Thomas Signer argues that we’re at the cusp of a profound disruption, driven by unprecedented demographic aging and the decoupling of money from the gold standard, both of which have fueled unprecedented levels of debt and asset accumulation. Signs are emerging that these trends may be reaching their peak, potentially culminating in major disruptions, he writes in his piece for finews.first.
finews.first is a forum for authors to comment on economic and financial topics.
Typically, when we think of «disruption», we imagine technological breakthroughs or natural events. Yet, disruption also arises naturally when feedback mechanisms are suppressed – when the forces of the market are interfered with. Suppressing these mechanisms builds tension, and the global capital markets have long been under such strain.
A minor trigger could destabilize this fragile environment, especially in developed countries, due to the interaction between two historical novelties.
«The second major shift occurred in the early 1970s»
The first of these novelties is the unprecedented aging of societies, which accelerated globally from the 1970s, with some exceptions in parts of Africa, Asia, and the Middle East. In many countries, the average age is now over forty, with Japan already nearing fifty.
The second major shift occurred in the early 1970s with the end of the Bretton Woods system. As societies began aging rapidly, the final indirect link between money and gold was severed, ushering in the era of fiat currency. This reintroduction of fiat money – a currency without intrinsic value anchored in physical goods – represents a remarkable shift in human history.
Historically, fiat money lost value quickly and was abandoned. But since the 1980s, thanks to declining inflation and interest rates, fiat money has held its value remarkably well. Much of this «miracle» can be attributed to rapid demographic aging, which has exerted a long-term disinflationary effect. Fiat money enabled massive money creation, leading to soaring debt and asset levels.
«The current state of the gold price alone suggests otherwise»
Since the 1987 crash, financial crises have occurred regularly, with each one poised to reduce debt and asset levels significantly. If left unchecked, these crises might have curbed risk appetite and leverage in the financial world. However, since the 1980s, governments and central banks have actively intervened to counter crises, utilizing the flexibility provided by fiat money to inject new capital, often «successfully».
Now, however, a vast disconnect exists between assets and income: asset prices, particularly stocks and real estate, have reached all-time highs, while GDP and incomes have stagnated. Soaring real estate prices have even accelerated demographic aging, as young people delay family plans due to unaffordable housing.
The growing wealth gap mirrors eras of feudal lords or robber barons, and it's unlikely that income will catch up with assets; rather, a «catch-down» of assets to income levels seems probable, potentially leading to significant disruption. It's doubtful that another financial crisis could be addressed with the same tried-and-true method of injecting newly minted money. The current state of the gold price alone suggests otherwise.
«What unfolds in Japan may eventually be mirrored elsewhere»
Japan appears to have reached a «point of no return». As one of the earliest aging societies, Japan serves as a case study for other nations facing similar paths. With increased volatility in its currency and stock markets, Japan is at a tipping point that hints at a potential paradigm shift. What unfolds in Japan may eventually be mirrored elsewhere, albeit with some delay.
The simultaneous aging of societies and the persistence of fiat money is historically unique. It would be naïve to expect that society as a whole is prepared to meet the challenges arising from changes in the interaction between aging and fiat money. A collective failure may be inevitable, but it is also understandable.
Nonetheless, there is hope for individuals and businesses. Resilience can be developed, and preparations can be made. At a personal level, it may be wise to shift focus from financial wealth to other forms of «wealth» – such as health and human capital, which support long-term employability.
Thomas Signer earned his MBA from Carnegie Mellon University in 1990. His career has taken him across Zurich, London, and New York with both Japanese and American investment banks. For the past two decades, he has worked independently as a financial consultant and teaches finance courses in the MBA program at SBS Swiss Business School in Zurich. His research focuses on the impact of demographic shifts on financial markets. Signer’s two books highlight the delayed parallels between the economic and financial market developments in Japan and the U.S., underscoring the central role of demographics.
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