Will The Onslaught Of Baby Boomers Further Exacerbate The U.S. Current Account Deficit And Entrench The DM-EM Capital Flows?

Tyler Durden's picture

Lately, Goldman's economists and strategists have been looking at the long-overlooked topic of demographic shifts within a society as a major driver to shaping consumption trends, economic outcomes, and, as a result, investment decisions. A few days ago, Goldman's Anthony Carpet penned "Demographic Dynamics: A case study for equity investors" in which he did an extensive analysis of what the demographic shift of America, driven primarily by the tide of baby boomer retirement which commences this year, means, and presented several stock choices that would likely benefit the most from this generational transition. We will present that report in the immediate future, but for now we wanted to bring your attention to the Goldman economic paper, "Current Accounts and Demographics: The Road Ahead" in which Goldman takes off the investment advisor suit, and puts on that of the economist. The study has some interesting observations as pertains primarily to the ever critical Current Account (which as we pointed out yesterday hit a two year high $49 billion deficit). In a nutshell the current account, or trade balance, is a proxy for the marginal savings or consumption that occur in a given country. The US has ran a current account deficit for as long as it can remember, with the result, as recently as several years ago, being a negative savings rate. The Current Account also tracks the international flow of capital, as global savers (Emerging Markets), tend to fund the deficits of global spenders (using their own recycled money) courtesy of the "spenders" flooding the world with their own currency. This phenomenon is the primary reason for the symbiotic relationship between China's saving society and the US consumer base. As is well-known, one of Obama's more ambitious plans is to double US exports over the next five years which means a collapse in the current account deficit. Yet as more and more Americans exit the prime savings age bucket, and become spenders, is Obama's current account reshaping plan doomed from the start? Goldman explains.

Over the past few years, global capital and current account imbalances have played a major role in a number of important macro debates. The  perception of unsustainable imbalances between the US and the rest of the world; the unusual  low of capital from the emerging (EM) to the developed  world (DM); and the so-called ‘global savings glut’ and its impact on real interest rates have all been key forces that may have played a role in the recent global recession. We have focused on the longer-term drivers of shifts in the world economy, particularly in our work on the BRICs and the N-11. Demographic trends are a key component of that work. As we show here, demographic shifts also play an important role in determining long-term trends in global current account balances and the flow of global capital. An economy’s current account is literally equal to its ‘net’ saving (total savings minus total investment). So a tendency to save more across an economy will translate into pressure for current account surpluses and a flow of capital to other countries. Because people’s savings behaviour is generally different at different points in their life, the relative age structure of an economy plays a significant role in explaining their borrowing and lending to the rest of the world.

Using a model that links demographics, growth and current accounts, we illustrate here how demographic shifts have driven global current account trends in the last 30 years, and what they imply about current imbalances. We then look at how the influence of demographics over the next 20 years  and beyond may affect current account positions. Importantly, it is the portion of a population of ‘prime saving’ age (on our estimates, roughly 35-69  years old) that matters most, and not the size of the working age population, as is commonly discussed in policy debates. That group is still growing  globally, even in the developed world, and will likely rise in most of the EM world, including China, for at least two decades. Interestingly, the common intuition that China is demographically more like a developed market than a typical emerging market is only true with respect to working age population. In terms of ‘prime saving’ dynamics, China is more like an EM than a DM economy.

Our results confirm that the recent situation involved what look like ‘excessive’ current account surpluses in some of the oil producers, and in parts of Northern Europe and China, with ‘excessive’ deficits in some of the well-known offenders, such as the US, Greece and Spain. Those imbalances have narrowed substantially in the past two years but are still visible to a degree. However, demographic trends have also been influencing what is an ‘appropriate’ balance, and will likely continue to influence changes in the future. In particular, demographics have generally reinforced a shift towards  greater surpluses in some large EM countries and deficits in some DM economies, even if today’s reality is poorly captured by a simple EM/DM split (see box on page 5). And although that dynamic has overshot, demographic projections suggest that pressure for capital to flow from EM to DM—far from being an anomaly—may be more persistent than people realise and may become more uniform over time.

