The generational wealth transfer is upon us, and it’s the largest one we’ve ever seen. Not only that, but the hedge fund billionaire Ray Dalio has identified why it’s great news for American households and terrible news for the federal government, and it likely has something to do with last week’s historic downgrade.
An estimated $73 trillion will be passed down from aging boomers to their heirs, many of whom are millennials. Such great wealth is in part the result of the government engineering a wealth transfer of its own, according to Bridgewater Associates founder Dalio, who posted a lengthy LinkedIn newsletter on Wednesday.
Over the past few years, the government has been moving wealth from the public sector (in the form of the central government and central bank) and government bondholders to the private sector (in the form of households and businesses), Dalio argues. “As a result of this coordinated government maneuver, the household sector’s balance sheets and income statements are in good shape, while the government’s are in bad shape,” Dalio wrote.
This transfer took place during the era of “free money” in 2020 and 2021 when interest rates were near zero and the Fed used a strategy called quantitative easing to try to boost consumer spending. This was an expensive strategy.
On Tuesday, Fitch shocked markets by downgrading the United States’ sovereign credit rating from a perfect score of AAA to the next rung, AA+, citing the government’s mounting debt and expected fiscal deterioration in the coming years as reasons for the downgrade. Fitch is the second of the three major credit-rating firms to remove their highest rating, along with S&P.
Although Dalio did not directly address the credit rating action, he sounded a similar tune. “Said more simply, central governments took on a lot more debt (so their balance sheets deteriorated), and central banks printed a lot more money (which caused inflation to rise) and bought a lot of the debt to get money into the hands of the private sector which, as a result, is now in relatively good shape financially,” Dalio wrote in his newsletter.
The greatest wealth transfer of all
The baby boomer generation was born between 1946 and 1964 during the birth rate spike following the end of World War II. Now, the youngest boomers are in their early sixties and the oldest are nearing their eighties. Their wealth comes from growth in the financial and housing markets since the early 1980s, when they were in their twenties and thirties, buying their first homes and making their first significant investments.
Since 1983, the average price of a U.S. house has risen nearly 500%, according to the Federal Reserve Bank of Saint Louis’ economic database. The stock market has also seen tremendous growth. The S&P 500 index has risen over 2,800% since the beginning of 1983, concurrent to the time index funds became a popular investment for middle-class Americans, the New York Times reported.
As this generation begins to die, the total estimated wealth transfer amounts to nearly $85 trillion—eclipsing any from the past. Boomers’ millennial children stand to gain the most—$73 trillion is projected to be passed down through 2045—and an additional $12 trillion will be donated to charities.
In comparison, the Greatest Generation, those born between 1900 and 1925 and who fought in World War II, handed down $16 trillion to their boomer children.
Although Dalio did not mention boomers specifically in his LinkedIn newsletter, he has previously discussed what he calls “a big squeeze,” meaning the benefits of loose fiscal policies of late are diminishing. Older households will feel the effect most profoundly as they leave the workforce and begin cashing in on retirement benefits like Social Security and Medicare. But many of these promises can’t be kept, Dalio has written for years, since at least 2016.
“Retirees expect that they will get the retirement and health care benefits that they were promised without working. So all of these people expect to get a huge amount of spending power without producing anything,” Dalio said during a speech at the Fed in October 2016. “At the same time, workers expect to get spending power that is equal in value to what they are giving. They all can’t be satisfied.”
In other words, Dalio’s recent newsletter argues that the government is increasingly taking the big squeeze onto itself. Just how much can the government shoulder? For now, Dalio says, it’s kept the economy in good shape, but his writing and Fitch’s downgrade raise the question of just how long that can last.
