The answer has two aspects: impact and timing.In the last Daily Reckoning Australia, we discussed why the human race was dying out. At this point, you may be asking yourself the following: Fine; we understand that demographics are important, and declining birth rates may be a big deal. But what does this have to do with markets and investing? Even if there’s some long-term impact, it won’t affect what I’m investing in right now. Why should I care?
Demographics are not just one of many factors affecting markets. Demographics are the dominant factor, by a wide margin.
We can all list the factors that affect market prices. These include interest rates, exchange rates, inflation, deflation, central bank policy rates, supply chains, geopolitics, consumer expectations, and many more. We cover these and other important economic factors in The Daily Reckoning Australia on a continuing basis.
Still, none of these are as important as demographics because demographics are about people, and economies are nothing more than the sum total of the actions of individuals in those economies.
How demographics shift GDP
We can begin to see the impact of demographics by using the basic definitions of GDP. The most familiar expression is C + I + G + (X – M) = GDP. In this identity, C is consumption, I is investment, G is government spending, and (X – M) is exports minus imports. These inputs add up to GDP.
But there’s an even simpler way to think about GDP. You can look at
L * h = GDP. In this equation, L is labour productivity, h is the total hours worked. You just ask how many hours were worked and how productive each hour was. You multiply hours by productivity and the result is total output or GDP.
Now, consider the impact of demographics. If a population is shrinking on the one hand and aging on the other, it’s axiomatic that fewer hours will be worked and each hour will be less productive on average because considerable effort will be devoted to the care of the aged, which does not lend itself to productivity gains.
Giving a dementia patient a bath is a worthy occupation, but bathing has not changed much in 7,000 years of civilisation. The last productivity gains in bathing were the introduction of indoor plumbing and hot water between 1870 and 1930.
The demographics of smaller populations and aging mean slower growth in GDP and ultimately even declining GDP. That’s a world-historic shock for nations, markets, and investors. It hasn’t happened on a large scale since the Thirty Years’ War (1616–48) and before that, The Black Death (1350s). This comes at a time when debt levels are at all-time highs. Investors are not ready for this.
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The demographic time bomb has already detonated
The second analytical mistake is to believe that this demographic crack-up is 30 or 40 years in the future. Perhaps you’re convinced you won’t live that long, or you and your heirs will be rich before the worst effects are felt.
Yes, the demographic disaster will play out over 30, 40, and even 100 years. But the impact is already here.
Japan is the canary in the coal mine. Japan has had multiple recessions and no sustained growth for over 30 years. This modern depression coincides with the fact that Japan has the oldest society of any major economy. The median age in Japan today is 48.6 years. (Today’s median age in the US is 38.5 and in China it is 38.4.)
Those numbers will get worse rapidly. In 2050, the Japanese median will be 53 years. China will be 50 years, and the US will be 42 years. Old age is highly correlated with Alzheimer’s disease, Parkinson’s disease, and dementia. Japan is already an aging, slow-growth society. The rest of the world will soon be like Japan. The demographic time bomb has already detonated.
The meaning of life
Any discussion of demographics inevitably involves a list of hot button issues touching on morality, ethics, and religion. These issues include abortion generally, sex-selective abortions, contraception, sex education, forced sterilisation, female infanticide, arranged marriages, dowries, women’s emancipation, marriage age, immigration (legal and illegal), and many other behaviours based on culture, religion, and science.
Our purpose is not to delve into the pros and cons of these issues. Everyone has their opinions; we have ours. Our role is not to describe the world as it should be, but to describe the world as it is. We’ll leave it to priests, rabbis, and moral philosophers to discern whether these practices are good, bad, or neutral. We will discuss them objectively for the purpose of assessing their impact on demographics and therefore their impact on the real economy.
A sneak peek at what’s to come…
In the coming editions of The Daily Reckoning Australia, we will look at the specific forces driving the demographic earthquake. Then we will assess the current demographic trends in developing economies and developed economies.
Those expecting sub-Sahara Africa to make up for low birth rates in the developed world may be disappointed to find that African birth rates are dropping sharply and may soon be as low as those in North America and Western Europe.
Next, we’ll focus on the two largest populations in the world — China and India. Together, these two countries have a population of about 2.8 billion people out of a total world population of about 7.9 billion people. In other words, China and India have 35% of all the people on the planet. As they go, so goes the world population.
Contrary to popular perception, China’s population is collapsing, and India will not grow as fast as many expect and may soon begin its own steep decline.
Then we’ll wrap up the demographic overview with a detailed discussion of the economic impact of the population decline and offer specific recommendations for portfolio construction and asset allocation today, to prepare for the slow growth and higher inflation to come.
Stay tuned.
Regards,
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Jim Rickards,
Strategist, The Daily Reckoning Australia
PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.
