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Sunday, January 23, 2011

Demographics is driver to economic growth

When reading this post please do not get discouraged about the negative view in the first part of the post, there is a positive ending. I encourage clicking on links to read up on details of other concepts already covered. Grab a coffee, throw some tunes on, and prepare for the rant of all rants , exploring the driving causes of the global crisis.
Demographics is the core issue to economic crisis.
Population demographics is key to promoting growth in all areas if human economic health. The US baby boomer generation is a classic case of how that demographic propelled US economic growth after world war 2. The baby boomer demographic effect was jumpstarted with the end of World War 2, and the US production capacity was in-tact, while Europe, Japan, and other countries involved in WW II production capacity was damaged. With the end of World War 2, America experienced economic growth at first due to the production differential, then extended through the life of the Baby Boomers.
I encourage readers to seek examples of this perspective if needed to understand how key demographics is to economic growth. I myself have posted a similar thought relating to asset price increases in my post “Pyramid Valuation scheme”.
More recently, Japan has been a text book example of the opposite effect of demographics promoting economic prosperity. Japan does not have significant immigration of newer, younger workers, while at the same time the demographic has aged. Japan’s population is entering retirement in significant numbers, resulting in the population skewing to cost vs income. Japan, unfortunately, is entering into this period after pursuing for years Keynesian economics of burning through the countries life savings in an attempt to promote economic growth. ( The US has always done the same, but has only entered into extreme spending since 2008. )
The result for Japan is as their population shift creates an economic imbalance that cannot be possibly be supported by the number of retirees vs number of remaining workers occurs. Japan’s debt to GDP is about 250%. Meaning, if Japan’s economy produces X, the deficit is 2.5X. As anyone who looks at their own personal finances, it doesn’t take a math degree to see this trajectory is headed for Japan failing as a nation. The “good” news is, if Japan’s government collapses, the event solves the economic problem. The “bad” news is, the retiree’s quality of life will be destroyed, and the transition for the Japanese may be a violent one, resulting in a government that may not be democratic.
At the heart of the world economic issues lies this demographic problem. The US and Europe have a similar demographic wave now approaching the same problem. The US is ramping up deficit spending AHEAD of the financial crisis of the boomer retirees. In effect spending the countries life savings to try to maintain quality of life. Similar to Japan’s approach, this is assuring that when the baby boomers need Social Security, Health care, and other services that US WILL NOT be able to able to provide these benefits. Alternatives can be to deny payment of services. However, my economic pessimism comes into play here, where I do not see the strength of leadership to pass legislation to slash benefits of pensions and government services to the aging generation AHEAD of a financial crisis for the US government.
Combine this baseline economic driver, with dependency on China, foreign energy, illegal accounting methods prior to 2008 causing massive mis-allocation of resources, a perfect storm is a brewing.
The good news for the US, if you can call it good news, is other countries have problems that may be worse than the US. Europe has more fundamentally economic issues than the US in some aspects, resulting in the current crisis-of-the-week for their country members. Canada and Australia in 2011 will enter into a real estate crisis, driving a similar banking crisis that America has already entered. Further, China has engage in practice of burying its financial problems by diving into country wide real estate ponzi schemes, producing entire cities built that no one lives in. What we have here is global economic hot potato, where each country tries to make sure they don’t lead the world into the financial abyss.
But I digress. Back to point of Demographics as the underlying issue.
The world is headed towards for the first time in human history, to be a race that is contracting in population rather than expanding. It is debatable when the peak of human population will occur, 2030-2060. Counting which year it occurs missed the point. Since the dawn of organized governments, a shift is near. This shift is driven by the westerners producing less than 3 offspring per couple on average. China has a law making it illegal to have more than 1 child per couple, assuring their own demographic crisis sooner than expected. Only India has a health demographic promoting endless next generations of people to promote economic demand.
This global demographic peak will cause catastrophic economic results under our current economic system. Just about all aspects of asset based resources has depended on a ponzi-type scheme where the next generation is larger, and can absorb the previous generations debts and create demand for assets. (This is focused on number of PRODUCTIVE people vs social recipients or retirees) The mere fact that humans have never experienced a global downward shift in population growth should send loud alarm bells off that society is not prepared for this event.
Now that the problem is well defined, lets explore government re-actions.
Government Actions to mitigate the pending crisis
A key point to understand about all humans is that they answer a problem with what they know. Very few but talented people are able to answer a problem with information they do not know. Let me give an example: Let’s say I ask you to create a filing system for a doctor’s office. How would you do this?
Most would likely answer with buy filing cabinets, and some sort of paper indexing system. I’d propose an electronic system where the office would be paperless, using computer software. Yet other people may have different answers. I could write for pages on ways to solve what up-front seemed like a simple problem with a different answers.
However, the key for this discussion isn’t what the BEST solution is. The key is to understand that the person responsible for solving the problem chooses a solution they think of. Also, out of the solutions thought of, which is economically viable. These two factors, able to even think of a solution, and able to fund the solution drives to what the solution selected becomes.
This is a true problem in society, where the best solution is often not chosen due to lack of knowledge or short term economic affordability over long term economics. I witness this daily in every problem I observe. Luckily I work with some key people that are well skilled in answering technical solutions with what they DON’T know. It’s difficult, made easier by Google, and it’s the right approach.
Ben Bernanke of the US Federal Reserve bank is viewing all problems through the lens of a banker. Ben’s has approached the issues he sees by responding to the problem that many banks are insolvent. By Mr. Bernanke by buying debts at prices inflated by 50 to 75%, printing money and give it to banks at near zero interest rates, paying banks interest on money they deposit to fed (and originally given through purchases!) he has responded to the current problem. There are many other examples of Bernanke’s attempts to prop up the financial system. The problem I have with Mr. Bernanke is his lack of imagination, and he answers with what he knows. But his role in life isn’t to be imaginative. His role is to do EXCACTLY what he is doing. To be a tool of the banking establishment, and answer problems the way a banker would answer them. For this, I give Ben an A+++, he has done a superb job of answering the financial crisis with steps to push out a global banking failure. A tip of the hat Ben, for a job well done to meet your goals.
