Trump's reckless budget bill ignores a ticking population time-bomb. Here's how investors should prepare for it

Globe and Mail

a day ago

There is plenty that is big and nothing that is beautiful about the budget bill that made its way through Congress, with pressure bearing down from the White House.
Of course, the major plank is extending the 2017 income tax cuts, which were supposed to sunset at the end of this year — because without that pledge, the CBO budget scoring would never have allowed for its expiration. This is not 2017 when the fiscal deficit was running near US$600 billion. This is 2025, and the shortfall is around US$2 trillion. So, with all the bells and whistles (tax relief on tips and overtime? Really?), tinkering when it comes to spending restraint, making what was supposed to be a ten-year period of tax relief permanent (never mind that we can't afford it), this will ensure that large-scale deficits and debts will be with us as far as the eye can see.
It is regrettable that there is nothing in this not-so-beautiful bill that arrests the unprecedented buildup of federal debt, but only compounds the problem. Nobody seems to care.
Of course, there is no sign, despite all the horror stories out there about a foreign buyers' strike, that the Treasury has experienced much difficulty in having the supply bulges at bond auctions met with investor demand.
While fiscal policy actually only has a loose 20% correlation with the direction of bond yields, this is not insignificant and explains why Treasury yields are among the highest in the developed world.
President Donald Trump craves lower interest rates, but his own policies are frustrating that objective, even with an economy that has softened, and inflation that is in the process of receding again, even with the tariff backdrop.
My big concern stems from the old refrain from American economist Herbert Stein to the effect that anything that can't last forever by definition will not. There is a risk that at some point something will break — and perhaps the steep correction in the U.S. dollar is an early sign that some investors are losing faith in fiscal policy. That the dollar selloff can take hold as it has with the Fed keeping rates relatively elevated is something that deserves close attention.
There are three things we need to consider beyond that.
First, the current deficit and debt bulge, with no political resolve to arrest it, will severely constrain fiscal policymakers in the future, especially when it comes time to fight recessions.
Second, basic economic theory dictates that what ends up happening is not accelerating economic growth from all this buildup of government debt, but rather a 'crowding out' of business sector credit availability. This is why, outside of AI data centers, capex right now is in a fundamental downturn. There is only so much funding available in the capital market pie, and the public sector plans on siphoning off an increasing share of this financing at the expense of corporate borrowing and spending.
Third, and perhaps the most important point, the deficit and debt situation is becoming increasingly structural in nature as mounting interest expenses ensnare fiscal finances now and well into the future.
When I say structural, I mean the power of compound interest in this ever-growing mountain of debt.
Check out these numbers:
• Interest expense: $945 billion (that's $2.6 billion DAILY)
• Defense spending: $910 billion
• Medicare: $970 billion
• Social Security: $1.5 trillion
Interest costs now exceed defense spending. Think about that. The U.S. is paying more to service the massive accumulation of fiscal red ink than to defend the nation. Debt-service expenses are now closing in on Medicare. By 2034, interest expense is expected to hit $1.7 trillion, which is more than what we currently spend on Social Security. We have reached a stage where half the deficit is due to interest costs, and with the way politicians in Washington are dealing with this situation, all of the deficit within the next decade will come from servicing the debt.
Want to know what that does to the economy, financial market stability, and the currency? Go and check out what happened to Canada in the late 1980s and early 1990s. An important history lesson for the uninformed and uninitiated, of which there is no shortage in Washington today.
My disappointment is profound.
The cries out of the White House that the economy will fall off a cliff because of what is labelled an 'historic tax hike' are absurd when you consider that all that would happen was what was supposed to happen back in 2017, which was a sunsetting of what was intended to be a ten-year tax cut, not a permanent tax cut.
The only thing that is permanent in Washington, no matter who is President, is spending. It is incredible that we are seeing deficits around $2 trillion even though government revenues, courtesy of the expanding economy, have surged +43% from where they were pre-COVID-19. The shame comes from the fact that even with the COVID-19 crisis long gone, the level of government expenditure is more than +50% higher today than it was before the pandemic hit.
So, while the budget bill certainly is BIG when it comes to spending, tinkering at the edges, it is not at all beautiful when it comes to exacerbating what is clearly an unsustainable fiscal path.
For all the concern about allowing the 2017 tax relief act to expire, I ask — why not just take tax rates to zero and see what happens when the deficit tops US$7 trillion?
Mr. President, you want to extend the tax cuts? Then realign program spending to be able to pay for the relief instead of blowing out fiscal finances even more than is the case. You cannot indefinitely borrow yourself into prosperity — even in the real estate business.
Finally, there is the demographic debt trap that nobody talks about. Let me paint you a picture with cold, hard data.
Population growth has decelerated to below +0.6% YoY now that the immigration curbs are in place, and that is half the historical norm (and about half the pace of a year ago). This is happening at a time when natural population flows have slowed to a trickle, with the birth rate collapsing by more than 20% in the past two decades and fertility rates at record lows. Within the next decade, deaths are expected to exceed births as we follow in the footsteps of Japan — it is 20 years ahead on the demographic curve. The U.S. is following the exact same path, just two decades behind. This isn't cyclical — it's secular. And unlike every other post-war slowdown, the Fed can't print babies.
