DEMOGRAPHY IS DESTINY
By John Mauldin
dailyreckoning.com
As the American Baby Boomer generation approaches retirement, there are many problems we will face. We can predict that the average retirement age will rise, medical costs as a percentage of GDP will rise, lifestyles will not be what we expect, and there will be downward pressure on stocks as boomers sell assets to finance retirement, among other issues.
Today, however, we are going to look not at the U.S., but at the rest of the world. If we think of the U.S. problems as severe, then the facts suggest the rest of the developed world is facing a major crisis. Over the next few decades, we are going to see a shift in economic and political power that is simply staggering in its implications.
Martin Barnes and his crew at the Canadian-based Bank Credit Analyst have come up with some sobering conclusions on the subject:
"The population of the 'developed countries' will drop rapidly over the next 50 years, while those of undeveloped countries, especially Islamic countries, will rise dramatically. Germany will experience no population growth and remains at 80 million people, while Yemen grows from 18 million to over 84 million.
"Russia will drop from 145 million to slightly over 100 million. Iran grows from 66 million to 105 million. Japan drops to 109 million, while Iraq and Saudi Arabia grow to 110 million. Italy declines from 57 million to 45 million, while Afghanistan grows from 21 to 70 million."
These figures underscore a 100-page CIA report released in July 2001, entitled "Long-Term Global Demographic Trends: Reshaping the Geopolitical Landscape". The report determined that "dramatic population declines have created power vacuums that new ethnic groups exploit. Differential population growth rates between neighbors have historically altered conventional balances of power....Our allies in the industrialized world will face an unprecedented challenge of aging. Both Europe and Japan stand to lose global power and influence...
"The failure to adequately integrate large youth populations in the Middle East and Sub-Saharan Africa is likely to perpetuate the cycle of political instability, ethnic wars, revolutions and anti-regime activities that already affect many of these countries. Unemployed youth provide exceptional fodder for radical movements and terrorist organizations, particularly in the Middle East."
This 2001 report led the BCA to an interesting insight concerning the current situation in Iraq. "The cynical view is that the U.S. desire to attack Iraq is mainly about oil. That may be part of the agenda, but other long-term strategic considerations are probably at work.
"The growing number of young people in a number of unstable or troubled countries could work both ways. For example, there are signs that many young people in Iran want the country to move away from fundamentalism, toward a more relaxed regime. The rising power of youth can be a force for positive change as opposed to instability. However, there will be a huge challenge in bringing democracy to countries that have no history of it. This will be especially true if the global economy is struggling because poor demographics are undermining demand in the industrialized world."
The world economy is currently dominated by the U.S., Europe and Japan. These studies show that there will be little or no help from Europe and Japan with regard to world growth. The world is already far too U.S.-centric; everyone wants to sell to the U.S. consumer. Our international trade deficit, which in January was over $41 billion, simply cannot be sustained.
The BCA suggests that the Japanese government debt will grow to 300% of GDP in the coming decades. To put this into perspective, think of it as the equivalent of a $36 trillion dollar U.S. debt. Even with zero interest rates, this is a staggering sum.
The Japanese economy cannot handle such a deficit without turning on the printing press in a manner unprecedented for major countries. It is hard to imagine the dollar, as weak as it may be, dropping against such massive and mounting deficits financed by attempts at inflation.
Europe is already spending a very small percentage of its budget on defense. As one wag puts it, they will be faced with a choice: "guns, or rocking chairs?" With a declining population, they will be hard-pressed to find enough bodies to man their military as it currently exists.
Unless they unwind their pension promises, Europe will play a smaller role in the world of the future, notwithstanding the view from France. The role of Asia, especially China and India, will be far more significant in the future world of our children.
The problems outlined in the two studies suggest that turmoil is coming to the developed countries of Europe and to Japan. They cannot pay for their promises to retirees and still grow their economies; they will have to choose one or the other. If they choose higher taxes and fewer opportunities, the best of young Europe will vote with their feet, as did their ancestors in the 18th and 19th centuries. That will only make their situation worse. But can a majority retiring population vote to cut their benefits?
In short, for the world economy to grow, developing countries are going to have to look to themselves for growth. The aging developed countries will simply not continue to constitute the growth engine they have been for the last half of the last century.
For forward-looking investors, this means there will be real business growth opportunities in the emerging markets and those countries which can sell to them.
As the BCA noted, it is critical that the Iraqi experiment in democracy be successful for the future stability of the world. In 1945, there were many who thought it would be impossible for the regimented Japanese to establish a successful democracy. Today, we watch as China moves toward a capitalist economy and democracy. What stock market performed the best last year? It was Russia, who - not coincidentally - has some of the lowest tax rates.
Call me naïve, but I do not think the primary consideration for the Iraqi war was/is oil, American hegemony or establishing a democracy in Iraq. But I do think that the current U.S. administration intends to use the event to do its best to bring about a thriving Islamic democracy.
The Iraqi people are educated, entrepreneurial and business-oriented. Given the chance, I expect they may surprise many in the world with how fast they rebound. Given their explosive population growth rate, they could become an engine for growth in the region. If Bush is serious about helping Iraq, he should get rid of any and all trade barriers with the new regime and stand back and let the free market work.
Only a few years ago, we were fearful of the Chinese hordes and their army. They were the enemy. Today, our economies are so inextricably interwoven that it is in our best interest to work any problems out peacefully. We now depend upon each other. If we want to find peace with Iraq and the Arab world, we need to find ways to establish economic ties with them as well.
I hope this is a beginning. If it is not, the demographic issues I outlined above will have very negative consequences for us, our children and our grandchildren.
Best regards,
John Mauldin,
for the Daily Reckoning |
