Thursday, June 9, 2016

Bill Gross' New Letter‏

Bill Gross periodically issues a letter on his views of the economy--and sometime a lot more. This is from his recent letter:

Some politicians like Paul Ryan who argue for balanced fiscal budgets are intelligent sounding but relatively clueless. “Austerity – if not now, then when?” he would argue in Reaganesque twitter. “Let’s slow down or even stop the inexorable clicking of the debt clock: 16 trillion, 17 trillion, 18 trillion”…he would add. Well yes, every little bit helps, Mr. Ryan, but the fact of the matter is (a great political phrase, is it not?) that reducing the growth rate of current government debt does little to help what in essence is a demographic not a financial problem: too few Millennials to take care of too many Boomers. Social Security “lock boxes” or Medicare/Medicaid “trust funds” which in essence represent “pre-funded” liability systems, cannot correct this demographic imbalance, because financial assets represent a “call” on future production. If that production could possibly be saved like squirrels ferreting away nuts for a long winter, then Treasury bonds or purchasing corporate stocks might make some sense. But they can’t. Future healthcare for Boomer seniors can only be provided by today’s Millennials and even doctors yet to be born. We cannot store their energy today for some future rainy day. Nor can we save food, transportation or entertainment for anything more than a few years forward. Each of those must be provided by a future generation of workers for the use of retired Boomers. And as Chart 1 points out, the ratio of retirees to workers – the dependency ratio – soars from 25 retirees for every worker to 35 over the next 10 years or so.

There’s your problem, and neither privatization nor any goodly number of government bonds deposited in the Social Security “lock box” can solve it. While these paper assets may “pay” for goods and services, their value will be market adjusted in future years to exactly match the quantity of things we buy, and that quantity will be substantially a function of the available workforce and the price they command for their services. This is another way of saying that the value of Treasury bonds and even private pension held stocks will be marked down in price as they are sold to pay for future goods and services, and that the price of these goods and services will be marked up (inflation) to justify their reduced demographic supply. Productivity gains are often advanced as a solution but productivity gains have been shrinking in recent years, and even so, employed workers cannot be expected to hand over future advances to retirees without a fight. Having more babies would also turn the trick, but at the moment, making fewer seems to be the going trend.

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