The rise in ‘prime age’ savers globally may also have played an important role in the story of the ‘savings glut’, putting downward pressure on global  real interest rates. Here too, the demographic underpinnings of that story could intensify in the next 10-15 years. Perennial worries about the impact on asset markets of dis-saving by US (and other OECD) retirees also need to be seen in this global context, both because current account shifts may  provide a safety valve and because global pressures are likely to move in the other direction. As with our work in many of these areas, the global picture looks quite different to the (usually better-known) US or OECD story, given that the importance of non-OECD economies continues to increase.

And while the entire paper is quite fascinating for those who tend to ignore populational dynamics in investment decisions (and is attached), the key results and observations are below:

A. The impact of demographics on current accounts and capital flows

  • Demographics are a major determinant of long-term trends in current account balances. Despite the popular notion that current accounts are determined by relative growth prospects, demographics seem to play at least as large a role.
  • The evidence suggests that those economies with a large proportion of ‘prime savers’—a range we identify as aged between 35 and 69—are more likely to run current account surpluses.
  • These shifts in the group of ‘prime savers’ are not identical to the more commonly followed story of shifts in the working age population. Most striking  is that China—whose working age population is widely known to be ageing faster than those of most EM markets—is much less distinctive in terms of ‘prime savers’ and looks more like a typical EM than a DM.

B. A demographic perspective on current imbalances

  • Prior to the global crisis in 2008, the world’s current accounts appear to have drifted a long way from their long-term demographic anchors.  Conventional wisdom—that the US, the Southern Europeans and several EM economies had deficits that were too large, while China, Japan, several Northern European economies and the oil producers were running excessive surpluses—looks fair relative to what slow-moving demographic and  growth trends would say was ‘appropriate’.
  • We have seen significant progress in reducing these ‘imbalances’ and are closer to the underlying ‘equilibrium’ predicted by our model. But these shifts  take the world only partly back to the levels that underlying demographics suggest.
  • Although there are excessive surpluses and deficits within both the EM and DM universes, EM surpluses on average have looked too large. That said, demographic pressures have driven larger surpluses in EM economies and validate the notion that they should be running surpluses now. What looks odd about the world is not that EM countries have lent to the developed world on average, but the scale of that lending.

C. Demographic pressures on current accounts

  • Demographics hint at fresh current account shifts in the next 20 years. Demographic trends push towards larger surpluses across a broad group of EM countries (including China) and larger DM deficits (including the US), because the proportion of EM ‘prime savers’ rises more and peaks later than for DM

  • Because the world is starting from a point where several large EM economies are running ‘excessive’ surpluses and several large DM countries’ deficits are ‘excessive’, those shifts need to be balanced against a tendency for the world to move further back to the underlying equilibrium. If both developments occur, this could blunt the demographic pressures between DM and EM groups.
  • These forces potentially show the biggest shifts within DM and EM groups, with big declines in the major surplus groups (the oil producers, China, Japan, Germany) matched by narrower deficits in India, Brazil, Turkey, Greece and Spain. With the exception of China and the oil producers, most EM economies could potentially see improving current account positions.
  • These shifts could push towards a cleaner split between EM (mostly in surplus) and DM (mostly in deficit) than is the case in the current, more complex picture. In particular, demographic pressures could see the largest DM surplus countries (Japan and Germany) move into deficit and the largest EM deficit countries (Brazil, India and Turkey) move into surplus.

D. Demographics and the ‘savings glut’

  • Demographic forces may have played an important role in the ‘savings glut’ and may have contributed to falling global real interest rates over the last  20 years, as the proportion of ‘prime savers’ globally has risen over that period.

  • The global pool of ‘prime savers’ is expected to keep rising, and peak in 20 years. As a result, the ex ante tendency will be for more, rather than less,  net saving globally, and the ‘savings glut’ (and lower real rates) may become a more persistent feature of the world than many think.