As the White House is consumed with the 'fiscal cliff,' what they omit is the 'demographic cliff' that lies around the bend. They price in a goldilocks scenario while ignoring the most profound structural headwind since the 1930s. The demographic cliff we are approaching isn't priced into equities, credit spreads, or Treasury yields. The body politic is in classic denial.
Here's what really keeps me up at night: nobody in Washington has the courage to address this. Social Security needs near-immediate 23% benefit cuts or 31% tax increases for solvency. Medicare? Don't get me started. But what did we see during last year's election campaign? Trump says 'hands off' on any changes to 'entitlement' spending.
The political class won't touch this until markets force their hand. When that happens — and it will — the adjustment will be brutal. Think Greece, not gradual reform.
Consider the following data:
• 65+ population: 63 million today, 76 million by 2035
• Median age: 38.5 today; it was 30 in 1980, 35 in 2000, and is set to reach 43 by 2050
• Prime-age workers (25-54): Shrinking as percentage of the population every year starting in 2035. As we saw in Japan, we can foresee a federal debt-to-GDP ratio in the triple digits at a time of rising dependency ratios and a massive volume of contingent liabilities as the retiree wave now underway gathers serious momentum.
This promises a future of deflation/disinflation, financial instability, rising personal savings rates and attendant sluggish economic growth, depressed rates of return on capital, and lower — not higher — interest rates.
Yes, the White House will end up with the lower interest rates it seeks, but not for the reasons it is anticipating.
I have been pounding the table on debt dynamics for two decades, but what's about to unfold in the future makes the present look like a dress rehearsal. It isn't just a future of slowing population growth, but one where the pace within the working-age cohort will soften the most. In the next decade, we are destined to see the average annual growth1 in the 25-54 breadwinner age category ease to just +0.6%. But the 65+ group is expected to expand by nearly +2.0%, and by more than +3.5% for the 75+ age cohort. By 2035, the number of people aged 25 to 54 will rise by 8 million (131 million to 139 million), but the 65-and-older category will surge by 13 million (to 76 million from 63 million). At that time, there will only be 1.8 people in the prime working-age labor force to support every retiree, from over 2.0 currently.
How will that exactly work when it comes to funding Social Security under its current structure? Never mind that the expected life expectancy when 'entitlements' were created by FDR in the 1930s was 60 years of age, not 80 and rising as is the case now. What is long forgotten here, as this deficit and debt infrastructure gets further built up in this Big, Beautiful Bill is that the median age of the U.S. population is now nearly 40!
More than half the population is 40 or older! In 1970, it was 28. In 1980, it was 30. In 2020, it was 38. Like I said — we are turning Japanese.
Meanwhile, what this means for the debt-to-GDP ratio is that the denominator is going to stagnate while the numerator explodes. When your workforce stagnates while your retiree population explodes to the upside, the arithmetic becomes terminal.
Shouldn't that at least be a footnote in this budget bill?
Isn't it a crime to keep the truth from the general public who don't have access to the data like I do? Book 'em, Danno!
Meanwhile, the consensus and the Fed continue to fret about inflation. They're looking backward, not forward. Japan's been teaching this lesson for three decades, but nobody's paying attention. Aging populations don't generate inflation — they generate deflation, savings gluts, and secular stagnation. Excessive debts only compound the situation. And what we know about the aging process is this: older populations save more, spend less, and take fewer risks. They shift from stocks to bonds, from growth to income, from consumption to preservation.
This isn't theory — it's behavioral reality backed by decades of data. An aging population guarantees continued velocity decline. You can't generate sustainable inflation when money doesn't circulate.
I said above that fiscal trends have a 20% correlation to bond yields, and if that is all that entered the bond-yield equation, the 10-year T-note rate would be north of 6.0% right now. But you can't run a bond model with a single-variable regression — there are demographics, inflation, nominal GDP growth, the shifts in the output gap, and unit labour costs that must be considered. This is why the 10-year Treasury yield is range-bound around 4.5%. And a key reason is this secular shift towards aging demographics. And in the future, demographics will swamp everything else.
Bond demand from aging boomers will overwhelm supply concerns. By 2030, the 60+ cohort will hold $35 trillion in financial assets, and they'll systematically rotate from risk assets to fixed income.
This creates a natural ceiling on yields despite fiscal deterioration.
Position for:
• Secular disinflation
• Compressed multiples
• Yield scarcity
• Fiscal crises
Sector Implications:
• Bond with bonds: Overweight high-quality bonds. Duration is your friend when yields grind lower.
• Health Care everything: REITs, pharma, devices, services. Health Care isn't just a defensive play — it's THE growth story in a no-growth world. Americans 85+ spend $35,000 annually on health care versus $9,000 for the under-65 cohort. Do the math on 85+ population doubling by 2040. Health Care REITs sport 92% occupancy and +3.5% rent growth. Compare that to office REITs hemorrhaging tenants.
• Dividend aristocrats: Aging investors crave yield.
• Gold: Currency debasement hedge as fiscal situation deteriorates.
• International diversification: Find demographics that are vibrant (India, Latin America).
Conversely, avoid:
• Consumer Discretionary (retirees don't buy BMWs)
• Homebuilders (household formation plummets)
• Traditional Retail (Amazon + aging = death spiral)
• Regional Banks (no loan growth in a no-growth world)
This isn't doom and gloom — it's math. And it hasn't yet dawned on the political class. The demographic die is cast. Those who position accordingly will preserve capital. Those who don't will learn why demographics dominate — including monetary policy, fiscal stimulus, and deregulation.
That is why the term 'destiny' is only used with 'demographics' in mind. The boomers had their day. That day is ending. Position accordingly. In other words, invest conservatively and thematically.
David Rosenberg is founder of Rosenberg Research.