Thursday, July 05, 2012

Big Picture Demographics

What is really happening when we "save for retirement"?

Well, it means you don't spend money you've earned right now, and, instead, do something else with it. Either you invest it (give it to somebody else, hope they do something productive with it, and share the gains with you) or you convert it into some asset (cash, gold, rare paintings) that you hope will keep its value.

Investing is great for the world; old cranky people lending their money to young, not-yet-cranky people to encourage them invent new and wonderful stuff makes the world a better place. "We" should do more to encourage it.

Saving cash under your mattress or storing gold or paintings in a vault increases the price of those things in the short run and might encourage governments to print more money, gold miners to dig up more gold, or painters to produce more Collection-Worthy artworks. None of which makes the world a better place (well, not for me, anyway, I'm a cretin who doesn't appreciate Fine Art).

And, of course, if the trend reverses and lots of people are try to sell that stuff to pay their grocery bills the price will fall. "Saving money" this way is a Ponzi scheme; you've got to assume that there will be enough people in the future who will be willing to work for you if you give them pieces of paper (or metal or canvas and paint) that you were willing to work for years ago.

I wonder how much of the global financial crisis and economic doldrums is driven by simple demographics-- by older people in developed countries (or their pension fund managers) deciding that they will save money for retirement in "safe" investments like government bonds or gold rather than "risky" investments like the stock market. I'm pretty sure I remember reading that we get more risk-averse as we get older, and the financial crisis seems worse in places where the population is aging most (Japan, Europe, the U.S.).

Unfortunately, the worse the economy gets the more likely we are to collectively "take fewer risks" and do really stupid-for-long-term-growth things like pay interest to banks on the cash they park at the Federal Reserve.

If I believed our governments were capable of making smart investment decisions maybe I'd agree with the Keynesians and be cheerleading for another big Stimulus-- "You're collectively getting older and stingier, so We will just do what we know is best for you and take that money you're sitting on and invest it in make-the-world-a-better-place stuff.  Trust us, we pinky-swear we won't waste it on unproductive projects that make our political constituents and donors happy."

Is anybody happy with how that worked out last time around?

So: if big-picture demographics is a big part of what is driving economies into the ground, what should be done?

Seems to me an easy answer would be to convert Social Security into a system that actually invests the tax receipts in some productive, economy-expanding activity (bonds, the stock market, venture capital, whatever) instead of the government writing IOU's to itself and sticking them in a drawer somewhere. I'm a "wisdom of crowds" type of guy, so I'd prefer that individuals make the investment decisions (or decide who gets to make the decisions for them).

But I'd settle for an appointed or elected Panel of Experts investing the money and getting paid oodles of money based on how well or poorly their recommendations did after a decade or two.


heiner said...

Interesting idea. However, the Gold price (in US$) has increased since 2008. That does not support the theory that elderly people now try to spend all their gold. (Since there are several things happening at the same time, this does not rule out anything, though.)

Gavin Andresen said...

I seem to recall some stories of central banks buying lots of gold, but I don't know who the sellers are.

If it is central banks trading newly-printed cash for gold from old rich people then that's a pretty good short-term strategy to encourage those old stingy people to spend more. Assuming they don't just bury the cash in a coffee can in the back yard.