Go into any
sit down café or restaurant during the week, especially in a mall, or cafe in a
more affluent suburb, and you will notice something; a lot of grey heads. The
cost of eating out has increased, the amount of food you get for what you spend
has gone down, but boomers are still spending big on takeout and other leisure
activities.
This is why
the old methods of economic manipulation are going to increasingly fail over
time. Traditionally the RBA would raise interest rates in an inflation cycle
and decrease them in deflation or slower inflation cycle, in order to keep
things in their goldilocks range of 2-3%. The goal of this was to force those
with mortgages to tighten their belts in inflationary cycles and curb spending,
and to spend more when the economy was growing at a slower rate. However, the
days of this working are coming to an end.
Older people,
boomers, have most of the money and much less debt, than younger generations, “As
you'd expect (and hope), Boomers have lower levels of household debt (averaging
$82,000) than Gen X and Millennials. These two generations each owe more than
$400,000 - chiefly in home loans.”[1] They have far more assets,
money and far less debt than Gen X and Millennials. Technically Genz also has far less debt, but that is because they are generally not on the property
ladder, or still live at home. Their asset to income rational is much lower, as well.
Hence, what
does raising interest rates do to Boomers spending habits? Well, it is a
windful. If you have little to zero household debt, own your car, and have solid amounts of money in stocks and savings, when the RBA raises interest rates it is time to
celebrate. When you consider how much larger the Boomer generation is to the other generations, this is tipping the balance towards increasing spending. In
other words, going forward the RBA raising interest rates will be a stimulus to
the goods and services economy, and it will further crush younger Gen X and
Millennial families with significantly larger housing debts.
Right now unemployment
and inflation are increasing at the same time.[2] This will be in part
because of record immigration. But also changes in the tech sector, AI and
other things will be influencing this. As news.com.au notes,
“Australia
is in an unusual situation, and so is the world. A real pickle.
Around
the world governments rely on monetary policy to keep inflation down. But
monetary policy is good at beating inflation only sometimes.
And
now is not one of those times.
When
central banks like the RBA lift interest rates, that slows down the economy and
the inflation rate cools down.
Prices
stop going up so much and the downside is slightly higher unemployment. Hooray,
usually. But not now.
Right
now, we are in the sort of situation interest rates are bad at fixing:
inflation and unemployment are both rising.”[3]
I suspect
this sort of thing is only going to get worse over the coming few years.
Boomers are starting to retire, many of them are already cashed up and many others will
be offloading both debts and downsizing their assets to enjoy their retirement. Of course, I
know not all of the older generation are in this situation, but many are. I
know some of them are looking at this with glee. I spoke to one older person
who was celebrating the recent increasing interest rate cycle we just went through over
the last couple of years, because for them it meant increased payoffs on their
already sizeable funds.
But for the
rest of society, those who were not lucky enough to be born into Australia’s combined
peak prosperity, with peak job prices and low house prices? Well, things are
going to get interesting in the coming years. Governments, and semi-independent agencies, are not quick to
change tactics, so as more boomer wealth starts to move around in the caravan,
hotel and holiday market, as well as the retail sector, inflation is going to
go up. All the indicators that say that spending is high will remain. But it is
becoming an age class divide, and the system checks that reign in inflation are going to only bite the relatively young,
“The
generational divide behind the cost of living split
Paddy
Hoy sees the split in a simple way at his ski hire store.
When
the time comes to settle the bill for a family group's booking, he notices one
generation dominates.
"We
have grandparents coming and they're throwing their credit cards across our
counter," he said.”[4]
There is no doubt that our economic system is designed to tax the young to subsidize the rich.
No doubt. But why would the older generations be interested in changing
anything? They make big bank off the way things are now, and they will continue
to do so while they can.
So, knowing
this, my advice is prepare for a few rocky years ahead. The entry of the Boomers
retirement money into the market is going to cause quite a shock, and there is
a very slim chance that our government agencies are going to change strategy in
how they seek to address it. Add on top of this that government has a vested
interest in keeping inflation up, because then they can take in increased taxes
and claim to have grown the economy, so they will be motivated to continue to
increase immigration putting more downward pressure on your wages, and
increasing the price of housing even further. Don’t expect this to change
anytime soon.
So, I would
be making sure over the next little while to avoid more debt, and shedding
whatever debt you can. Now is not the time to buy the newer car, or extend the
housing loan to go to Bali, or Paris. Now is the time to get rid of as much debt as
possible, because they are going to make us younger people continue to
subsidize the lifestyle of the aged. Hence, interesting economic times are
ahead.
List of
References
[1] Invest
Smart, 2025, https://www.investsmart.com.au/investment-news/how-does-your-wealth-compare-to-the-average-aussie/154214
[3] Ibid.
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