BOOMERS - Wealth Concentration and Stagnation
In reading Sotheby’s report on Real-estate trends in luxury
properties the excerpt below spurred some thought, 9.6 million people
(boomers), 80% of high net worth Canadians, are over 55 years of age and 58% of
those are retired – and more are soon to be retired; this reality is rested
juxtaposed against the provision of many FREE services to this same cohort, of
most significance of course are medical services. While this “age group” is
larger than ever before, they are healthier than ever before which may defer to
some degree their taxing the free services, but tax services they will. There
is a another affect on economy as well, they cost more to keep and they
generate less income, once more however, the capital they have they are
conservative in investing – less apt to take chance on disruptive, innovation
or risk prone investments, often the type of investments that stimulate the
economy.
In the forest management people refer to a stand of timber
becoming decadent, that is to say, that in its maturity the old growth
precludes new forest, and the old growth is well established and living thereby
precluding giving living space to new forest – this is a point of stagnation,
the increase in fiber volume is limited. This contrasts to a circumstance after
a fire perhaps, where several species are taking hold, there is age class
variance as the forest species move through life cycles – there is dynamism
here – annual increase in fiber volume is greater here. The population profile
of Canada, much of the western world is in a state of decadence due to this
reality, which parallels the aged forest reality.
Japan, given its racial homogeneity and the resulting
resistance to immigration was the first example of this pernicious reality
taking hold – some two decades of low growth and a monetary policy at war with
deflation ensued. Could this fate be awaiting us in Canada or the wider western
economy? There are indications that there are factors seemingly suppressing
inflation, Central Bank policy has been simulative in the extreme since the
2008 downturn, with little indication the tide is turning. It seems that the
economy is never really hitting it’s stride, never any pressure on price due to
capacity restraints, just more or less – sideways. It would be unwise to
suggest that a single cohort is to blame, or a single demographic element – it
is, however, certainly a single and significant contributing factor.
The combination of the increased use of free government
services, the withdrawal from vocation and resulting income contraction and the
ongoing conservative management of capital on the part of this cohort is sure
to challenge us.
The situation seems to cry out for some means to incent this
cohort to put its money to work more aggressively. There may be reward to
government coffers in policy that mitigates risk in the areas of investment that
most improves our economy. There is
requirement for infrastructure spending, capital that is more or less latent or
invested at no real rate of return – the government could engage in 3P
processes that include partial payment of infrastructure thereby reducing “cost”
and improving return. A municipal bond program could be brought in to play, so
local communities could go to their citizens to raise capital for City infrastructure
and enjoy the support of upper level governments, via a tax credit of some
kind. Recent attempts at infrastructure spending seem somewhat muted, in the
post stimulus spending time frame we are now in, there seems very little infrastructure
spending on the horizon. The joy of infrastructure spending is, it gives an immediate
boost the economy now – in much the same way a healthy house market does, AND
then it is the gift that keeps giving as it makes the future economy more
efficient.
The process of government sweetening the pot for investors
in government infrastructure is aggressive in that it is a form of quantitative
easing, it is quantitative easing that puts enhanced return in a place that
rewards presently “latent” capital AND directs benefit to the middle class,
rather than the institutions that caused the downturn in the first place. Quantitative
easing in other jurisdictions had the government issuing a $1000 bond at a cost
of $900 – this is a simplification for illustration, the point is financial
institutions got “free” money. Sweetening the pot for “Boomers” who have capital
directed in a manner that is less advantageous now, who then move investments
to a place that moves the economy in an immediate way, is likely to provide
several benefits; including the funds to government coffers on the boomers
capital gains taxes.
One would have to put pencil to paper to see the degree that
is appropriate for government to participate; however, when one tallies the quantifiable
benefits of infrastructure, increased revenues from capital gains – (offsetting
to some degree the initial investment by government) AND the multiplier effect of
the actual work – one would guess supplementing infrastructure bonds and or municipal
bonds to the tune of 5% would be very viable – I suspect even a better return
could be offered. Here we have a several wins; the public gets better return on
capital, the public invests in the infrastructure it needs (the hospitals the
boomers are going to be filling, the road and rail that support commerce, the
city transportation networks the improve commerce and the environment, the much
needed education system reconfiguration – the list is endless) AND the people who
have wrongly paid to repair the damages of a financial industry gone a rye, get
a little back.
I know what you're thinking, this is like a remake of the Keynesian
“Roosevelt New Deal”, and there is nothing new here. The concept of the new
deal is here, the implementation is different. The Keynesians purpose in all policy is to increase
aggregate demand, they rarely care how that is done, government spends – I mean
SPENDS – to increase aggregate demand. This is different, this is government “seeding
the economy”, by providing an avenue for all levels of government AND it could be
easily adapted for small and medium business as well in the same spirit as the
British Columbia Venture Capital Program, an avenue that lets infrastructure that is in
REAL demand be build. The “New Deal” was a top down, centralized effort, the
same sort of effort that had quantitative easing enriching the very people who
created the financial downturn in the first place. This is a hybridization of
quantitative easing, municipal & government bond programs, directed at a
group of people who require secure returns and whose capital we need.
Canada is a long way from the Japan scenario, we have
immigration, we are a resource economy and we have a generally more vibrant
demographic picture. We do however, need to be mindful that the “idle boomers”,
their ageing and their “idle capital” could be a drag at the very least, and
push us into a period of stagnation at worst. With a small amount of incentive, we
can generate a big result, and if it is managed properly, rather than saddling
future generations with debt, we enhance future generations’ operational
reality and enrich them.
Government Resource Revenue Dependence
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