith came onto Charlie Rose in 1994 and warned of all the consequences we’d suffer from this. Everyone criticized him for it because he’d famously been a free market capitalist. The WTO wasn’t an example of free markets though, it was an example of labor arbitrage. The industrialization that caused the boom of the 50’s and 60’s was completely offshored to other countries. One of the consequences of having the global reserve currency is that you lose your industrial economy, and that’s exactly what happened. Everyone called for inflation (measured by CPI), but it never came.

Fast forward a bit to 1998, and a giant leverage burden appears. Those Asian and South American countries who benefited from the labor arbitrage were completely irresponsible. Emerging markets took on way too much debt, and they all started blowing up, one by one. Stock markets in these countries fall by around 90% as they fail. This played into the advantage of the U.S., because now we could leverage that debt against them, having the global reserve currency. They are now slaves to the U.S., debt slaves. Obviously, this doesn’t help the middle and lower classes of America. It only benefits the government, and allows us to further offshore the American industrial economy because these emerging markets are debtors for the foreseeable future.

At the same time, a bubble in financial assets begins forming in the United States. The average household is 25X levered, as they’ve been encouraged to take on debt to buy assets. This is compared to 4-5X levered 15-20 years prior. The hedge fund industry rises with Wall Street, and the popularity of the 2-and-20 model explodes. That’s the standard, most funds I’ve talked to today bring in closer to 30% at the end of year. Greenspan cuts rates again as the emerging markets all blow up, as none of them can pay back their debts unless interest rates are lowered dramatically. Everything stabilizes again. When everything stabilizes and rates are at record lows, everybody begins speculating into the largest stock market bubble of all time, the famous .com boom. Greenspan cuts rates again as that blows up. But, boomers begin to think, “how will we retire without the stock market?” So of course they begin speculating on property.

Around this time, women entered the workforce at massive numbers due to rising asset prices and indebtedness, because they had to keep up, forming even more competition in the American workforce. Real wages aren’t rising so families need multiple sources of income. So now the boomers are faced with a massive debt burden, the rise of technology, cheaper workforces globally, too many boomers in the workforce competing for wages, and now a record amount of women competing for wages.

By the time 2008 rolls around the industrial economy is almost completely offshored, and the economy is now hyper financialized. The weakest balance sheets are households, followed by the banks. When property prices fall, everybody suffers. Few people saw this coming, and if they did, they made boat loads of money shorting it. Everybody was on one side of the boat (Watch The Big Short movie if you haven’t before, it will probably be much more entertaining than reading this). Bernanke, who replaced Greenspan's job as head of the Federal Reserve, tells everybody the crisis was contained (it wasn’t), and he cuts rates once again. But this time, that wouldn’t be enough, it’s too systemic. Another tool is used, which they coined the name quantitative easing, or QE. They can’t call it “money-printing” as that would be too unpopular to the public, but that’s all it is. In a debt crisis, somebody has to bid the collateral, and everybody was over-levered so the only entity left to bid the collateral was the Federal Reserve. Everybody calls for inflation once again (measured by CPI), but it doesn’t happen, all that extra money printed goes into assets.

At the same time, we need a fertility rate of 2.1 just to simply maintain our demographics. We had a fertility rate of 2.12 before the crisis, but when the recession hits, it drops to 1.7, which means we are right back to a shrinking population. Many demographers predicted that when the recession was over, it would go back up. It hasn’t come close to 2.1 since 2007. In fact, it’s at dangerously low levels of 1.7 as of 2019. The Federal Reserve begins papering over the cracks of the demographics through money printing. Everybody else across the world isn’t having enough children either, so they are forced to follow suit. Wall Street and America is the epicenter of the world, so this is all systemic. Every central bank globally begins printing money too, because they have the same problem that needs solved. They only really have one tool to solve the problem. I brought this up to my buddy George Gammon down in Houston this past month, and his response to me was perfect. “When a hammer is your only tool, every problem looks like a nail”. Money printing is the only tool left.

In the 2010’s, early boomers began retiring. These were the lucky ones. Only rich boomers can retire, and their kids have entered the workforce as well, who number about 86 million people. The velocity of money collapses, because as people get older, they spend less and less. Remember the example I used of young people when they first enter the workforce? Well the opposite is true for people who retire, they are usually living off a nest egg, have already bought everything important, and just generally don’t consume much. Labor participation rates fall at this time. Asset prices begin following the Fed balance sheet. Out of 2008 came the rise of asset prices once again, making it even harder for everybody to catch up. Here is a chart showing the S&P index from 1996-2018, and as you can see it’s moved exponentially since the 2009 bottom.

There are many people who see this chart and have been calling for a massive crash. It’s because they are simply looking at the numerator. It’s not the rise in the numerator that is causing asset prices to go up, it’s the fall in the denominator. The fall in what we denominate everything in (the dollar) is making everybody poorer. The Fed balance sheet is simply a function of demographics. But even with this massive run up in markets, the average person with a nice retirement portfolio hasn’t gotten any richer since 2008. They may see that their portfolio went up, their house price has gone up, and their pension is funded. But, this is an illusion. The average person hasn’t gained any buying power, their assets are simply going up because the denominator is falling. To show this, here’s the S&P 500 from 1997-the end of 2021, normalized for the M2 money supply:

As you can see, it’s flat. That’s right, the chart you look at that looks like it’s gone parabolic since 1997, has actually given a 0% return when denominated by the money supply. That’s why even though you see the price of all your assets going up, you don’t feel any richer. Most people feel this, and know something is off, but don’t understand why.

