“Demographics and Depression” Becomes the Theme Du Jour

In a May 2009 essay entitled “Demographics and Depression,” I warned First Things readers that the great economic headwind of our time was demographic:

Our children are our wealth. Too few of them are seated around America’s common table, and it is their absence that makes us poor. Not only the absolute count of children, to be sure, but also the shrinking proportion of children raised with the moral material advantages of two-parent families diminishes our prospects. The capital markets have reduced the value of homeowners’ equity by $8 trillion and of stocks by $7 trillion. Households with a provider aged 45 to 54 have lost half their net worth between 2004 and 2009, according to Dean Baker of the Center for Economic and Policy Research. There are ways to ameliorate the financial crisis, but none of them will replace the lives that should have been part of America and now are missed….

In the industrial world, there are more than 400 million people in their peak savings years, 40 to 64 years of age, and the number is growing. There are fewer than 350 million young earners in the 19-to-40-year bracket, and their number is shrinking. If savers in Japan can’t find enough young people to lend to, they will lend to the young people of other countries. Japan’s median age will rise above 60 by mid-century, and Europe’s will rise to the mid-50s.

America is slightly better off. Countries with aging and shrinking populations must export and invest the proceeds. Japan’s households have hoarded $14 trillion in savings, which they will spend on geriatric care provided by Indonesian and Filipino nurses, as the country’s population falls to just 90 million in 2050 from 127 million today.

The graying of the industrial world creates an inexhaustible supply of savings and demand for assets in which to invest them–which is to say, for young people able to borrow and pay loans with interest. The tragedy is that most of the world’s young people live in countries without capital markets, enforcement of property rights, or reliable governments. Japanese investors will not buy mortgages from Africa or Latin America, or even China. A rich Chinese won’t lend money to a poor Chinese unless, of course, the poor Chinese first moves to the United States.

That the aging world population needs to save for retirement, and an imbalance of savings with respect to investment opportunities reduces returns in capital markets, finally has dawned on the commentariat. Goldman Sachs just issued a report on demographics and the stock market, noting, “The rise in ‘prime age’ savers globally may also have played an important role in the story of the ‘savings glut’, putting downward pressure on global  real interest rates. Here too, the demographic underpinnings of that story could intensify in the next 10-15 years.” There have been similar articles in the financial press and the client notes of Wall Street economists.

If you subscribed to First Things, you knew about this a year and a half ago.