Transcription
Hey everybody, Peter Zeihan here, coming to you from just outside of Longs Bay in New Zealand, uh, corm door region. Uh, we're taking a question from the Patreon crowd today, which is one near and dear to me because it talks about two issues that I care about a lot: demographics and me. And the question is, uh, what is the future of America's Gen X? Are we simply doomed to pick up the trash after the Boomer keger party? Uh, yes and no, um.
So, uh, the backstory: demographically speaking, you can cluster people into different financial groups by age. Folks under age 18 are typically dependents. People age 18 to 45 are the big consumers; they're spending a lot of money raising kids and buying homes, but their incomes are low. So, high outflow, high consumption, high growth, high inflation, but low capital generation, low tax base.
Then, once you turn 45 and until you retire at 65, you are saving for retirement. Uh, your income is at its the highest it will be in your life; the kids have largely moved out, the house has been paid down, uh, you're starting to think about downsizing. Different economic model: in this sort of system, the tax base is huge, there's a lot of capital running through the system. Uh, capital cost, borrowing costs are low; the government gets lots and lots of income that it uses to expand the state, technical training, infrastructure, that sort of thing. Uh, but consumption has dropped off. And then you turn 65 and you retire, and you liquidate most of your financial assets and go into low-risk stuff: uh, no stocks, no bonds, typically T-bills, cash, and real estate. Uh, that money is no longer available for the tax base; it is no longer available for investment capital, and then you whittle away on that as you retire.
So, the Baby Boomers have been the largest generation ever in American history for two reasons. Number one, when the GIs came home, uh, they basically founded modern America. They had large fam and they moved to establish new territories that we now know as the suburbs. In addition, they were the first generation born during a period when the country had already been industrialized. And what happens when the country industrializes? It's not just that you get rail lines and electricity; you also get antibiotics in hospitals. So, the highest death rate for any age group pre-industrial is 0 to 5 years old: newborns and young children who, uh, tend to die off and so always have replacement children. If that sounds familiar, anyway, um, that didn't really happen for the Boomers for the first time. And you combine healthcare with a new generation that's large, they live longer, and so we got a double population bulge with the Baby Boomers. And it was so huge relative, and remains so huge relative to all their population groups, that they have basically dominated American economic and cultural life ever since.
So, when they were going through their, uh, early adulthood years in the late '60s to the early '80s, labor costs were low because they super-saturated the labor market. Inflation was high because of their demand, and all of the American pressures were demand-based. Then, from the late '80s until roughly 2015, when their kids had moved out, uh, and they were generating all that capital, inflation dropped quite a bit, growth slowed too. But all of that investment capital that they were generating pushed things forward, like, say, the tech revolution. Uh, that also allowed for the expansion of the government under Johnson, Nixon, and Reagan. Uh, and during this time, the Boomers, because the cash flows were robust, built a larger and a larger welfare state, primarily looking at themselves.
You fast forward to today: now two-thirds of them are retired. They're taking their money, they're going home; the taxes that they're paying have dropped off, and we are left with a welfare state to fund their retirement without their income to pay for it all. And the next generation down, the one now entering the capital-rich part of their lives, is Generation X, which is the second smallest generation the United States has ever had. So, simply on the numbers, between the exiting Boomers and the entering Xers, we're looking at chronic budget deficits, assuming the government was relatively circumspect in its spending. But our last few Boomer governments—Trump, Biden, Obama, W. Bush—have been the most fiscally profligate in American history. Uh, and so, we're looking at absolutely massive, multi-trillion dollar deficits every single year. To be continued.
Okay, continuing from Buffalo Beach and Fanga. Uh, so anyway, deficits are massive, locked in as long as the Boomers live, which is going to be on average, you know, another 15 to 25 years, based on who's doing the math, um. And during that whole time, the Boomers have created a social welfare state for themselves that they have had never had any potential of paying for. And since the next generation down that is now cap incoming, capital-rich, is Gen X, and the Boomers have always outnumbered Gen X by a substantial margin, the financial burden will fall on them. Uh, in this, the Boomers can count on getting voting backstop against any sort of fiscal reform from their children, who are the Millennials, who are maybe the second most selfish generation in American history. So, you can count on these two voting blocks agreeing that Xers should pay for everything. So, a assuming if at some point there is any effort in Congress to actually rationalize the budget, you're going to have these two voting blocks, the two largest voting blocks in American history, um, forcing that rationalization on the group that is most capital-rich: Gen X.
