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Inflationary Policy Is WMD on Babyboomers

Moderate inflation is good. This has been held as self-evident truth in modern monetary policy. But this will quickly become antisocial as the entire west goes through a structural change in demographics caused by babyboomer retirement. BoJ seems to have realized this early and well; they have managed their social transition with remarkably success, despite much sneering from western economists (I argued here that the Japanese lost decades is in fact a great achievement that US will only wish to match in 10 years). ECB seems to have realized this judging from their proclaimed resolve for austerity as opposed to unlimited simulus. The big question is: when will Fed and US government realize this? The reason for this fundamental shift is simple: soon-to-be retirees need to save but inflationary policy sacrifices savers for the sake of stimulating economic growth. In normal demographics, this works because most people get to participate in the growing economy by staying employed or employing; even though everybody's savings get eroded by moderate inflation, there's a good chance that most will be more than compensated by increasing earnings. Retirees are net payers for inflation because they can't replenish with inceasing earnings, as is always the case. But if they're a small group, the society pretends they don't exist and moves merrily on. Starting from right now, however, as babyboomers go into retirement or start deligently (perhaps belatedly) saving for retirement, inflationary policy will cause much more pain than ever seen before. Even under "moderate inflation" scenario, it's still a significant erosion of buying pwoer and living standard over 10, 20, 30 years. The effect will be quite painfully clear, and soon, for those living on fixed income. As I said in the earlier article, we will some day, one way or another, realize that Japanese style stagnation is the best possible outcome during this transition. We are becoming a savers society whether you like it or not. Do we cope with it or fight a losing battle in which everyone loses?

1 Comments in Response to

Comment by Anonymous
Entered on:

      This written expose doesn’t tell it all. Because of omission, maybe willful if not due to ignorance, it is misleading. Take these lines for example that the public reads: "Retirees are net payers for inflation because they can't replenish with increasing earnings, as is always the case. But if they're a small group, the society pretends they don't exist and moves merrily on." The omission is, in a deflation, wages or earnings shrink except pensions that are received regularly. With their income intact, retirees remain with purchasing power, not wage earners that economically speaking become scarce market participants as their income dwindles.

      If retirees are a big group that society cannot pretend they don’t exist, and that is foolish if it ignores the important role they play in the revival of the economy – millions of retirees and their kind with similar nature and structure of income remain society’s purchasing power that absorb the market shock, arrest the downward swing until the economy is restored back to where it was before it fell.

     In exposing ignorance, here’s the deal: In economics, I am a fish in the water, and I want to write about it. If Ernest Hancock will allow me access to the editorial page where I could share what I have learned in the academe as well as my experience in this discipline or if would restore my letter-to-the editor log-in after it was intentionally made inaccessible, I could expose more ignorance that misleads the public. But if certain false propaganda and ignorance are to be protected in this site, you have this situation where access to publish and expose is cut off. Why don’t you react to this challenge and call Ernest’s attention so that I could put the good words where my mouth is?

    And now that I brought this up, this could be my last appearance if I made Ernest swear and decide to simply just delete me off. He owns the site and he can do whatever he wants, like Caesar does whatever he wants, because he owns the State except that which belongs to God, is God's. And if we do not meet again, I say, nice meeting you guys!

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