E. Implications of the shifts ahead

  • Even after recent progress, currencies and demand profiles may need to move further to support further rebalancing across the major economies.
  • The likely ongoing flow of capital from EM and the demographic component of the ‘savings glut’ story suggest that real rates may stay lower
    for longer globally than generally expected, and may even fall further.
  • While local markets in DM could see more pressure (and DM real interest rates rise relative to EM rates), increased EM savings could remain an important part of funding DM dis-saving as the population ages, mitigating long-standing worries about the impact on asset markets of ageing populations in developed markets.
  • Demographic pressures for capital flows make it even more critical to improve financial/regulatory infrastructure to handle large cross-border flows.
  • The development of EM capital markets—a consistent theme in our research—may be important in offsetting the underlying demographic pressures for continued capital flows from the EM to the DM world.

We will next present Goldman's piece which looks at potential investment opportunities when evaluating the "baby-boomer onslaught" factor.

Full paper.

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chrisd's picture

We also need to re-evaluate the theme that every healthcare company lists as the number 1 investment rationale - baby boomer demographics. We already saw what occured as a result of them purchasing goods, both on borrowed dollars as well as earned. What happens when 60% of them are receiving end-of-life care at the same time? We continue to rely on government payors for healthcare. Private payors will increasingly find ways to cut costs and / or not pay at all.

Mongo's picture

Here is one for ya!




Scared?...you will be... YOU WILL BE!

Ripped Chunk's picture

Sign O' The Times Mongo.

Mongo's picture

Indeed. Quite sad actually, but I agree. Sign of the times we live in.

Vampyroteuthis infernalis's picture

Not too far from a 3rd world nation.

midtowng's picture

What this article doesn't talk about is how this will effect a global monetary structure that is based on a currency from a nation with a chronic CA deficit.

IrishSamurai's picture

Have made this point over and over again to family and friends regarding the markets ... this Depression is (and will continue to be) demographical in nature.  Lots of capital outflows from Baby Boomers as they draw down their meager retirement to supplement the Ponzi (SS/Medicare) that cannot be sustained and eventually they and the Ponzi will die off ...

Dow sub-5000 is not a possibility, it is a certainty ...unless the administration and policy makers engage the Soylent Green strategy ...



The 22nd Prime's picture

Maybe it should be retitled...

"Current Accounts and Demographics: The Road to Serfdom"

pauldia's picture

A little off topic but very poignant. A approximately 8:08 tp 8:10 am this morning on CNBS Becky Quick is doing an interview, During which she refers to the issue of volumne picking after the summer ends and states won't it be more difficult to " manipulate" with retail investors entering? Could someone check and post the video?

Paul Bogdanich's picture

Will the Baby Boomers retirement aggrivate the deficit?

Ya think?  What a news flash this is.

Stranger in the Alps's picture

Wonder what this means for the future of Chimerica...

Stuart's picture

AND especially with low interest rates, retirees are forced to deplete their capital to make ends meet.  

docj's picture

Will the onslaught of baby boomers further exacerbate the U.S. current account deficit...

Uh, yes.  Of course.  Duh.  Next question.

Meanwhile, ain't it cute watching the FedCo PPT doing their darndest to resurrect this courpse of a market?  Plucky little bastards, don't you think?

Misean's picture

"one of Obama's more ambitious plans is to double US exports over the next five years which means a collapse in the current account deficit."

Brack "Bass Ackwards" Obumble.

Shameful's picture

Well he could be right. I think it's possible to double our exports of death, destruction, and fraud in 5 years. It might take some long hours and hard work but I think Wall Street and Washington are up to the challenge!

Misean's picture

Those are the few things running at 110% capacity right now.  Doubling is quite a tall order.

Pheesh's picture

Hmm, I don't see how the US doubling exports could be construed as a negative goal, I just don't believe it can be legitimately accomplished in the current environment. 


More power to us if we actually start exporting more value than we import...

docj's picture

Well, we certainly exported "financial innovation" (MBS, CDO, etc.) to the world.  How'd that work out for everyone?

carbonmutant's picture

 People aren't putting their savings in passbook accounts they're putting them in 401Ks or brokerage accounts... everybody need higher yields.

gs_runsthiscountry's picture

BINGO - and they werent putting money in savings accounts back in 1999 either.

Hence, the repeal of Glass-Steagll and in with Gramm-Leach Bliley. The birth of the Bank Holding company, which, put us where we are today.