Now, uh, that's the bad side; that's the cleaning up the Solo cups argument. But there is a positive side here, um, for some people, specifically. With the Boomers leaving, we have a lot of tension and tightness in our labor market. They were the largest generation ever, uh, which means they were the largest work cadre ever. And because there were so many of them in the '60s, '70s, and '80s, they pushed down the cost of labor, which made the labor market hyper-competitive, uh, from a global point of view. Uh, and we had inflation due to their consumption from any number of points of view, but from their earning potential, it was actually fairly low. So, most of the hand-wringing during that era about wage increases being too low for the inflation rate was totally rooted in the size of the Boomers and that disconnect. Uh, in order to make ends meet, that made the Boomers the most mobile generation we've ever had in history since the time of the Pioneers because it was all about going to wherever they could get a little bit more income. And it also pushed, uh, women into the workforce in order to get a second income.
Now, you play that forward for a couple of decades, and you change the labor market, you change social norms. You get the sexual revolution, you get the women's rights movements; all of these things were because there were so many Boomers. But now that all of that labor is leaving the market, we have something that, from a global point of view, is a lot more typical, and we're just not used to it. And so, we have labor inflation eking into the system now.
Now, something to remember about the Boomers: when you have a two-income household, because you have to for financial reasons, uh, the pressure on the family Union and the pressure on married couples is really robust. And so, the Boomers also had the highest divorce rate ever in American history. Now, Gen X, coming up behind them, looks at this, it's like, "No, we're not doing things that way." The Boomers have always said that they value their money more than their time; we see the pain of that, and we are not going to make that mistake. We are far more likely to value our time over our money. So, unlike the Boomers, who have lots and lots and lots of two come households and high labor participation rates, as a result, Xers went the other direction and have a relatively low labor participation rate with a lot more single-income households. That puts you under a lot of financial pressure because not only is there half as many people working and earning, uh, it also means that you're less likely to move, and you're also at the bottom of the totem pole with all these Boomers above you. So, Xers were working in a super-saturated labor market that they couldn't really affect effect because they were down at the bottom, and they were less likely to work in order to preserve their families. This gives us a much lower divorce rate, much more stable relationship rate than anything that the Boomers had. But wow, did we pay for it! We saw the lowest increases in take-home pay on an annual basis of any worker generation in American history until about five years ago, when all one-third of the Boomers had already retired. And now, in the last five years, we've seen the greatest increases in take-home pay of any American generation ever because all of the skilled, all of the upper-level management jobs are becoming available at the same time. And even if everyone in Gen X wanted to work—and I guarantee you we do not—there would have never been enough of us to fill all of those Boomer show shoes anyway. And so, from the Xer point of view, we're seeing record increases in take-home pay for the first time in our adult lives. Now, the rest of the world knows that as labor inflation, but honestly, the rest of you can suck it, because we're finally having our moment.
At some point in the next 10 to 15 years, when the Xers are at the peak of their income and the peak of their wealth because of this delayed gratification, there is going to be a conversation in the United States, led by these six Millennials who can do math, about rationalizing the budget. So, Larry, Moe, Curly, Thelma, Louise, and Leonda are going to sit down and run the math and realize that the only way they can make the budget make sense is to basically gut Gen X, and they'll have the voting power to do it. Now, until we get to that point, it's a Gen X World. We're going to control all of the money, we're going to control the majority of the property, we're going to dominate the stock market. And we're in a situation of supply and demand: if capital is available in limited supply, if demand is robust in a time when the Millennials are having their kids and building their homes (large generation demand), and we need to reindustrialize the United States, doubling the size of the industrial plant, whoever has the capital—Gen X—is going to be able to demand exorbitant rates for it. And it's going to be a great time until such time as the Millennials actually run the numbers. So, if you're an Xer, our time has finally arrived, but it's only going to be a moment, so make the most of it. Get your money where it's going to be protected, because sooner or later the Millennials will figure this out, and we will find a way to get the budget back into some degree of balance, and it will be Gen Xit paying for it, but not today.