There is perhaps a caveat, which I referred to earlier when stipulating that capitalism rewards scarcity. If labour is in relatively short supply, and wages and salaries benefit as a result at the expense of profits, could there be a new cycle of skilled and general wage inflation? Some consider it possible in economies that are relatively closed to immigration, have rather inflexible labour markets, and an accommodating central bank. But Japan is or has all of these and isnāt anywhere close to inflation.
Is There no Hope?
The answers to many economic and financial issues we consider nowadays arenāt rocketscience, but the political will and imagination to do something about them are in short supply. To countenance the effects of demographic change, there are many things that governments can do. They can increase employee participation in the work force, for example, raising the pensionable or retirement age, changing pension systems, retirement patterns, and working practices, encouraging companies to retain and retrain older workers, and in some nations, making it possible for more women to enter the labour force. They can help to create a climate for stronger productivity growth, by trying to avoid the financial strangulation of schools and higher education during the coming fiscal cutbacks, and by using public policy levers to encourage entrepreneurs and innovation, and by targeting the new sectors that will drive future growth. This last idea, by the way, is a long-established form of public support for industry, not least in the United States.
These initiatives all sound rather fanciful in 2010, but in the end, but they will provide the means for us to adapt to aging societies. In the meantime, even though itās hard to find positives for real estate as an asset class, some types of equities will remain the investorās asset of choice, cyclical volatility notwithstanding. Demographic change will bring forth new consumer products and patterns, significant changes in information, bio and resource and materials technologies that could revolutionise manufacturing processes, mind-boggling changes in medical science and treatment, new forms of asset gathering and insurance and, lest we forget, the next billion consumers in emerging markets and all that jazz.
Emerging market demographics, as I have suggested, are, for the most part, strongly supportive of the demographic dividend. Even in China, the pool of rural migrants should serve as an offset to the fall in the working age population for a little while longer. It is in emerging markets, with massive demand for infrastructure and capital, where returns will be the greatest, even barring the odd bubble and bust now and then. It would certainly help relatively poor countries, with weak social security systems, to learn from the experience of the rich world what works and what doesnāt in dealing with destiny.
July 13, 2010
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P.S. Donāt forget to order The Age of Aging. It is a terrific book. (J.A.B)
(c) Boeckh Investment Letter