But these actions do not attack the heart of the problems, which include demographics. Demographics isn’t the only problem, but it is by far the lion share driving the crisis to a head. It is a race against time, until the baby boomers tip the western countries into insolvency. No amount of financial banking ponzi schemes can avoid this crisis. Ben can react to crisis, he can kick the can, he can even inflate money supply in an attempt to make paper assets look great. But a quick fix often leads to a quick fall. It is not a solution, and Ben’s own words prove this. When you listen to Mr. Bernanke, he talks of “to induce consumer spending, the goal it so make the consumer feel confident to spend more”. How does this solve anything long term? Shouldn’t economics be based upon growth of industry? Growing economic fundamentals? Technological innovation to drive productivity? The answer is simple, that’s all Ben can do, he answers with what he knows and is allowed to do.
So the problem isn’t Ben Bernanke directly. Ben, unknowingly is driving the crisis to much worse levels, by delaying reality and allowing leaders to avoid dealing with core issues facing society. After all, drastic steps do not need to be taken, all is great! Just look at the stock market. Ignore 9.6% official unemployment, upwards 16% true unemployment, and skyrocketing debt. True growth, according to Ben’s own words, is making people feel good. And soon, we can expect this to solve the demographic driver?!?
Obama has done similar with what he knows. He tried to pass legislation to attack the health care benefit cost problem that the baby boomers are bringing. If he had succeeded, the government could have forced doctors into debt slavery, to have them bear the cost of funding retirees health care. That combined with Social Security being indexed against inflation EXCLUDING energy and food, two of the biggest monthly cost for retirees, would have kicked the can further for the crisis the baby boomers bring to the government balance sheet. The problem of course, all of this is a band-aide. Obama, who is not a visionary of change, answers with what he and his staff know, legislation to kick the can. Again, I am not condemning Obama, he just lacks the capability to answer with what he doesn’t know. In short, he is not a visionary. Him and majority of congress answer with what they know, legislation in can-kicking.
There are many other actions being taking by various governments. From what I have read, the common theme is answering a problem with what they know, None are answering with what they don’t know.
What we know
Let’s look at the “what we know” as answers that could solve the problem, but no one wants.
Possible “what we do know” solutions
  • Cut benefits, those who retire can live by kindness of others or work under duress until you die.
    NOTE: Wages would drop to minimum wage for lion share of retirees, due to too much demand for a job to live.
  • Have a global event where the aged are permanently retired, possibly through disease. (h1n1 event?)
  • Force the younger generations into debt slavery, raise taxes to 50-75% of income.
  • Encourage people to have kids en mass now, and prepare those children for the workforce by as soon as possible, time is of the essence to serve your elders!
  • A complex mix of all of the above.
Throw in one or two others you can think of. Perpetually increasing population through births has problems that make it not a viable option. Society cost of investment into child rearing at a time of financial duress, natural resource shortages caused larger population, and society willingness to bear more children.
Point is, all are painful events no one wants. The problem is hard, and a solution must be either painful or NEW!
What we don’t know.
This brings us to where I have hope, answering what is a global human race problem, demographics shift. Such a problem deserves to be thought of as solvable ONLY with what we don’t know. After all, this is a new problem in human history! Those who think pulling paper levers, re-architecting social ponzi schemes, are not thinking at the correct view level. This problem must be attacked at it’s heart, how can the demographic issue be mitigated.
The answer therefore does not lie in money, or can kicking.
To arrive at what we don’t know as a solution, first, we need to analyze the issues derived from the demographics. They are:
  • Ability to work is directly correlated to physical health. So able to be a productive worker can be linked to age-related health issues.
  • Willingness to work is often related to perception of lifespan. People work their entire lives dreaming of the day they can “retire” and take it easy. Most cannot be inspired to work hard at age 75, when they believe they are about to permanently retire. Lifespan effects willingness to work.
  • Cost of health care unto society skyrockets with age. (related to ability to work)
  • More workers than retirees - In essence, further kick the can by having more people producing than living off workers. Or alternately if possible construct demographics to be perpetually structured this way.
You may think of other problems retiree’s bring society, but from a financial perspective, I believe this captures the heart of the big problems.
    I ran across an alternate solution on a podcast on Futures in BioTech. What if, we could extend people’s life expectancy? What if, instead of average death at 80, average death is 100, or 120?
    What if, the diseases that come with age, are equally pushed down the chain, by 20 to 40 years? (News 5-22-12)
    And given technology, if we can push the demographics out the new time given to society will likely bring yet the next innovation to kick the can further. (I find it disturbing that I find myself proposing a can-kicking solution, but more time will allow for the next solution.)
    Think about it, if you knew with relative certainty, your lifespan would be on AVERAGE 100 in relative good health, working until 90 is not that crazy. Lets look at the “burden” of cost for each person’s unproductive years. Currently in USA, using average life expectancy rates.
    Age 0-21, and 65-78, 34 years requiring support, with 44 years work. 56% productive.
    Age 0-21 and 87-100, 34 years requiring support with 66 years of work. 66% productive.
    This produces about 17.9% gain in productivity! That is absolutely huge!
    And of course, if life expectancy can be increased to 120 years on average, the gains are unbelievable.
    Now, how realistic is this? The genes have already been found and current research is underway right now to show how to increase lifespan in mice. I doubt these early trials will yield a solution, with lack of funding, many years of testing lies ahead to find the right solution. But if society targeted areas of what we don’t know to solve for the demographics issue, the solution would be found sooner.
    Such advancement would delay cases of age related diabetes, cancer, dementia, and other diseases. Each human would have a longer period of higher quality life, extending the quality of life we have accomplished in the last 100 years through physical environment improvements.
    In this case, I would expect people gladly having their life expectancy extended to 100 years, in exchange for working until late 80’s. The ultimate “what we know” is we want to live.
    The demographic crisis or other core society problems need more answers with what “what we don’t know”. More brain power is needed to creatively propose solutions on addressing the underlying problems society faces and less to dissecting the unfolding of the global financial crisis like critics of a bad movie. Extending people’s lives is by no means the only answer, or proven possible and affordable. I encourage others to propose a creative solution that is realistically supportable by the will of the people. The financial crisis is a reflection of the underlying society structural problems; it is not the root cause.
    I am a little skittish about the presenters credentials, but good speech.

