by George Magnus, Contributing Editor and Senior Economic Advisor, UBS Investment Bank, for Boeckh Investment Letter.
As the world economy and financial system struggle to regain their footing, they must contend with a number of problems. One of these is a negative change in demographics. The population is aging rapidly and the proportion of retired to working people is rising sharply. While these are slow moving forces compared to, say, banking crises, they are powerful and inexorable trends that cannot be âfixedâ. Rather, we, and governments, must adjust to them and investors must pay attention to the complex investment implications.
This letter contains a special feature on the subject by Contributing Editor, George Magnus, Senior Economic Advisor, UBS Investment Bank. I have had the good fortune to share a platform with George at a prestigious Family Investment conference in Europe for a number of years and I have read his work for much longer. He is an original thinker with a very sharp intellect and a competency that stretches over many areas of economics and finance.
He has written the Age of Aging (John Wiley 2008), which I strongly recommend to anyone interested in one of the most potent factors influencing our long-run destiny.
He has also just completed a book called Uprising: Will Emerging Markets Shape or Shake the World (forthcoming in the fall).
Demographics, Destiny and Asset Markets
By George Magnus (Contributing Editor)
The evolving financial crisis in the West and its long-term consequences has exposed deep-seated structural flaws in our economies, and in the global economic system. These span our susceptibility to deflation, the loss of traditional economic growth drivers, the integrity of public finance, the regulation of the banking system, weaknesses in labour markets, and the lack of discipline that obliges creditor countries, such as China, Japan and Germany to share the responsibilities for economic leadership and reform. But we are also starting to come to terms with a less visible and slow moving phenomenon that has a direct bearing on many of the structural problems we face, namely the onset of rapid aging.
Although demographic projections of population, life expectancy, and fertility are not free from error, the nature of aging means that for all intents and purposes, demographics are our destiny. A lively debate about rapid aging in richer economies has been going on for at least the last 30 years, and in its simplest form, it is about the essential question of âwhoâs going to look after grandma?â
A more contentious and neo-Malthusian form resides in the perceived threats of overpopulation, aided and abetted universally by longer life expectancy. The worldâs existing population of 6.5 billion is expected to grow by a further 2.7 billion by 2050, almost all in emerging and developing nations. Although the populations of the U.S., and other Anglo- and northern-European countries are expected to rise slowly over time, those of Japan and Russia are already declining, and those of Germany, Italy and Spain will join them in the next five years. But population aging also has other weightier economic, social and political consequences that are emerging from the dark shadows cast by the financial crisis. Some are about the efficiency of our economic coping mechanisms as the labour force ages, and stagnates or declines. Others are about the pressure to rebuild public and private savings, and strengthen our ability to finance aging societies without punitive levels of taxation on our children or ourselves.
What are asset markets supposed to make of these game-changing, but glacial demographics, especially as they pertain to one of the hotly discussed topics âdu jourâ, namely, whether inflation or deflation will get the upper hand?
The Baby Boomersâ Boom
Tracking, let alone, predicting the impact of demographics on asset markets is prone to exaggeration and hyperbole. Demographics are slow moving and relatively predictable, and asset markets are sensitive to an array of economic and financial developments, most notably the credit cycle. But people are quick to point out that the halcyon era of sustained equity and real estate price appreciation from the 1980s until the financial crisis occurred in tandem with the entry of the boomers in to the labour force. This brought unprecedented numbers of women into work, and they brought with them higher educational attainment levels than their parents. As the quantity and the quality of labour increased, aggregate consumption rose, and aggregate savings rose too. In most countries, except possibly Japan, savings went increasingly into equities directly or otherwise, and in some countries, such as the U.S. and the UK, these savings increasingly took the form of real estate investments.
