This time is different.
We’ve all heard that before. And it’s been true. Every unfortunate time.
Yes, every crisis is different. Different consequences. Different opportunities. Were this not the case, we’d have worked it out and done away with crises altogether. Happily ever after.
But the thing is, this time is really different.
While we were inevitably bound to the road ahead, events have put the foot to the pedal. And the horizon is now in sight.
At risk of sounding dramatic, that means a plan for financial independence is now more important than ever.
What Is Financial Independence?
But before I explain why, let us recap on what’s meant by financial independence.
In short, financial independence is a financial state where you generate enough income to cover your living expenses without having to be employed or dependant on others.
A state of financial independence provides security and comfort. It provides possibilities and choices in our careers and personal lives. It provides the financial confidence and luxury to reject the unfulfilling and embrace the fulfilling.
I needn’t oversell this. I’m sure you’ll agree this is a worthy goal for all, regardless of how unattainable it might first appear.
And as I’ll explain, it’s now a goal that matters more than ever.
Why This Time Is Different
There are three main reasons why this time is different:
- The technological landscape: new technologies threaten our employment in historically unique ways.
- The demographic landscape: ageing populations elevate the risks of relying on the state for financial support.
- The monetary landscape: the stability of fiat currencies is under unprecedented pressure.
Each of these areas poses unique threats and opportunities for our financial well-being. And a strategy for financial independence is the ultimate defence and attack.
Let’s look at each of them in a little more detail.
#1: The Technological Landscape: Don’t Depend on Employment
Throughout human history, in some form or another, human beings have feared the impact of technological advancement on jobs. The Luddites feared the rise of textiles technology. Lamplighters feared the rise of the lightbulb. Horse-drawn carriage builders feared the rise of the automobile.
So pervasive is this anxiety of technology throughout history, academics have even given it a name: “automation anxiety”.
And yet, each and every time we’ve confronted automation anxiety, the economy has adjusted. Technological unemployment has proved temporary. Alternative, labour-intensive industries have emerged from the fruits of automation.
The question, then, is why would this time be any different?
A combination of robotisation and artificial intelligence will no doubt create new employment opportunities. Human-machine collaborations will be a vital feature of the new economic age. But these new opportunities might not offset or outshoot to the degree some expect.
One distinct difference is the emerging cognitive capability of new technologies. Machines that can learn, adjust, and predict will be capable of supplanting some of our roles as paid thinking agent. Processes historically considered immune to automation – areas like medicine, education, and a wide range of knowledge work – will be exposed to the possibility of at least partial automation.
Jobs lost might therefore outshoot jobs created. And even if that weren’t the case, we might expect to be out of pocket in real terms. In fact, as Martin Ford argues in The Rise of the Robots, we’re already seeing some of the initial economic consequences on wages play out.
In most developed economies, wage share has declined as a percentage of national income since the 1980s, breaking the standard economic view that this remains constant over time (known as Bowley’s law). Meanwhile, while productivity has increased across most developed economies in the world, real wages have stagnated.
This all points to two important conclusions. First, as ever, it pays to be prepared to be unemployed for a while. Technology isn’t going to displace our cognitive role in work tomorrow. But it certainly will put a severe dent in it over the next few decades. While many of us will reskill and win from this trend, many of us won’t.
There is no room for complacency here. We should remain optimistic, but we must protect ourselves from the risks of unemployment, now more than ever.
Developing new skills and scarcity power in our careers is essential, of course. But better still, the surest long-run protection is financial independence.
The second important conclusion hides in plain sight in the economic data. It’s this: owners and investors win.
In so far as possible, we need to own our slice of the cake. Relying on suppressed real wages over the long run, without investing some of those earnings, is a losing battle.
And as we’ll turn to now, relying on the state for your future income is a losing battle, too.
#2: The Demographic Landscape: Don’t Depend on the State
Developed economies are getting older. That’s well documented. But the potential impact of this reality on our futures isn’t yet as widely discussed as it should be.
Let’s start by putting the scale of this challenge into perspective.
The percentage of our populations aged over 65 has been steadily increasing across the developed world. In the graph below, you can see from a few examples just how significant this increase has been over the last 60 years.
Take the European Union. In 1960, around 10% of the population was aged 65 or older. In 2018, that figure was 20%. This trend is expected to become even more pronounced from 2021 when Europe’s population is forecast to start shrinking. By 2035, one in four people in Europe is expected to be aged over 65.
While Europe leads the way in these statistics, it’s a similar story across the developed world. Increased longevity and reduced fertility rates are shifting the dial.