Hansel's picture

Which Goldman decoder ring are we supposed to use today?  Reverse psychology or Reverse-reverse psychology?

SDRII's picture

The entire analysis is predicated on a forex regime ex anti in its assumptions. Maybe but unlikely. Why is a benign response to coalition of the willing preemptive move to SDR presupposed? What does the "model" look like with a dethroned dollar? A war? Demographics undeniable, but to suppose this means a perpetuation of a disfunctional mechanism innuring to incumbants (or DM) is typical self serving sell side junk

Pettis most recent on the shift to China consumoption is a more interesting read on balances 



crzyhun's picture

Reverse Dent psychology. Pretty hairy.

Actually, demographics for western culture are declining. Check it out. Thus, not just US of A, but Japan, Europe = Russia, and China too. What it all suggests is a lowering of lifestyle/GDP vs Africa most of South/A + Mexic0, and the Middle East ex Israel.

Oh- and as if that weren't enough, south of the border, down Mexic0 way, total drug war....this is more than rampant drug use in the northern 48. This is about power and money- lots of it....sleep well sheeple.

william the bastard's picture

In summary, If the US pulls its guarantee of GSE obligations, ye prince of Pimco will exit, driving up yields, pulling in Chinese investors and briefly reflating the US credit rating. Alas all's well with the world ex seniors and 401k-ites using Pimco as a mattress.

poorold's picture

The demographic shift is going to be a ball and chain around any real economic growth.

Savings of retirees are going to shrink quite a bit and much faster than anyone projects.

I expect there will be an ever increasing pool of "retirees" looking for work that isn't there while they try to pay for life's basics--food, shelter, transportation and, of course, 10 prescription medications they are taking every day.


All of these looks into the future ignore the fact that the world is broke and getting more broke.  Standards of living are declining more more and more people.  And the government is going to try and maintain the standard of living via their promises of social security, healthcare, etc.

It's simply not possible and the government's attempt to do so is going to tax the productive elements of the economy into poverty too.

But nobody models that.

KevinB's picture

Demographics and investing are "long overlooked"?

Only if you haven't been paying attention for, oh, a decade or so. David Cork wrote "The Pig and the Python" which addressed this issue in 256 glorious pages.

Of course, although he covered the developed world, he was from Canada, so everyone ignores him until the geniuses in Wall Street discover it ten years later.

juliawong's picture

Also from Canada, David Foot: Boom, Bust and Echo, 1996

Canadians have long range thinking perspective?

JR's picture

Bottom Line: The baby boomers were born after the war was over because of the promise of prosperity, i.e., that with no war the American system would produce jobs and economic growth.  The boomers worked and the fifties delivered on the economic dream. 

But now, just as retirement begins, the boomers find that mysteriously that dream has been stolen.  All the prosperity and the promise are gone.  And standing beside that empty space in the pot of gold at the end of the rainbow are the obscenely wealthy, criminal investment bankers who’ve used their political connections and control of the money supply to take every last dime they can bag. 

And in walks Goldman today, its investment hat put aside and its caring analytical economic hat in place, with a very detailed analysis on just where those stupid baby boomers went wrong.

It’s kind of suspicious to me that just as the first baby boomers are approaching the end of that rainbow, there's Blankfein, with his little smirk and analytical report, explaining to them why the pot will be empty.

The analysis of this story is that the international bankers are diverting attention away from the fact that they copped the American Dream and have arrived at the scene of the empty coffers to place the blame for their crimes on the baby boomers. Boomers helped build the American Dream and should be retiring into retirement prosperity.  Instead they’re taking out reverse mortgages on their homes and cutting their prescription pills into quarters to stay financially and physically alive.

And Goldman, and its dupes, call the boomers “greedy.”  Where is Tom Brokaw now with a sequel to his book The Greatest Generation, with a book on Who Stole the Future?

Segestan's picture

True.. but no one wants to hear a good word for the greedy boomer, they only want to have a say in how the bankrupt boomer retires. I'm a boomer,  and their is much blame to go around starting with globalization and the Peace corp nonsense.

