17 March 2010

An Aging Society is a Dying Society

When a society ages, its resource allocation increasingly favors the old. Healthcare costs, for example, rise exponentially. Broadly, an old population is unwilling to take risks, which makes social or economic change difficult. Underlying forces in an aging society favor unproductive expenditures and less competition.
Rising social burdens in an aging society obviously fall on the working population, i.e. the tax burden on the working rises over time. The diminishing reward for work decreases labor supply, as workers choose more leisure. A vicious cycle in labor incentives is quite possible.
The changes in an aging society are far greater than what the arithmetic of the so-called dependency ratio – the ratio of non-working to working citizens – suggests. A society changes in many ways to become more conservative, less hard-working, and less innovative. The society ages....
...Rising national debts in developed economies are driven by aging. The benefits they promised during the high growth period cannot be supported by government revenues anymore. They resort to borrowing to keep promises. Japan's national debt at about 200 percent of GDP is the highest in the world. Other developed economies seem to be on the way there. The average fiscal deficit in Europe is 6 percent of GDP. Britain's is 12 percent, and America's is 10 percent. While most analysts blame oversized deficits on the recession, they could last for many years to come. Japan's deficit in the 1990s was viewed similarly. With such high deficits, it won't take long for them to catch up with Japan....
...Aging has disastrous consequences for asset prices. Property, for example, must be a permanent bear market. Declining population means declining demand for property. As property is a long-lasting asset, permanent surplus is likely, exerting a constant downward pressure on property prices. Japan's property prices have been declining at about 7 percent per annum for nearly two decades. The rental yield happens to be similar to the price decline. Foreigners are enticed by Japan's high rental yield from time to time. Few have made money.
An aged economy is a stagnant economy. Hence, corporate profits are likely to be stagnant. Without growth, stocks should be very cheap, say, around 10 times earnings and 5 percent dividend yields. Japan's stocks were trading at above 70 times earnings at their peak. They have been falling for two decades. Foreigners are sometimes attracted to the improving valuation of Japan's stock market. Periodic foreign buying causes market upturns, but all have turned out to be value traps... 
...Aging is supposed to be deflationary. Japan's experience supports that theory. However, deflation is possible only because governments can borrow to cover the cost of aging. When debt is unsustainably high, inflation is inevitable. Inflation is a form of reneging on promised benefits. I'm afraid the world is heading that way. __Andy Xie
Japan, Eastern Europe, and Russia have a head start on most of the developed and semi-developed world.  Italy, Greece, and Spain are following very closely.  Then will come Canada, Germany, Belgium.

It is uncertain whether China and India will survive as nations long enough to experience the demographic plight of Japan and Europe.  War within the populous nations of Asia grows increasingly likely.  China has played a pivotal role in nuclear weapons proliferation in Asia, and may suffer a bit of poetic justice in that regard.  We should all hope not, however.  Besides the human death toll, the current pollution and toxicity streaming out of Asia is bad enough without adding radioactive dust and soot to the mix.

The aging of societies will create incredible stresses across Europe and Asia.  Things could turn tragically bad, very quickly.

Peak Oil acquires yet another definition:  the time when skilled human populations fall to such low levels that too few remain who can produce the fuels or build the machines that use the fuels.

Previously published at abu al-fin


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