The fertility rate in the United States, for example, has dropped from 3.6 children per woman to now around 1.7 children per woman. A mixture of growing job uncertainty delaying the decision to have children, sexual education and contraception, and the equalisation of opportunities for women in the workplace are expected to perpetuate the steady decrease.
Now, don’t get me wrong, there is much to celebrate in these statistics. Our improving longevity and workplace equality are great achievements. But the shifting demographics present an enormous fiscal challenge.
Given that our working age population is decreasing (see below), the question is how will we fund pensions and healthcare for an increasingly old population?
The first obvious option is to focus on the state pension. Governments could reduce state pension provisions, either by increasing the pension age further or by reducing payments. The former is inevitable. In the UK, the state pension age is expected to reach 68 between 2037 and 2039. But we should expect that to go much higher across the developed world.
The second option is to simply borrow more. Whilst we’ve seen unprecedented borrowing during the COVID-19 pandemic, we’ve also seen exceptionally low interest rates. But this won’t last forever. Widening deficits might be a solution to a short-term crisis, but they are not a sustainable solution to a long-term demographic challenge.
A third option is to increase the tax liability. Again, this is a likely lever of choice. But if you subscribe to the Laffer curve logic, it could actually make things worse.
A fourth option is to focus on growing the working age population. Encouraging mass immigration would be politically unpalatable but a possible near-term solution. More realistically, governments might focus on cranking up the fertility rate by incentivising parents to have more children.
Hopefully you get the picture by now. This is a highly complex problem. And if our recent crisis has proven anything, it’s that the state isn’t great at finding solutions to complex problems.
Bottom line: our demographic timebomb screams it. Don’t depend on the state. We must make provisions for our futures by working towards financial independence.
And as we’ll move to now, we must do so with an eye on the unique state of our currencies across the world.
#3: The Monetary Landscape: Don’t Depend on Cash
About 20 percent of the US dollars in existence were created in 2020. Nearly $3.5 trillion. Let that sink in for a moment.
Quite remarkable, unprecedented, and not limited to the United States. With limited runway left on interest rates, central banks across the developed world have turned up the dial on “quantitative easing”, digitally creating money from thin air to encourage spending.
Central banks can perform this act of black magic because most of our currencies are “fiat currencies”. That means they are not backed by a commodity like gold and instead rely on the confidence of currency exchangers to determine its value.
Now, it’s fair to say that there is widespread debate about the effect of these policies. Some believe it will be the hyperinflationary death of fiat currencies as we know them, pointing to Zimbabwe and Venezuela as examples of the brutal consequences of printing money.
Others suggest it will not be inflationary because there is higher degree of confidence in these mainstream currencies. They point to an absence of hyperinflation following quantitative easing during the 2008 financial crisis as evidence of this point.
In the medium term, however, it’s sensible to conclude that this will be inflationary. Why? Because while it’s a simplification, when a currency becomes less scarce it becomes less valuable. In turn, non-cash assets denoted in that currency go up in value, all other things being equal.
But there is a second important difference this time around: the emergence of digital alternatives. As confidence in cryptocurrencies grows, confidence in fiat currencies continues to fade. Whether it’s led by Bitcoin or an emerging national cryptocurrency, this is a unique and legitimate threat to central banking as we know it.
Once more, of course, you know the punchline. The best way to protect ourselves in this dynamic monetary landscape is through a strategy for financial independence. By regularly investing in a diversified portfolio of non-cash assets (while keeping an emergency fund of cash) we can own inflation rather than let inflation own us.
We’ve covered a lot here, so let’s recap on the salient messages.
#1: Financial independence is more important than ever. While it has always been a worthy pursuit, we face a unique blend of trends that make a strategy for financial independence more important than ever.
#2: We must be prepared for both the opportunities and risks of technological change. A financial independence strategy reduces our dependence on our employer and provides protection in the face of technological unemployment. It also allows us to own our own slice of the profits.
#3: Do not rely on the state for your future income. Our ageing populations point to a reduced state pension provision in the future. We cannot afford to rely on the state to cover our costs of retirement.
#4: Protect your wealth from inflation. Unprecedented monetary policy points to an inflationary environment in future years. We’d be wise to invest in a diversified portfolio of non-cash assets to protect our wealth.
While we’ve focused predominantly on the threats some of these changes pose, there is every reason to be optimistic. By taking the right decisions now, we can mitigate some of the emerging threats and capitalise on the opportunities these changes will bring.
For the pragmatic, a world of opportunity awaits.
So aim high. Aim not to depend on your employer. Aim not to depend on the state. And aim not to depend on your cash.
Aim, in other words, to be financially independent.