What Trump Will Inherit

An analysis of the forces that will shape the next 4 years regardless of Trump.

For all the importance placed on the power of the President to shape the future of the country, there are always macroeconomic trends that are indifferent to who leads the US Government. These trends often begin generations before an administration takes power, and today the most significant are the global demographic crisis, and the maturation of digital computing technology. These are seismic shifts that were always going to come to fruition on the watch of whoever won the 2024 election. To effectively respond to these shifts would have required a President willing to go so radically against the political grain that they would have been pilloried by their own party, and their agenda stopped cold. Over the next 4 years, these trends will fuel 4 major, interrelated crises: the labor shortage, the global capital crunch, a tech sector crash, and the crash in the real-estate market. Trump will try to blunt all of these, and he will fail just as Harris would have failed.

The Labor Shortage

The most immediate crisis the United States is facing in the 2020s is the labor shortage, which is the result of the mass retirement of the baby boomers. We got our first taste of that in 2020, 3.2 million more Boomers retired than had been expected in addition to the million Americans who died during the pandemic. This disproportionately impacted trade-skill jobs like meat packers, longshoremen, machinist and truck drivers; jobs that Millennials and Gen-Z were in effect discouraged from seeking during their adolescence. Fewer workers with a smaller labor pool means interruptions in supply chain which translates to higher prices, and that's before you factor in price gouging. The peak of this first wave was felt in 2022 when the economy faced a shortfall of 2–3.5 million workers according to the Federal Reserve. This is by no means unique to the United States, as every advanced economy is facing similar pains. Japan has by far the highest age dependency ratio with 69.05% of the population being dependents — people <15 or >64 , followed by France and the United States at 62.37% and 57.06% respectively. In short: We don’t have enough people to fill the jobs being left by all the retirees, OR being created by the growing demand for services specific to the elderly.

As hard as it is to believe, the supply chain interruptions and inflation caused by the labor shortage starting in 2021 was only a foreshock of the coming crisis. The initial shortage of workers has been mitigated over the last 4 years by the injection of immigrant labor into the US via a surge in refugees from Latin America and Ukraine, but even if those immigrants weren't under threat of Trump's deportations, the labor shortage will get much worse over the next 4 years. Most estimates put peak retirement around 2025, and annual retirement from 2024 to 2027 rising to 4.1 million people per year up from around 2 million in 2022. With nearly half the Boomer cohort having already left the workforce while continuing to consume much as they did before retirement, this will create severe supply chain interruptions and fierce competition for labor across every industry. This all means we need to keep replacing Boomers who retire with new labor, AND ever more labor to meet their unique post-retirement needs, stretching the country's long term care and healthcare workforce dangerously thin.

Right now, nobody in power is even acknowledging the reality of situation, much less proposing a viable solution. Businesses are either competing for labor by waging wages, or trying to show temporary growth with layoffs in an attempt to hire back the same staff at lower salaries. In government, liberals have proposed minimum wage increases and stimulus programs, while conservatives are attacking the welfare state and proposing tax cuts, with both having the goal of getting more people to voluntarily join the labor pool and increase economic growth encouraging investment. None of this has worked, and none of it will work going forward, because fundamentally the problem remains that there aren't enough warm bodies to bring into the labor pool to offset the boomers. Politicians will publicly deny the problem even exist for at least a few more years, but the Democrats already hit upon a solution that they refuse to take credit for: creating easier paths to entry for illegal immigrants. This was made easier by the surge in global refugees fleeing violence in Latin America and Ukraine. Of course, Republicans vehemently oppose this policy, and the incoming Trump administration now seeks to reverse it, and even go beyond reversing it by expelling not only recent refugees/immigrants, but also the 11.7 million undocumented who've been here for years. Trump has even suggested a process of "denaturalizing" people who've already gone through the legal process to become US citizens, and even depriving the children of immigrants citizenship despite the birthright citizenship clause of the 14th Amendment.