Vampyroteuthis infernalis's picture

Thank you Segestan. A honest boomer who realizes that the boomers as a generation are complicit in their own future impoverishment. I am part of Gen X and what do we get? The left over scraps given to us by boomers and an enormous debt load we will never be able to pay off. Thanks for nothing!

Segestan's picture

We are all products of grand ideas... the LAST war etc. etc... the strong survive..

Boomers as a group were children of grand ideas. Only the globalist used the grand idea to line there pockets.

Just wait until you get old and others act like the world is wrong because of you...

aerojet's picture

The boomers didn't work in the 50s, they were children in the 50s! Their parents did the work!  Also, the baby boom is a result of the war years, not the result of a more hopeful future.  In the 1950s, everyone thought there would be an atomic war with Russia. 

Had better birth control been available in 1945, there would have been no baby boom.



Segestan's picture

The Pepsi generation would disagree. As for birth control , no we needed border control and honest business. America is less than 5% of humanity.

aerojet's picture

So explain to me how 10 year old kids built America again? And explain how the statistical anomaly that is your generation had nothing to do with the pent up desires of American servicement separated from the sweethearts? 

It is a well-known sociological phenomenon that baby booms occur after wars end because of the unconcscious need to replace all those who died.

Segestan's picture

I'm not going to get into pissing date with you... you know exactly how one generation leads to the next. As for population control in America .. Why?  We had the ability to feed and employ as many as could be born.. but No instead we where feed the globalization BS without end.

JR's picture

My mother’s sister did not work when she was 10 years old but at 13 she began babysitting and doing garden projects to raise money for her college future, and at 15 obtained a work permit—and paid her entire way through university. It’s important not to confuse the soft-pillow Gen X driven-to-school generation with the work ethic values of the post war generation.

This letter to the editor I saw yesterday puts a face on the victimization created by the ideology of collectivist levelization that goes hand-in-hand with globalization:

Have President Walk in Our Shoes

I do not care for President Obama’s position on health care because I’m disabled and my wife and I have to try to survive on the minimum Social Security disability check I receive.  I cannot afford to buy health insurance let alone try to survive in this area and I’ll bet there are a lot more people like me in this situation.

I’ve applied for benefits at Social Services and been denied because of my assets that I’ve accumulated over the years.  They want you to exhaust your assets or be broke before they might give you any help and I’m not going to cash out my IRA just for that because I worked all my life and if I cash it out, most of it will go to paying taxes.

Maybe the president should live in our shoes and he would have a different outlook and not force us to buy something we cannot afford.

Dale Merriman, Marina, CA

RockyRacoon's picture

The boomers didn't work in the 50s, they were children in the 50s! Their parents did the work! 

Yeah, but we partied like a mo-fo during the 60s and 70s!  Sure was a great time to be alive.  Condoms?  We didn't need no stinkin' condoms.   Sex was a cautionary act only when pregnancy was considered.  I lived it and enjoyed it.  As with most folks my age, we eschewed information on world politics and economics.   Some made good livings and some didn't.  Not much different from today.  I am pretty well prepared for retirement and won't be much of a drag on the younger generations, but many are not.  If soylent green is in the future, well, it is.  Bloom where you are planted.

Caviar Emptor's picture

Bingo! And as the chorus of "Reagan! Reagan!" dies down, cold hard reality sinks in: No, we can't inflate our way to prosperity one more time. Simply put: Living in a country that makes nothing but consumes everything is a doomed experiment. Lotsa luck.

poopdeville's picture

Look, this is very simple.  50 million Americans "would have" retired in the next 15 to 20 years.  That is unsustainable, especially considering that the workforce is about 180 million.  It was already hard for 180 million people to pay for 300 million.  It will be significantly harder for 130 - 140 million to pay for 300 - 310 million.  Retirees are, unfortunately, freeloaders living on the labor of the current generation of workers.  Yes, they "invested" their dollars in the capital market.  (This is actually a sign that the labor market was working above equilibrium.  Why should they have surplus dollars to "invest"?  We won't be...)  And now they're taking their capital "away", and worse yet, are selling it more-or-less simultaneously (leading to deflation of asset prices) and expecting the current generation of workers to keep working, for everybody's benefit.  See the problem?  

