Inflationary Policy Is Lethal for Babyboomers

Moderate inflation is good. This has been held as self-evident truth in modern monetary policy. But this will quickly become antisocial as the entire west goes through a structural change in demographics caused by babyboomer retirement. The BoJ seems to have realized this early and well; they have managed their social transition with remarkably success, despite much sneering from western economists (I argued here that the Japanese lost decades is in fact a great achievement that US will only wish to match in 10 years). The ECB seems to have realized this, judging from their proclaimed resolve for austerity as opposed to unlimited simulus. The big question is: when will the Fed and US government realize this?

The reason for this fundamental shift is simple: soon-to-be retirees need to save but inflationary policy sacrifices savers for the sake of stimulating economic growth.

In normal demographics, this works because most people get to participate in the growing economy by staying employed or employing; even though everybody's savings get eroded by moderate inflation, there's a good chance that most will be more than compensated by increasing earnings. Retirees are net payers for inflation because they can't replenish with inceasing earnings, as is always the case. But if they're a small group, the society pretends they don't exist and moves merrily on.

Starting from right now, however, as babyboomers go into retirement or start deligently (perhaps belatedly) saving for retirement, inflationary policy will cause much more pain than ever seen before. Even under "moderate inflation" scenario, it's still a significant erosion of buying power and living standard over 10, 20, 30 years. The effect will be quite painfully clear, and soon, for those living on fixed income.

As I said in the earlier article, we will some day, one way or another, realize that Japanese style stagnation is the best possible outcome during this transition. We are becoming a savers society whether we like it or not. Do we cope with it, or fight a battle in which everyone loses?

Disclosure: No positions