Demographic winter chills financial markets

Spengler explains the connection between depopulation and the crippled financial markets. Excerpt:

Why didn't the Germans and all the other overseas investors buy mortgages in their own countries, instead of scraping the bottom of the credit barrel in the United States? It is because there aren't enough Germans, or Italians, or Frenchmen or Japanese starting families and buying homes. There weren't enough Americans, either, and therein lies a tale.

The aging pensioners of Europe and Asia must find young people to pay interest into their pensions, and they do not have enough young people at home. Germans aged 15 to 24, on the threshold of family formation, comprise only 12% of the country's population today and will fall to only 8% by 2030. But one-fifth of Germans now are on the threshold of retirement and half will be there by mid-century.

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There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.

Philip Longman -- who, it must constantly be said, is a secular liberal -- wrote an entire book about the connection between population growth and economic growth, and how the latter depends on the former. It's all well and good to look forward to the smaller carbon footprint declining populations will create, and all that. But who is going to pay for the medical care of the elderly? Who is going to keep us all living in the manner to which we've become accustomed? Oops! We forgot to have kids!

Demography is destiny. In the documentary film "Demographic Winter," the financial analyst Harry S. Dent presents a chart showing how the Japanese and American economic growth rates tracked the growth of population in both countries. Japan started to decline in the 1990s because its population was aging faster than ours (Japan did not experience a postwar Baby Boom). Basic concept of generational waves affecting the macroeconomy introduced here. Dent explains the Japan model in detail here. Excerpt:

Japan's rise from the ashes of World War II was truly meteoric. No country in history could match Japan's growth rates from the 1950s through the 1970s. In just two decades, Japan evolved from a largely agrarian country to an industrial giant that rivaled the U.S. and Europe. By the 1980s, American companies found themselves struggling to compete with Japanese manufactures in steel, autos, and consumer electronics. Business schools began teaching classes on Japanese management techniques, and American workers looked on in fear as their bosses were replaced with Japanese managers.

The Japanese stock market played its part too. After putting up good returns throughout the 1960s and 1970s, shares shot through the roof in the 1980s, and by the middle of the decade Japanese stocks were in a full-blown bubble. Between 1985 and 1990 the Nikkei tripled, hitting a high just shy of 40,000 in December of 1989.

Today, we see a very different Japan. The present rally notwithstanding, the Nikkei is still down over 60% from the top - more than fifteen years later! Japan has spent the last fifteen years in and out of recession, never able to get any real momentum. So what caused Japan to fall into this hibernation? The falling desire of Japanese consumers. Low consumer demand due to the aging of the population meant low profits for Japanese companies, which in turn led to decreased hiring and even lower demand. A vicious cycle developed with no way out. This cycle - lower demand, lower profits, lower production, etc., is exactly what we see in our future.

The Japanese consumer got old. As he slowed his purchases in the early 1990s, the economic bubble burst despite all efforts to keep it inflated.

The Bank of Japan cut interest rates from 6% to zero, essentially giving money away in the hopes that someone would spend it to build a factory, increase production, or to consume. In the standard formula, lowering interest rates spurs consumption and investment. As the reward for saving money gets smaller, the incentive to spend it gets bigger. But an odd thing happened in Japan; interest rates dropped, but savings remained high. Consumer spending stayed flat and then fell. New investment in productive assets stalled - Japanese business already had more than enough capacity.

The United States will start "turning Japanese" around mid to late 2010. The demographic trends that have powered the economy since the early 1980s will peak at this time and finally reverse as the Baby Boomers begin to save every dollar they can spare for their impending old age. Demographically, we will be in the same place as the Japanese when they began their slow, grinding decline in 1990. And when consumer demand falls, American businesses will have a hard time turning a profit. Stocks will likely enter a long bear market, and investor portfolios will be ravaged.