By Michael Baxter 1 Dec 2009 [0 Comments | 838 views]
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There are some things economists can deal with, others they can’t. Right now the world is seeing a big underling change, and economists are powerless to do anything about it.
We all know the world has got a population problem, The number of human beings on this planet is set to grow and grow. This could create massive poverty in some countries.
But, in other parts of the world, the problem is the precise opposite.
If there is one country in the world, however, that is sitting pretty, it is the US.
The deepest of all underlying economic forces, demographic change, is likely to benefit the US, and yet we are told the US is on a collision course with disaster. This doom laden prophecy is wrong, and this is why.
There is a forgotten explanation for Japan’s malaise.
It is the great demographic shift.
The land of the rising sun also happens to be the land where the demographic shift is happening first too. In Japan, people are older.
It has been an issue now for around two decades.
What happens if you are approaching retirement, and asset prices have just crashed in price? Answer, you surely first panic, and then cut back and save. This is what happened in Japan 20 years ago. She has been saving ever since. This high savings rate sucked demand out of the economy, and everything the government tried to do to fix the problem failed.
In Japan, the problem is set to get more serious. The Population Reference Bureau reckons the country’s population will decline by around 25 per cent over the next 42 years. Only a handful of countries mainly in the former Soviet Union are expected to see an even bigger decline. (Incidentally Bulgaria is expected to see the biggest fall.) Russia is in it deep, too. Its population is expected to decline by 22 per cent.
By contrast, Europe has got it easy. Its population decline is expected to be around 7 per cent.
But a 7 per cent decline in population at a time when people are living longer, is still serious.
Very soon there will be more Europeans retiring than entering the workforce. How this diminishing labour pool supplies the growing retired population is one of the great challenges of today.
What is inevitable is that we will save more. The appalling stock market performance of the last few years, coupled with worries over housing, means the savings rate is rising and it is set to stay high.
This is the single biggest reason why there is a real danger Europe could follow Japan into decades of economic malaise. It is also the single biggest reason why deflation, and not inflation, is the long-term danger.
Contrast this scenario with the US.
The Population Reference Bureau expects the US to see its population rise by 44 per cent between now and 2050.
Couple the growth in the size of Uncle Sam’s brood, with the impressive improvements seen in US productivity recently, and you see an economy that is actually in pretty good shape.
Assume US productivity rises at 3 per cent a year – which is lower than the current rate - and that in the long term per capita growth keeps pace with the rise in productivity. If this is right, and if the population increases the way it is expected to, by 2050, US GDP will be around 400 per cent greater than it is now.
Those who look at the fiscal deficit and say the long-term prognosis for the US is dreadful, are about as wrong as you can be.
This does not mean there won’t be hiccups along the way, but the underlying trend is clear, and it is up
But what about Europe, how do we deal with the demographic problem? Well we can, and to find out how, click here: The panacea to UK strength lies in banks that remember their purpose