Without a doubt, the most disastrous thing Trump can do to the US economy is to reduce the size and flexibility of the American labor pool, and that is precisely what his anti-immigrant stance is going to do. Those people who crossed the border illegally over the last 4 years were absolutely essential to mitigating (but not stopping) the labor shortage. If even a fraction of them are deported, we're looking at inflation spiking in 2025 and 2026. But even if Trump failed completely, and not one person who immigrated to the US was deported, he'd still inherit a shrinking labor pool, and in turn rapidly rising inflation. Trump is trapped, and ironically his only hope to avoid total disaster would be for an embarrassing defeat of his domestic agenda in Congress and in the courts.

Global Capital Crunch

When there aren’t enough workers to meet demand, wages go up, but so does the price of everything from food to fuel. Since the 1980s, raising interest rates has been the standard practice for lowering inflation, and before the pandemic that strategy worked. But here’s the rub: retirees don’t invest, they divest, transferring property and stocks into T-Bills and the like so they can live off the equity. Baby boomers control the overwhelming majority of the world’s investor capital, which means higher interest rates are affecting only a draining pool of investors. In addition, the global economy has gotten addicted to cheap capital and now they literally can't survive without it. For 15 years the United States has had interest rates at or near 0%, meaning cheap credit, aka cheap debt. This has led to a lot of companies borrowing money ad-infanitum and now they face interest payments that exceed their annual revenue. Twitter/X is the most well known example, but even more traditional companies like American Airlines face this crisis.

For those of you who lived through the Crash of 08' the end of a source of cheap credit should be making you break out in a cold sweat… but its actually much worse than 2008. Higher interest rates aren’t going to go anywhere, because they’re the only thing keeping inflation tolerable. But inflation will keep getting worse anyway because of the labor shortage. That means EVERYTHING will get more expensive, because labor will become more expensive while productivity continues to decline from a lack of capital to make regular improvements to existing businesses. We are now in the death spiral of Reaganomics; the entire economic model of the last 43 years is not built to handle a world in without easy credit. For individuals this makes the housing market even worse because interest rates that high make paying a mortgage all but a fantasy, makes the price of basic necessities an ever increasing burden, and eats away at your savings. Trump has no plan to deal with this problem beyond tax cuts, and attempting to eliminate the independence of the Fed, and even if these weren't in pursuit of his personal enrichment, they're too little too late to stop what comes next.

Tech Sector Crash

The tech sector is arguably the most vulnerable to the global capital crunch because it was essentially born as a result of cheap credit in the 1980s. Cheap capital made it possible for companies to startup and offer cheap, often advertiser-based services, and after 16 years of near-zero interest rates, some of the biggest players in tech got to their position in the market despite losing money year after year. Take Twitter as an example: Twitter’s impending death while partly a result of Musk’s own incompetence, was all but guaranteed when interest rates started climbing. From 2010 to 2021, twitter was only ever profitable for 2 years (2018 and 2019). The company dominated the market not because of profit, but because of perceived growth due to its user-base. That growth allowed Twitter to get investors to back successive funding round with the goal of buying more server space, which allowed them to offer more and better services, attracting more users, all in the hope of becoming profitable, but really just to grow their valuation. NOBODY could have made twitter profitable because they would have had to borrow money at the same high interest rates Musk had to borrow at, and somehow turn a profit on a website who’s whole appeal is that its available for free for everyone with a tolerable amount of adds. Its a Capital Catch 22: tech companies need money to show growth, but they have to turn a much higher profit to pay back the interests/attract investors, but the increased fees or ads will turn away users which will show negative growth. Musk has tried to solve this by eliminating content moderation to attract new users while laying off staff to cut costs, but that's just made the user experience that much worse, causing an exodus of users to rivals like Blue Sky. While that is temporarily a relief to social media users, eventually Blue Sky's user base will grow to the point where they'll be in the exact same position as Twitter. This is the beginning of the end of the tech sector, and indeed the internet as we know it, and very few companies are going to survive.

