$450 Billion In ZIRPorized Purchasing Power: Two Charts That Explain The Baby Boomer Dilemma

Tyler Durden's picture

When it comes to predicting consumer spending patterns, especially those of the baby boomers who are traditionally reliant on fixed income (but lately have had to migrate back into the workforce, as retirement prospects diminish, in effect displacing the young 18-24 year old Americans where unemployment is now at a substantial 46%), the following two charts from today's David Rosenberg letter do a great job at explaining the schism between interest and dividend income. The former, as is well-known, has been crippled and is plunging courtesy of Bernanke's ZIRP policy, which makes cash yields on savings and fixed income instruments virtually negligible, and the latter, which while rising, has a long way to rise if it is to catch up to lost annuity potential. It is here that the primary tension for the Fed resides: it has to force investors to switch their mindsets from the capital preservation of fixed income, to the risky behavior of pursuing stock dividends. It is also here that we see the lost purchasing power of the US consumer: interest income is down $450 billion from 2007-2008 levels to roughly $1 trillion, while dividend income has risen to $825 billion, which is where it was at the prior peak. In other words, when all is said and done, Bernanke's ZIRP policy has eliminated $450 billion in purchasing power, even if he has succeeded in reflating the equity bubble. Yet while bonds at least have capital preservation optics, what happens to dividend stocks whose cash flow yields can be eliminated at the bat of an eye, if and when the next flash crash materializes, or the next financial crisis is finally too big for the central planners to control?

Personal Interest Income:

Personal Dividend Income:

And in Rosie's words:

With bond yields melting and money market rates vanishing in recent years, the household sector has seen its income stream from the fixed-income market (and bank accounts!) recede dramatically. Interest income is all the way down to $974 billion, the lowest in seven years, and down by nearly one-third or $450 billion from 2008 levels.


This has happened at a time when the median age of the 78 million pig in a python, otherwise known as the baby-boomer cohort, is moving from 56 to 57 and the first of this group is already in their mid-60s. The investment life-cycle suggests that this cohort will begin to shift towards capital preservation and income orientation. The dilemma, of course, is that to generate income of any means, this requires non-traditional sources like corporate bonds (only 'junk' now will give you a coupon north of 7%), REITs, MLPs, hybrids and the like.


This ultra-low rate backdrop, coupled with the record amount of liquidity on the corporate balance sheet and the growing need for income or income-proxies for the aging but not yet aged boomer population, has unleashed a secular growth phase in dividends. Dividends now come to $824 billion and are 85% of the size of interest income for the household sector, and at the current pace (dividends are +7% from a year ago and interest earnings are down 3%) these two lines will cross for the first time on record within the next two years.


The corporate sector is responding to shareholder demands and increasingly focussed on returning retained earnings in the form of dividends — this year should be a record. And the reality is that payout ratios of 30% are below the typical level of 35% in the most recent pre-bubble cycle, let alone the long-turn historical norm of 52%. So even though the income-equity theme has lagged so far this year, this remains a secular theme ... especially for those content on being the tortoise, building the wealth by accumulating the cash flows, rather than the hare who inevitably gets exhausted chasing performance.

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NotApplicable's picture

Bizarro World.

All your reality are belong to us.

Bam_Man's picture

More people continue to write naked out-of-the-money put options to produce income than are buying for protection.

Al Huxley's picture

How about - 'Because it's just another trap like FAZ to assist people who think the whole game isn't rigged with donating money to the financial institutions they think they're betting against'?

Greater Fool's picture

The only thing it's ever worthwhile to do with VXX is short it.

AgShaman's picture

Reflating the equity bubble....

(Baby Boomers = 'Sucklings' = Bagholders)

They are prime targets and easy pickins' for the Bernanke's Death Star "tractor beam"

TruthInSunshine's picture

If one agrees that the incredible bear market rally we've experienced since 2009 has been mainly the product of expansion of government debt, unlike the last bear market rally from 2003 to 2007 which was the result mainly of general credit/debt expansion (focused in significant part in housing and housing related chattel paper and derivatives) [and yes, we are now in approximately year 22 of a secular bear market; just chart returns on indexes vs real prices - if you take adverse tax implications of churn'n'burn funds, survivorship bias and index reshuffling into account it's even more brutal], equities are even more overvalued now than in 2007, and further, there's been an even larger bubble in bond markets, that is one for the record books.

Corn1945's picture

It boils down to the fact that the US (and the entire Western World) is at the end of the current debt super-cycle.

A rise to historically normal interest rates would lead to total financial collapse. The interest on the debt would become crippling. That's why you have to expect continued monetization of debt to try to stave off the inevitable.

I personally think dividend stocks will be the next bubble because there is no place else to go. When that totally detonates (as all bubbles do), the Central Planners will give us the usual "No one could have seen this coming!" line of bullshit.

zebrasquid's picture

My friends are boomers, and most are, in fact, cutting back on discretionary buying. Dinners out, vacations, new cars, new clothes, household accessories.....it is all out the window.

These are people who have net worths $500K-$2Mil but no income(for the reasons cited herein).  Most are getting laid off from $50K-$150K salaries, and have no idea/hope to get new ones.

