Ben's Doomsday Prediction

Dominating headlines today is our bearded buddy Bernanke's Congressional testimony about the dangers of a retiring baby boomer generation. His timing is impeccable—just as pervasive worries about the dollar, deficits, oil, inflation, housing, etc. were starting subside a bit, Ben jumped right in to stoke the embers on this familiar fear.

Bernanke: Baby Boomers Threaten Economy
By Editorial Staff, Reuters

The story goes: as tens of millions of baby boomers retire, the liabilities on the federal government for healthcare and social security will bankrupt the country and burden us with a mountain of incomprehensibly, insurmountably, insidious debt.

In a related story, scientists have moved their forecast on the demise of mankind a few minutes closer to the zero hour:

Doomsday Draws Two Minutes Closer
By Geoff Brumfiel, Nature.com
https://www.nature.com/news/2007/070115/full/070115-8.html

Jeez. Just a bad day all around. But we've got a few minor things to point out:

First, these so-called "liabilities" and deficits from social programs are something that won't happen for decades, and are already widely known about. This means they're priced into stocks and have little or no surprise power to move markets going forward.

Second, we've maintained the US needs more debt of all kinds—that the US is under-indebted, not over-indebted. We can incur a lot more debt than most people think and be financially healthy.

This may sound like heresy, but it's true. And before you denounce us as pagan/satanic/voodoo cult mongerers of the temple of debt, consider: if you think we've already got too much debt, then you must have some sort of belief about what the "correct" level of debt is. (Hint: the answer is not zero. Everyone, everyone!, including individuals, corporations, and governments has an optimal capital structure including debt.) If you don't know what level of debt is optimal, how can you know when it's out of whack? A close analysis might surprise you.

We've written a ton on how this works, and won't recount it here. For more see our past commentary: "Are You Optimal?" Also, you can get scads of information about this topic in Ken Fisher's new book, The Only Three Questions That Count: Investing By Knowing What Others Don't.

Third…it's not really even debt in the first place! The so-called "liabilities" of Medicare and Social Security are simply government programs, not true liabilities—Congress can legislate cuts in the programs, alter them, or decide to revoke the programs altogether any time they feel like it. This is much different than actual Treasury notes, for instance, which bear an obligation to pay.

Fourth, in the year 2050 the median age of the average US citizen will be 39 years old—not exactly an extremely aged population. Most people will be working and have families and be big consumers and still driving the US (and world) economy forward.

Which means most extrapolations about our future financial health are too conservative. Gains in profitability and productivity for the global economy are very likely to be better than most long term forecasts. That means more wealth and bigger tax receipts—lessening the effects of these social programs.