I've written before about how Technology operates in cycles, and we are currently living at the end of the cycle for digital computing, setting the stage for a "malaise era" for the tech sector. But a malaise era typically is proceeded by an era of solutionism; products and services that nobody actually wants that are pushed out by companies and investors to try and invent an ROI similar to what they had a decade ago. In the 1970s that was high displacement engines and ventures like Concord. Today its VR, Crypto, and AI. Now when I say "AI" I mean Large Language Models (LLMs), sometimes called Generative AI because it generates images, text, videos, etc. using huge datasets of similar information. While technically impressive, LLMs require enormous amounts of data to make improvements to their models, and this requires a massive amount of server space, nearly 1-2% of global electricity according to the International Energy Agency (IEA), potentially doubling by 2026. This is what most of the capital invested into the AI bubble has gone towards, all the while the industry has failed to find a viable source of revenue.

The AI Bubble will burst, probably inside of the next year or so. There isn't enough data to train LLMs to make substantive improvements on new models, even without the problem of AI feedback loops where AI trains itself on its own imperfect generated content. This problem will become apparent as more AI companies delay the release of their next generation of software, or release models with only minor improvements to the disappointment of consumers, which will lead to investors finally learning about an AI Winter. Investors will dump stock in AI companies trying to profit while valuations are still inflated, and eventually will just be trying to recover a fraction of the truly absurd amount of money they put in. Losses will pile up, and panic will set in, leading to companies dumping other assets that were only ever kept afloat by overinvestment like VR, Crypto, before eventually reaching more mainstream tech companies. The timing of the panic, along with the specific rather than systemic cause, are all but impossible to predict, but given the scale of overinvestment across an entire industry, it will likely be a series of "Black Days" rather than one big one. Crypto may limp along because of Trump's support for that scheme, and enterprise-level AIs might cause temporary balloons to investor confidence, but ultimately there's just too much bad money out there in the face of a financial system that is only going to get more constrained over the next few years. The end of result of which will be...

Housing Market Crash

As the tech sector struggles, and investors dump toxic asset, eventually they'll look to what will be seen as their most solid investments to recover losses: real-estate. Real-estate at the moment looks like one of the most secure markets in the United States. Nationwide housing prices are at record highs, and while defaults are rising, they've not even returned to pre-COVID levels which were holding at or near the 12 year low of around 2%. The US Housing market as a whole is at a record $49.6 trillion, more than 3x the entire global tech sector, with demand so strong builders can't keep up. All of this sounds great, except it has an Achilles heel: the retirement of the baby boomers. On top of constraining the work force and driving up inflation, which will only drive down the US savings rate and increase personal debt, the boomers have their financial futures largely invested in their homes. Retirees typically sell off homes to live off the equity and eliminate the burden of a mortgage, which they'll be motivated to do in an environment of historically high housing prices and apparently bottomless demand. Except Boomers are the victims of their own success: 50% of all household wealth is concentrated in their hands, and they're just 20% of the U.S. Population. In other words Millennials and Zoomers won't have enough money to buy a flood of expensive houses sold by new retirees. Prices will fall, and the financial sector will go into a tailspin.

This won't be like the Crash of 2008 where the crisis is ultimately based on a string of shady financial schemes, its the crash in a market that a generation of people will have invested their entire lives into. The equity millions of baby boomers expected to live on will be wiped out, and while some truly ghoulish economists will predict that the crash is actually good for the market because it will mean a deflationary period and will motivate more people to return to the workforce, the problem will come back to a lack of warm bodies. Yes, younger boomers will delay retirement, and there will be some deflation from the crash in housing prices, but even if home prices fall there won't be the swell in buyers that typically follows such a crisis. The savings rate prior to the crisis will be at record lows, as will personal debt, which will contribute to a Non-Performing Loan crisis which when combined with rising interest rates will make credit a fantasy for most people. We're looking at the final chapter of supply-side economics, and I suppose its fitting that it will come to an end under perhaps its most iconic mascot.

To respond effectively to them would require Trump to take an unprecedented level of intervention in the US economy, and as difficult as it is to see Trump shifting course to that degree, its even more difficult to imagine Congressional Republicans backing such a shift either. Any one of these crises would be enough to sink any party's odds in the following election, even if they didn't actually do anything that contributed to them. Trump's policies will make them all hurt that much worse for ordinary people. The backlash will cost his party dearly, but we'll get into all of that more in a later entry.

Click here to read Part I.