    Interesting video about overpopulation not at root to poverty, just the opposite.
    UN projections for population growth

    Video on extending human life

    2 comments:

    1. Hi Mike,

      I find your proposal bizarre, especially in light of your last couple of posts on food shortages and in light of the revolution in Tunisia brought on by an indentured populace governed by the corrupt elite.

      I disagree that an indentured population is the solution to the financial woes of most countries. You rightly mention that decades of corruption, as well as the appeasement of the masses through ponzi supported welfare has a significant hand in the current economic crisis, but it also rests on the creative financial managers that manipulate our system of stability to excessively benefit themselves (criminal behavior as opposed to corrupt behavior). Your solution, shared with others in the industry, suggests that only perpetuating the injustices of the past and putting the burden on the masses will we be able to rectify our problems. This is simply a setup for further corruption, advancing a system to be taken advantage of by people talented at gaming the system.

      Your proposal seems completely contradictory to your criticism of Bernanke and other world leaders who only do what they know how to do and do not think "out of the box." Therefore I have a proposal for you. What about universal debt forgiveness and equitable bartering?

      Consider that our entire financial and economic system is made up. There was no poverty until we figured out a system where we could allocate resources. That's not to say the system hasn't served the species well, in fact, quite well, allowing us to reach a populace of billions in relative comfort. But it's still a work a fiction that we support universally.

      So I suggest that instead of backtracking, we move forward with less servitude and more equitable giving, along with universal debt forgiveness. Of course, no rich person is going to go for it; the only solution the elite will provide is one where they can continue to do what they know how to do, as you say, and that is indenturing the populace in as creative a way as you suggest. Such thinking is not out of the box, that's the same thing all over again at a much greater scale.

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    2. Actually, I agree with just about everything you have written. Except one thing.

      Perpetuating the worlds largest ponzi scheme through demographics does delay the current generations from facing a total world collapse. And I do have hope in technology that over time, things will get better. So it is possible that "buying time" by perpetuating a demographic ponzi scheme buys enough time to avoid severe pain.

      For example, say in 30 years, we have unlimited energy from the sun, CHEAPLY, and we replace 95% of fossil fuel use (exceptions such as plans, trains, and other heavy machinery)

      Then add say, robotics, that automatically grows and harvests food.

      During a world collapse, the local government could provide enough basic services (cheaply) to ease the financial system collapse.

      Mind you, I am drastically over-simplifying things, but the point is, new technological capability may make a global currency collapse easier to deal with.

      IF that happened today, we will have martial law over-night, and mass death through riots, food shortages, power shortages, and other hardships.

      So perpetuating the demographics ponzi scheme solves nothing, but it does buy time.

      And frankly, I can't see what I posted actually happening, most people living to 120 years old on average. The general point is, we need to focus on how to improve matters, rather than watch this horror show unfold and comment on it. :)

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