No man is an island, especially in the markets. Our consumption basket includes
the efforts of hundreds of millions of people around the world, and our right
to consume depends on our ability to sell to hundreds of millions of people
around the world. During the present century the number of adults in affluent
and productive countries will shrink by about a third. All of us will be
poorer.
There will be a third fewer people earnings profits for businesses, paying
taxes to governments, buying homes or cars, or taking vacations. Starting
around 2015 the adult population will start to decline at about 2% a year.
Productivity in the industrial nations (output per worker) has grown at
slightly more than 2% since 2000, according to The Conference Board, [1] so a
2% decline in working-age population suggests that output will remain more or
less flat indefinitely in the developed countries.
Population aged 15 to 59, more developed regions
Source: UN Population Prospects, Constant-Fertility Scenario
Growth in the industrial world will come to a halt, and government revenues
will stagnate, just when governments need revenue the most. In 2010, 24% of the
people of the developed countries were elderly dependents. By 2030, that figure
will rise to 30%, and by 2040 it will rise to 42%. The demands on public
pension and health systems will be enormous, especially in rapidly-aging Europe
and Japan. Taxes will rise drastically to support the retirees, which means
that after-tax income will fall.
America is the grand exception to the global trend.
Adult population by region (2010=100) Source: UN Population Prospects, Constant-Fertility Scenario
America's higher fertility, though, may be a mixed blessing, and it may not
persist, for it depends on very high fertility among Hispanic immigrants. By
2050, Americans of European ancestry will comprise just half of the population.
Hispanic immigrants are drawn disproportionately from the poorest and
least-educated strata of Mexican and Central American society and may not
integrate into America as well as previous immigrants. But there are other
sources of American demographic strength. Evangelical Christians, who comprise
about a quarter of Americans, have a fertility rate of 2.6, far above
replacement.
America, Canada and Australia are the lepers with the most fingers. They are
the only industrial nations worth investing in for the long term, but
demographic decline in the rest of the developed world will affect them as
well. There will be fewer people to buy American exports, and fewer suppliers
of new products from overseas.
What about the developing world? China's adult population will fall from 915
million in 2010 to only 682 million in 2050, by more than a third. India's
adult population will grow by a third, but it remains to be seen how many of
them will be integrated into the country's pocket of modernity and how many
will remain trapped in poverty. Africa, Latin America and the Arab world never
have contributed much besides raw materials to the world economy, and the
productivity of their people simply is not a factor over any pertinent horizon.
The bubble that popped in 2008 (see
Waking from Lever-Lever Land, December 25, 2008) was the collective
delusion of the industrial nations that they could generate high returns from
investments despite the imminent decline of the number of people there to
produce those returns.
Now that the delusion is dead, the citizens of the industrial nations have no
choice but to accept lower returns on investment, reduced government largesse,
and a poorer existence generally. From the Wisconsin State House to the Palazzo
Montecitorio in Rome, the only question is how fast governments will cut
spending and for whom.
The crisis came in 2008, when leverage collapsed. Today's euro zone debt drama
is not a crisis, but a negotiation. There is an instructive comparison between
the municipal debt crisis in the US and the sovereign debt crisis in Europe.
The most corrupt city in the US is a refuge of angels compared to any political
venue in southern Europe.
The voters who also are the taxpayers have given a mandate to politicians to
ruthlessly cut expenses. In Wisconsin and Minnesota, where Republican governors
confront public-sector unions, it has come to open confrontation. In fits and
starts, the system is working, because states and cities must raise money from
their residents, and taxpayers vote directly for those responsible for taxes
and spending.
State and local government employment is falling sharply, with 21,000 layoffs
in June alone. During the past year, US cities have shed 124,000 education
jobs. Borrowing by US states and cities has fallen by half this year, and
municipal debt performed better than any other fixed-income asset class.
In Europe, where national governments and the bureaucrats in Brussels control
spending by localities, and voters have little to do with local government
budgets, there is no such responsiveness. The result is a battle between Greek
recipients of government largesse and German taxpayers. There is no incentive
for local constituencies to throw the bums out, for it is not the tax money of
the Athenians that pays municipal salaries in Athens. Europe's laggards must
look deeply into the abyss before doing what US states and cities have done
proactively.
That's where the similarity ends. America has enough taxpayers to fund its
obligations at all levels of government. The euro zone will lose 30% to 40% of
its potential taxpayers by mid-century. And at some point, today's Italian and
Spanish government bonds will have about as much value as obligations signed by
Emperor Romulus Augustus in the year 475 CE.
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