TLDR
Post-WWII, baby boomers drove inflation with massive demand for goods. Today, retiring boomers strain social security, fueling a looming debt crisis. Meanwhile, emerging technologies (AI, automation, cryptocurrency) could lead to deflation by increasing production and reducing labor costs. This collision of demographics, inflation, and technology will reshape the US economy, threatening a debt crisis and challenging traditional economic assumptions.
The Great Inflation
After the end of the Second World War, soldiers returned to the United States and started families, giving rise to the largest generation in American history: the baby boomers. This generation, the most influential in U.S. history, reached adulthood in the 1960s, simultaneously flooding the market with demand for houses, cars, and other durable goods. This convergence of consumer demand contributed significantly to the Great Inflation.
However, they were not the sole causes of this inflation; the era was marked by other influences that lead people to overlook demographics.
We are too much accustomed to attribute to a single cause that which is the product of several, and the majority of our controversies come from that.
— Marcus Aurelius Antoninus
The federal government and existing leadership failed to foresee—or perhaps chose to ignore—the inflationary pressures building at that time. It's hard to believe they had full awareness; otherwise, their haphazard monetary policies, which included printing money to fund the Vietnam War and the expansion of the welfare state, would have seemed grossly reckless. As government spending diverged far past its gold reserves while global oil supplies remained in turmoil, inflation peaked at 14.8%.
Demographics played a crucial role in this inflationary era. Understandably, many were blinded to the simple truth: demographics at the cusp of 1980 were inherently inflationary. More people simply mean more potential demand for goods, leading the economy to expand in response.
Notably, as the baby boomers entered the market, their birth rates did not match their predecessors. The crude birth rate fell from 23.7 births per 1,000 people in 1960 to just 11.0 by recent years.
The Great Deflation
Throughout history, technology has been a significant driver of deflation by reducing production costs. It has enabled faster transportation and communication, allowing us to respond more quickly to market demands. Technology has also expanded global coordination, connecting the world like never before. As a result, capitalism has driven innovation, allocating capital towards technological advancements that lower business costs.
In the 2020s, new technologies have emerged that will disrupt traditional institutions and transform advanced economies. Three key areas of innovation are:
Cryptocurrency and smart contracts, which reduce transaction costs and automate financial transactions, challenging traditional banks and payment systems.
Automation and robotics, which are increasingly replacing human workers. According to the World Robot Report, robots held 126 positions per 10,000 human positions in 2021, a trend expected to continue. Amazon's warehouse automation and the Longshoreman strike demonstrate the impact of automation on jobs.
Artificial Intelligence (AI), a deflationary force that will become even more powerful with the advent of Quantum Computation. Like electricity, which revolutionized physical labor, AI will transform intellectual output in the workplace and beyond.
These technologies overlap in their ability to reduce the amount of output needed to achieve a goal, resulting in a smaller workforce producing more goods. This reduces employment costs, bypassing requirements like minimum wage, health insurance, and paid time off. In a competitive market, this would lead to lower prices. However, in the presence of oligopolies and monopolies, prices may rise more slowly instead.
The consequences of these technological advancements may be far-reaching. Corporations may see skyrocketing profits while robots, automation, and AI dominate the job market at little cost. This could lead to a sustained period of underemployment and unemployment, reducing demand for goods and services among the underclass in advanced economies. Some economies may resist these technological advancements to prioritize human interests.
TLDR: These technologies will reduce demand & increase production—a recipe for ever-lower consumer prices.
Leverage is Calling
The rise of the national debt in the United States shows little sign of abating. The current administration has proposed eliminating the debt ceiling, lending this discourse an unprecedented urgency. The federal spending soared to a staggering $6.75 trillion in the 2024 fiscal year against $4.92 trillion in revenue, leaving an enormous deficit of $1.83 trillion—a stark reminder of our financial reality.
It's prudent to consider why the U.S. is on this trajectory toward a looming debt crisis. The specter of looming demographic trends, particularly as baby boomers retire en masse, marshals greater expenditures on social security. Social programs are under strain from an increasing retirement-age population, which may predominantly outnumber the working sector in the near future.
With people in the U.S. aging better and living longer, older adults are one of the fastest-growing groups in the country. In fact, by 2030, all Baby Boomers will be age 65+ and by 2040 roughly 78.3 million Americans will fall within that age group. - NCOA
Continuing this trend may render the social safety net—social security and Medicare—a substantial burden on the national budget. This, in turn, could lead to currency devaluation and escalated living costs—as seen in the past few years where inflation has reached difficult levels.
What is a debt crisis?
A debt crisis is caused by a excessive borrowing and misallocation of capital over an extended period of time. As an economy's outlook weakens, interest rates tend to rise in an attempt to retain or attract investors. However, in this scenario, monetary policy's effectiveness in controlling the currency begins to wane. In a normal economy with balanced budgets and steady growth, the Central Bank has significant control over interest rates. But when an economy is on the path to a debt crisis, the Federal Government's fiscal decisions become the dominant force shaping the economic outlook.
Fiscal Dominance occurs when a government's fiscal policy, including its spending and taxation decisions, becomes the primary driver of the economy, overshadowing the Central Bank's monetary policy. This can happen when a government runs large budget deficits, accumulates significant debt, or implements policies that have a substantial impact on the economy. As a result, the Central Bank's ability to control interest rates, inflation, and the overall economy is diminished, and the government's fiscal decisions become the main influence on the economy's trajectory. In essence, Fiscal Dominance represents a shift in power from the Central Bank to the government, with the latter's policies taking center stage in shaping the economy's future.
Recent statements from Fed Chair Jerome Powell, emphasizing a "Higher for Longer" strategy, may show a declining strength of the Federal Reserve to control factors in the economy more broadly. This was the first hint that the US was nearing a state of Fiscal Dominance, but the icing on the cake is the diversion between the Federal Funds Rate & the 10 Year Treasury Yield.
Ticking Time Bomb
In the aftermath of the last Federal Reserve Meeting the markets were in full panic as the Federal Reserve Chairman expressed some frustration about it's inability to quell the inflation that is in the economy, yet even with this anger they still reduced the Federal Funds Rate to reduce costs for American Families. The market turmoil that followed this meeting illustrated the fact that no one knows that we are in an era of Fiscal Dominance. This is good because this is a game of the musical chairs, until the music stops.
It’s pure insanity.
Inflation is up.
Money is flush everywhere. Bitcoin $106,000.
Stocks new time highs.
Why in the hell are they doing this?
2,725
While we wait, watch and enjoy the music, there is no doubt: the fuse has been lit.
Mr. Trump will be arriving to the White House soon and will surely be looking to weaken the dollar, cheapen energy and reduce taxes. Each of these things will reduce the cost of doing business on US Soil and likely bring some manufacturing to the US. His actions could be just what the market may be looking for to reduce interest rates for now as investors pile in to earn the returns his America may offer.
Mr. Trump has also already proposed the removal of the debt ceiling which is something that contradicts Elon Musk's & Vivek Ramaswamy's Department of Government Efficiency's mandate to reduce federal spending. An admirable attempt from two billionaires who benefit from money printing, but there is no stopping this train.
The future is largely unpredictable. All we have is the present. The present United States Economy has a plethora of deflationary factors within it that are being largely unchallenged by fiscal policy. The expenditures of the government are rapidly increasing as the amount of people retired on social programs rise. Using the deflationary factors as a cover, inflation can be largely hidden in the economy.
