The FINANCIAL — The global savings glut that inflated Western asset prices left many people feeling they could rely on lofty valuations so needn’t save so much. However, realising paper gains could prove a challenge when their baby boomers find their peers also trying to cash in.
Had the baby boomers invested in assets that boosted Western economic productivity there would be nothing to fear. That capital could compensate for a shrinking workforce, thus supporting GDP. The baby boomers would be selling their assets to a smaller, but highly productive and well-paid, cohort.
Unfortunately spending on research and development, and alongside it productivity, has been in decline for four decades. The real wages of the working generation are stagnant in much of the G10. The baby boomers didn’t save enough, their savings were misallocated, and technological progress has been slower than hoped.
So in coming years, younger generations may be unable to buy the assets at the inflated prices baby boomers are relying on to fund a comfortable retirement.
There will, however, be no shortage of savers in the emerging world. Indeed, there will be at least 330 million more peak savers in the emerging world by 2030 than today, about the same as all the developed world’s peak savers now.
But there are two problems in emerging countries’ savers bailing out the baby boomers. First, transferring ownership to ‘foreign’ investors may not help young workers in developing nations: with real wages held back, they may be unable to afford assets such as housing. Also, displeased with the older generation for ‘selling the family silver’, they may question the benefits of open borders and increase the political divide by voting for fringe parties.
Second, emerging savers may become less keen on Western assets. They flocked to the relative safety of developed-world assets because of deficiencies in their own legal, regulatory, and financial systems, but the lack of financial development is increasingly hindering their countries’ progress and creating headaches such as bubbles in property markets, one of the few assets available to them. Further, yields on G10 government bonds are now very low.
As emerging-market financial systems develop, savers there will be better able to capture the return from their economies higher productivity. As systems open up, we are likely to see a massive expansion in foreign portfolio investment. Increasingly we expect savers to look to their emerging neighbours. South-South financial trade looks set to explode.
Indeed, the West’s youngsters may also increasingly look East and South for a decent return on investment.
Without capital inflows from the emerging world to developed economies, the demographic headwinds present a major challenge for Western assets markets. As the pool of savings and investment opportunities shifts East, Western baby boomers may struggle to realise decent returns on domestic assets such as property, government bonds and domestic equities.
The inadequacy of past savings will be laid bare. Longer working lives thus appear inevitable and the twilight years may be less golden than hoped.
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