Most of the things Baby Boomers have made have decayed beyond use.  But they want to trade their decayed-asset backed dollar for my fresh-labor dollar.  See the problem?  My fresh-labor dollar is worth less because it has the same denomination as the decayed-asset backed dollar.  The time-value and decay-value of money and the labor it represents is not taken into account in the numerical value of a "dollar".  Note that a gold backed dollar would exacerbate this problem.  Fundamentally, the problem is that retirees want to trade 10 - 40 year old labor for today's labor.

Lets not even get into the massive misallocations of resources, in terms of disposable housing (instead of spending on structures that would last multiple lifetimes, so that retirees would actually have valuable things to trade at the ends of their lives), the creation of suburbs, etc.  The situation is a near perfect analogy to somebody "doing you a favor" (that actually ends up hurting you) before you were born, and then demanding a favor in return.  Worse yet, the marginal cost of returning the favor is much much greater now, because of the demographic problem.  I say, "Get stuffed" 

GS et al are sleazy, and they will take every last dime they can, but this is not their fault.  The American dream died because the economics of the American dream are untenable.  They always have been.  Unfortunately, people would be called "un-American" for pointing this out, even 10 years ago.  Or even today.  "Yes we can!" indeed.  Look for more of this rhetoric.

JR's picture

In spite of your misinformation, the owners of the Federal Reserve System did extract most of the value from the American economy—and 95% of the value of a dollar since the Fed’s inception in 1913.  They did take away the value through inflation and other mechanisms of the labor and promise given to the baby boomers. 

And I can see by your reasoning they’re going to take yours too: only this time it’s a little different. In addition to taking your money and your value, they’re going to take your country.  By the time you retire, unless some of your generation fights with the rest of us, the banker-controlled politicians will be telling you which high rise cubicle is your number, and which country you may live in and whether or not you are still a valuable enough “human resource” to qualify for Dr. Emanuel’s Reaper Curve “healthcare.”

Glasater55's picture

Society should have put the brakes on boomers in the sixties instead of indulging the heck out of them.

poorold's picture

I disagree with your statement.  The government didn't nudge the boomers.

Instead, the government took the boomers future and began spreading it around in the form of welfare when the government should have been educating people that having babies is not "work."

Now, the government supports illegal aliens too.


btw, what would the real unemployment figures be if all the unemployed illegal aliens were thrown in???

Segestan's picture

agree.. but most of those aliens are not even counted.. it's FAR worse than the government hacks let on.

aerojet's picture

The illegals get by, they did the same thing back home, they don't need government.

Segestan's picture

Well that's kind of true, they are often a hardy group, but many illegals already have someone in their families living in the system who are legals. They stay in the shadows , so to speak, but they are getting alot of family and government help.... billions.  There is no place to exist without connecting into the system.

gs_runsthiscountry's picture

The fact of the matter is many of those aliens you speak of, many of them, sometimes upwards of 6-7 work off the same SS#. So, a large proportion of those will never collect on programs their labor is paying for. That bankrupt, IOU ridden, congressional slush fund is being propped up for millions for retires, on the backs of Hispanic slave labor.


Whether anyone wants to know the facts and deal with them is another matter.


Segestan's picture

Thats the story often used.. but those jobs where all filled by Americans before the flood gates let them work on the farms and even then those lucky enough to have work acted like they where slave labor. The whole poor immigrant story is a charade because thier own governments are crap they blame it on American boomer pigs.

gs_runsthiscountry's picture

I agree something needs to be done. Actually, I agreed something needed to be done 20 years ago. An there in lies the problem. Upwards of 20 million illegal immigrants didn't get here overnight, and no one did anything about it. Now, you have a conundrum, politically speaking.


Why? Because, for example, in my state all it takes to go vote is an envelope with your name and address on it, to verify where you live. You don't even need a drivers license. As a matter of fact, you dont even need that envelope unless you switched voting wards. Understand? These immigrants get to vote. Now, how do you think state and local politicians react to that while running a campaign? Say your district is 30-50% Hispanic?


The whole issue of voter fraud is in a dark room somewhere. Nothing has been done for years because they are votes.