Financial Reader Part 2. Demographics & Finance
The second excellent piece from the FT is an, admittedly poorly edited, piece about demographics and finance (The population conundrum). I’m going to challenge the very essence of the piece, but in doing so I do not detract from its substantial contribution.
Japan – the first major developed economy to experience population shrinkage through ageing – was the economy that first introduced the idea that economics and finance are positively correlated to demographic trend. One might think that obvious, but, as the FT article points out, high returns have coincidentally been accredited to almost any other driver:
Such high returns were frequently attributed at the time to factors such as globalisation, deregulation, rising productivity through the widespread use of technology and the taming of inflation.
For me, the first major contribution to the topic was perhaps The Pinch, a detailed pre-crisis review of post industrialist Britain. Now the FT is taking the concept global, and mainstream. Yet is it automatically true that financial markets are prisoners of demographics, and that for this reason we are doomed to suffer a protracted slump?
The idea is both scary and intuitively alluring. But whilst the empirical correlation is clear, it is wrong to assume that our future is bleak simply because populations are ageing. Perhaps the best reflection of this comes from my own MBA programme, which took place in Spain. By coincidence Spain has some of the worst demographic dynamics of the Western hemisphere, putting the topic firmly on our study screens.
My challenge to the thesis that the demographics and economics are structurally cointegrated was perfectly underscored by my MBA class. As a group we produced a stream of ideas of business strategies to profit from ageing markets. Large retired populations switch to saving and spending, rather than working. But in essence this means they still consume, and invest. Their consumption patterns change of course, and so we can look for new businesses, products and services to benefit.
Stretching a degree further, I would highlight that the global population trend remains upward, hence there also remains potential for labour markets to remain stable, if sentiment toward immigration evolves suitably. Remember at the same time that we are automating ever more and have the potential to eliminate many low-skilled jobs altogether. Absent that, we will of course see continued off-shoring and an even more productive, self-sustaining globalisation process.
For me then, there is an empirical, but not obviously fixed relationship between demographics and economics. More pertinently, we live in a world of deleveraging and painfully excessive debt-loads, like it or not, we need to dramatically reform our welfare states, and to stimulate growth to get out of this fix. Until we complete these two monumental challenges, the danger is that financial markets will struggle to move against shifting demographic trends, regardless of the creativity of the capitalist system.