[p2p-research] Guest Post: The OTHER Economic Crisis?

Sun Oct 11 21:21:34 CEST 2009

The demographic crisis...shocking.

Sent to you by Ryan via Google Reader: Guest Post: The OTHER Economic
Crisis? via naked capitalism by George Washington on 10/11/09

By George Washington of Washington’s Blog.

You know all about the subprime, alt-a, option arm, and commercial real
estate crises.

You’re well-aware of the house of cards built with credit default
swaps, securitized assets and other exotic investments.

You’ve heard about the massive debt overhang threatening individuals,
companies and the country as a whole, and the massive de-leveraging
which is still to occur.

You’re aware of the soaring unemployment rate, the tapped out consumer,
and many other economic problems.

But do you know about the demographic crisis?

What Demographic Crisis?

Franco Modigliani won the Nobel Prize in Economics 1985, partly for his
“life cycle hypothesis“, which states that spending and savings
patterns are predictable and largely a function of age demographics. In
other words, Modigliani’s hypothesis is basically that age demographics
largely determine the health and robustness of an economy.

Harry Dent and other financial advisors who have examined American
demographics say that we’re in big trouble.

Specifically, they say that the basic health of any country’s economy
is largely driven by the number of its citizens who are in their peak
spending years.

For example, the peak Japanese spending range has been estimated to be
comprised of 39-43 year olds. The more 39-43 year olds Japan has at any
given time, the more consumer spending there will be, as these are the
folks who are the big spenders in Japan. Dent argues that the Japanese
economy will tend to grow when the number of 39-43 year olds grows, and
to shrink when it shrinks.

Dent says that this principle applies to all countries, although the
peak spending years might vary slightly from country to country.

In the U.S., Dent says, 46-50 year olds are the biggest spenders,
because that is when – on average – they are paying for their kids’
college, paying mortgage on the biggest house they will own during
their life, and making other big-ticket purchases.

Claus Vogt agrees, saying that – all other things being equal – the
country with the youngest population will experience the biggest growth
in the future, as it will have the highest percentage of productive
people in the days ahead (Modigliani’s age categories are somewhat
different from Dent’s and Vogt’s, but – in general – people are having
children later than they were in 1985).

Whether or not you believe Modigliani , Dent and Vogt, it should be
obvious that countries with a large percentage of elderly people and a
small proportion of productive workers will have less productive output
and a larger demand for social services than those with a higher
percentage of workers. It should also be obvious that this will tend to
drag down the economy.

Which Countries Have the Most Favorable Demographics?

Which countries have the best demographics?

Let’s start by looking at the “age pyramid” for the United States. The
following 2 charts from the National Institutes of Health shows that
the population is aging:

This graphic (courtesy of Ed Stephan) shows the U.S. age pyramid from
from 1950 through 2050:
male female Population of the United States, by Age and Sex,
1950-2050 (millions) information source: International Data Base, U.S.
Census Bureau;
supplied pyramids were modified using Canvas, GraphicConverter and
GIFBuilder.
[If you can't see the dates at the bottom of the pyramid, click here].

As NIH notes:

The first of the postwar baby boom cohort, born 1946–1964, will turn 55
years in 2001. In just three decades, an extraordinary change in the
age structure of the United States is anticipated. By 2030, one in five
persons (20% of the U.S. population) will be aged 65 or older,
increasing from the present ratio of one in nine persons (12.8%). The
number of persons in the 65 and older age group will more than double,
increasing from the current 34 million persons to 70 million persons.
Moreover, within the older segment of the population, because of longer
life expectancy and additional persons reaching older ages, there will
be age shifts resulting in the 85 and older population more than
doubling in size from 4.3 million persons to approximately 8.9 million
persons.

An aging U.S. population means less productive workers, less
big-spending consumers, and more dependent elders.

Here’s China:

As Reuters points out, China will have an aging population in the
future, but not for some time:
China’s working-age population will peak in 2015 and plunge by 23
percent by 2050.

Brazil has a much younger age demographic.

And India’s is even younger than Brazil’s.

The following chart shows that Japan has the worst demographics of all,
with a staggering percentage of elderly who need to be taken care of by
the young:

Chart 2: Old Age Dependency Ratios for Selected Countries

Source: http://data.un.org/

And this chart shows that – as a whole – emerging markets have a higher
percentage of working age population:

Chart 3: Working-Age Population as % of Total Population

Source: http://data.un.org/

You can find some interesting charts showing age pyramids for
multi-country regions here. You can search for other countries or
regions, as well.

What Does It Mean?

What does all this mean?

Well, initially, it means that – in addition to everything else they
have going for them – 2 of the BRIC countries (Brazil and India) have
much more favorable demographics than the United States. So they are at
a competitive advantage to America for demographic reasons in addition
to the other reasons that people write about.

Indeed, as Richard Jackson told the White House Conference on Aging in
2005:

If demography is destiny, global leadership may pass to the “Third”
world…

Countries with slowly growing workforces may have slowly growing
economies…

We live in an era defined by many challenges, from global warming to
global terrorism.

None is as certain as global aging.

And none is likely to have such a large and enduring effect on the
shape of national economies and the world order.

Moreover, Dent and another of the main writers focusing on the economic
effect of age demographers – Daniel Arnold – say that America’s aging
demographics point to a major depression.

As Arnold writes:

2008 was the victim of a self inflicted sub-prime financial crisis.
This has nothing to do with the demographics based massive depression
that is yet to come, as described in the book. The sub-prime
consequences are however very similar though mild so far compared to
what is coming our way. The book clearly spelled out that along the way
unpredictable short-term (1 to 3 years) disruptive events could happen.
The sub-prime crisis is just that. It should be regarded as the “warmer
upper” or “hors d’oeuvre” for the big one that is now rapidly closing
in on us all.

I hope that he’s wrong.