So, they are hunkering down for the future, scared they will outlive their money.

And, these are the better-off boomers.  The average boomer has what, $50K, in total net worth?   


This has got to be a big drag on the economy for years to come.   

Forget chasing 6% in a stock that could lose that in a day.    Chase puts on all discretionary retailers, restaurants.   Sooner or later, this year almost for sure, those stocks will get killed and

you'll make multiples your money (more than enough to offset the draw down from timing).




LawsofPhysics's picture

"you'll make multiples your money (more than enough to offset the draw down from timing)."

Sure you will.  Oh yeah and CDS are safe bets too.  ALL paper is burning.  Get physical or have nothing.

TruthInSunshine's picture

I see the same thing. Even those with significant assets are cautious as hell.

And something like 78% of Americans near retirement age have less than 20k saved for retirement (I forget the exact figure, but it's close to that).

hairball48's picture

+1 I'm 64 on early SSI. My only savings are less than $20K, but what I do have is 100% in Gold and Silver. That's the best I could see to do. Ex wife pretty much broke me :)

That said, I can't wait for the crackup-boom!!!!!!!!!!!!

Yeeeehawww, bring it on !!

Boston's picture

Reminds me of ...... me.

But I refuse to allocate a material percentage of total assets to equities. For what, a 2% dividend yield and the shitty risk/reward on valuation (upside 10-20% vs 20-50% downside). No thanks.

Instead, I've been adding low grade IG and high grade HY bonds......but ONLY after big sell-offs and after doing my own credit assessment. I'm more than replacing my 4-5% "risk free" yield from maturing Treasuries and high grade IG paper. But I fully expect to lose some of that to credit losses. 

I avoid all fins and diversify far more than I did with my "risk free" holdings.

Bottom line, I'll be OK, but I can't imagine how about-to-retire mom-and-pop savers are not going to get crushed, not just in the near-term but over the next 5-10 years if the Fed keeps ZIRP in place....

LawsofPhysics's picture

There is, always has been and always will be a very real cost for creating capital out of thin fucking air.  Especially if you don't add any real fucking value to the system.  Get fucking physical assets (of all kinds) and get to know your fucking neighbors.  If you don't like the latter, you better move while your dollar still buys fuel, capiche.

Waterfallsparkles's picture

I think we can figure out what you like to do in your spare time.  I guess if you happen to be "LUCKY".

yogibear's picture

In Zimbabwe the stock market climbed exponentially, Bernanke and the Fed members noticed. Devalue/monetizing is the plan. Get ready for exponential increases in the price of food and energy. Bernanke said his secret weapon is the printing press. He also says he will print in his university documents. We know what the Fed's plan is already. Monetize/print/dollar trashing.

roadhazard's picture

Here in the mountains we call that, "too much sugar for a nickle."

DosZap's picture

slewie the pi-rat

Best grab one now,because that is a Class 3 handgun if not now,it will be pronto.

Single pull, double projectiles is a no no.Either way a gimmick ASAIC.

Jam Akin's picture

Std 12 Ga buckshot rounds provide 9 projectiles per pull, so what's the big deal?

DosZap's picture

Jam Akin

 yep,and shotguns are In a single shell, and with one pull of trigger,being able to shoot two .45ACP's in one pull is not the definition of a semi auto in BATFE terminology,this pistol has / fires two separate bullets, out of two separate cases at one pull.............Hide n watch.

IF they skirt it,it will only be because of two separate triggers,but even then you CAN shoot two at once, a no no,with a single pull.

Want to that, use a  mutliple shot revolver round loaded w/wad cutters stacked on top of each other, 2-3 bulets,from one case at ONE pull, so still legal.

I should be working's picture

I've never understood why the fed is so desparate to push investors into stocks.  The S&P500 @ 1000-1100 before QEII started was fine.  Now we're stuck in a vicious cycle where we add liquidity only to have the market revert to the mean when the free money is over.  It's the same lesson as the housing tax credit.  It's a free market, blowing hot air into it is a temporary fix.

William Wallace's picture

Tyler said, "Bernanke's ZIRP policy has eliminated $450 billion in purchasing power."  But rather than being totally eliminated, the wealth was transferred to the government (lower interest payments) and the banks (increased loan business and better spreads).



Mercury's picture

"ZIRPorize" is really a term that should be part of common parlence these days.

Although ZIRPorization will likely beget even more compensatory entitleization.

merizobeach's picture

In conversations with my only buddy who is also a daily reader here, we've added QE to our commonly used vernacular...

"Looks like I walked out the house without cash enough for the tab; you wanna QE me a lunch here, [buddy], and I'll get you back at the pub?"

Getting Old Sucks's picture

When seniors go broke in a few years from now, the government better hope they can still get low interest rates to borrow the money for another 25 million PERMANENTLY on food stamps.