It’s the same illusion across the world when divided by every central bank balance sheet. You’d think everybody who owns a house across the world would be feeling rich, but housing prices just simply follow the central bank balance sheets. Everywhere. Take the U.K. property prices divided by the bank of England’s balance sheet since 2008. Flat. The German property prices divided by the ECB balance sheet? Flat. Swedish, Canadian, Chinese? All flat when divided by their central bank’s balance sheet. Debasement makes it look like assets are rising in price, but it’s really just the denominator falling.

Only 2 things have beat the balance sheet since 2008, which were the Nasdaq, and Bitcoin. This is because technology is eating the world. People are now looking for something to blame, because almost nobody has figured this out. They look at their portfolios or house prices and think they should be getting richer, but they don’t feel richer. We split into left and right, and blame each other. The rise of Facebook/social media has created an even greater divide as everyone realizes they’re going nowhere. The American Dream never happened for most of the boomers. Millennials are now getting killed by education priced at ridiculous rates. They are entering the same debt crisis and enslavement as the boomers. Because remember, real wages haven’t gone up in around 40 years. So they have more debt but aren’t making any more from their wages. Debt slaves.

Now let’s fast forward to the pandemic and see how everything is playing out. The pandemic hits, and the way the system is structured, there is always a debt bubble somewhere. It’s now in corporate debt. Interest payments for these companies are almost nothing and so there’s a ton of zombie companies, such as GE and AT&T. We’ve left supply and demand and entered a government debt bubble, household bubble, corporate bubble, and overall financial bubble. The Federal Reserve figured this out very quickly. They can’t let the price of collateral fall, and so they make the only rational move possible as markets tank, they devalue the currency. Or put more simply, print money. The Federal Reserve has put themselves between a rock and a hard place. You either let the greatest global depression the world has ever seen happen, or you bid the collateral by printing money. When the pandemic hit, they realized they can’t let anybody default, because if they let one group I’ve mentioned default, the whole system and the U.S. defaults. They use fiscal stimulus, because the whole system relies on debt growing or it all explodes. They can’t let the pension system go bust or 76 million boomers lose all of their wealth. Since the bottom of the pandemic after assets sold off, everything looks like it has gone almost straight up in price after fiscal stimulus. Until you divide it by the balance sheet.

In the current day, all assets are close to all time highs. Until you divide by the central bank's balance sheet. This has been a big mess in the making for over 100 years. The situation we’re in now is incredibly hard for everyone, and everybody is arguing with one another because nobody can figure out why this is happening. The road ahead is tough as well. The government will have to use lots of fiscal stimulus just like the 1940’s until the debt/GDP is much lower. Currently it’s about 130%, and we need to get it back down to below 100% before interest rates can normalize. This will not come from taxpayers directly, it’ll come from printing money, or in other words devaluing the currency. In 2008, Satoshi Nakamoto’s whitepaper on this new form of money called “Bitcoin” gave people the chance to “opt out” of this debt based system. The few who understand what will happen over the next 10 years will use this life raft. This is a “Fourth Turning” type of moment we are in.

People realize they are being screwed now, they feel that something is off. They just don’t know how or why. I hope this helped you understand what is happening and why it must happen. You may not agree with how everything is moving, but don’t get caught asking for it to be different. You can’t change the rules, you have to play the game on the board that’s sitting in front of you. “The world will not end in a bang, but a whimper”. The game moving forward is to print money until we whimper the debt away. It’s important to have a personal strategy that will not leave you and your loved ones victims to this debasement. That’s why I’m so passionate about this.

The traditional answer to all the problems I’ve laid out historically was gold. Gold will preserve your wealth during these times. But what if you don’t have that much wealth to preserve? Remember real wages haven’t gone up, and won’t for the foreseeable future. How do we create wealth? The answer from the right side of the aisle has always been trickle-down economics and tax cuts on corporations. The answer from the left has been to tax the rich, cut interest rates, and fiscal stimulus. Neither one of these will fix the debt burden as it’s too large. The Austrian economics approach has been to let it all burn down. Let the free market correct itself. The truth is, I subscribe to the school of Austrian economics for most of my economic ideas. But, that isn’t an option this time around. That should have happened 40 years ago, but now we are too far gone. These problems need to whimper themselves out, not end in a bang. We need to stop waiting for the big bang, because it’s not coming. It’s illogical to believe anyone in power would allow that to happen on their watch. They will print money, because they have to. Feel free to make your own decisions and create your own path forward, but here is what I have decided. I’ve chosen to stop waiting for the big bang. It’s not coming. I’ve chosen to quit complaining about the game. I’ve also decided to stop putting my politics onto everybody and everything, and play the cards we’re dealt. But I will do everything in my power to help as many people as possible understand the game being played.