TruthInSunshine's picture

There's a reason why Social Security is the 3rd Rail of American Politics.

lasvegaspersona's picture

The past is close behind

the future looks nearer now than ever

GCT's picture

Well I may be stupid as a boomer but I am out of the markets and have been since April of last year.  Hell I do alot better in gold and other commodities.  I guess I am not a typical Booomer as I have a nice nest egg right now.  Sure I know inflation and such but I have only one bill and that is my house and will have it paid off next year.  So screw it I feel safer in Gold and cash then in the stock market or worse an annuity. 

Some of the commenters are right on though I have alot of friends that do not have squat because they have to give their children anything they ask for or want to keep up with the Jone's.  Well they made their own bed they can lay in it.  I never expected SS to be there so I saved and invested accordingly.  You would think they would wake up and some just say well I will have SS and Medicare!! I just want to smack them.  

ShaneAshton's picture

You don't have to pay property taxes....where are you...I'm moving there ;)

merizobeach's picture

Well, it looks like all the states have property taxes.. http://www.dailyfinance.com/2010/04/13/5-most-tax-friendly-states-to-liv...

Leaving the ole USuckAss entirely, though, may be your best option; well, if you appreciate liberty and have any marketable skills anyway..

memyselfiu's picture

there must be low tax unorganized territory in the US, there's lots up here in Canada. I grew up in one, well and septic field, but with elect/comm grid available- less than $300/yr in provincial taxes...

Getting Old Sucks's picture

Something we're thinking about is giving one of our kids a mortgage at say 3.5%.  Bet if a lot seniors with money did that, things would change as far as ZIRP is concerned.

DosZap's picture

Getting Old Sucks

Hope that works out for ya.............

Age old adage, never loan money to friends or relatives IF you expect to get  it back.

It is a good idea IF your able to own outright, or have enough socked away if the kids lose their jobs,you can make the installments

Have a daughter married to a lazy ass and will not even try to be 100% -40-50 hrs a week at ANY job,his Dad has loaned them $$ for 4-5 mos to pay their house pmts, and or bills.Otherwise they would be living in a small rental home, or house.

He's an enabler,and his lazy son just keeps taking the cash.

He is in no financial condition as old as he is to continue this, and have enough for himself......

Getting Old Sucks's picture

I really relate to that son in law story.  I have one that's worse.  Not worried about my son though.  Sponsored him through law school and he paid every nickel back.  Works his ass off and his wife's a doctor.  I'm actually thinking about this for me.  Get some money out of the bank and make more interest on it.  I'm not rich but we saved our asses off as the kids went off on there own.  Debt free and haven't paid a penny of interest to anyone since 1997.  Never owned a house.  LOL, raise 4 kids in a two bedroom apartment, put them through college (lawyer, two nurses, and advertising exec, all doing well)  We're still in that apartment and it's big enough now.  Nobody drove a car till they bought their own, we couldn't afford it.  Highest salary I ever made was 75k at the end of my career (started at $64 a week).  Wife home till kids got older and then put her salary to tuitions and savings too.  We are a litlle scared about the future.    If a collapse comes, we're probably screwed like most.  Hate to see all our lifes work go to shit.  We just hope our kids and grandkids get through it all.

Hope I didn't bore anyone, kind of new here.


Yen Cross's picture

 Getting old is a perception. Nothing more or less!  Getting smart and tactile, works for me! :-)

Dingleberry's picture

Zirp means either stocks or Vegas....take your pick. Even though granny doesn't like gamblin' at her age, uncle Ben don't like her hangin' out in his casino without burning thru her cash.  Maybe she should buy Apple? I hear it has gone up.....  

eddiebe's picture

What the above article points out is bad enough, but what sucks even more for someone that has a couple of bucks saved up, is the total unpredictability of the markets. Used to be some truisms applied, but now that everything is manipulated and laced with fraud, there is really nowhere to turn.

JohnKozac's picture

This supports the plunging aggregate demand that Bill Gross complained about last year.

navy62802's picture

The baby boomer dilemma is that the baby boomer generation spent the money that their children are going to make.

silverserfer's picture

the sheep are ready to be shorn. The plan is going perfectly to plan!

insidious's picture

Most stock is held by wealthy or at least well to do individuals. The wealthy are the ones who receive significant stock dividends. The people who lived off of CD interest do not hold massive amounts of stock or benefit significantly from increased dividends being paid by corporations. This is yet one more way that wealth is being transferred to the top 5-10% of the population and primarily to the top 1%.

Bear's picture

Interest income only 40% lower than 2007 ... this seems impossible ... 2007 short term interest was at 5.25% today 0% .... how can there be 1 trillion in interest income. It seems that it would require at least 50 trillion in savings accounts.

Venerability's picture

Do non-Boomers truly have NO comprehension about who the Baby Boomers are?

"Reliant on fixed income?"

Boomers are now aged 48-66.

Most business, academic, and media leaders are Boomers, as are the vast majority of those in positions of political power.

Never in this country's history have younger generations been so anxious to deprive the dominant generation of benefiting from what would normally be our peak years for career advancement, earnings, and influence.





cnhedge's picture


does this mean the fed should end the ultra low interest rate asap?




Yen Cross's picture

Long "Gypsies @ Nordstromes".  Fat fingers, and Tank asses welcome<>