Cursed by demographics
The persistent confusion of financial signals is perplexing at the moment - particularly for those of us who might be categorised as small to medium investors. Is the global economy recovering or are there more bad times ahead? At stake are individuals' superannuation and investment assets, which have already declined sharply. It's increasingly likely that government will struggle to support retirees. Raising the pension age to 67 is an early sign of this process.
I'm not an economist. But I've run businesses, mostly small- to medium-sized ones for the last 30 years. Like most people in small business, I'm drawn to concepts that are easily understood and seem to make common sense.
One idea that fits the ‘common sense' category is an understanding of demographics and how that impacts on economic trends. Early this year I read The Great Depression Ahead by HS Dent. He's visiting Australia soon and, no, I'm not promoting his tour and I have no association with him other than reading his material.
Dent's a non-orthodox economist. He brazenly suggests that economists know very little and that they speculate using data that cannot ever be complete. The global economy is too big and moving too fast for economists ever to grasp it properly. Dent reasons, however, that demographics are one thing that is known - and demographics determine all major economic trends in developed economies.
The core thesis is straightforward. During every individual's life-cycle there are known behavioural and spending patterns. These are well researched and documented in every developed nation's population surveys. In an average 80-year life, the dominant trends are known. In our 20s we enter our first income-earning phase and tend to consume our moderate incomes on personal life experiences: travel, first car and so on. During our 30s we establish a family and a home and there's not much discretionary income remaining. In our 40s incomes improve (but we spend a lot on teenagers). We borrow to extend the home, buy a holiday house or even an investment property. We'll start a share portfolio.
Into our 50s: the kids move out and we'll travel more - but we'll begin to reduce our loans and spending, conscious of future retirement needs. In our 60s we tighten our spending, aware that we need to conserve cash for our 70s and beyond. These are life trends to which most of us can relate, even if there are variations. Gay and childless couples, for example, have different patterns, but still within the same broad trends.
Dent says that combining these known lifestyle patterns with demographic knowledge can predict economic trends. He claims that since 1988, he's been predicting the economic boom and bubble we've just seen. He published books such as The Great Boom Ahead (1993), which predicted the boom would end around 2008. Dent puts a strong focus on USA trends but his analysis is global.
Former Treasurer Peter Costello showed a keen interest in demographics, but mainly from the perspective of the impact on future government revenue and expenses. I've previously looked at demographics from the angle of labour supply. For example, between 2008 and 2012 Australia's available labour pool will drop by 490,000.
What we're experiencing, of course, is the ageing of the post-war baby boomers. It's combined with the low birth rates of two decades ago. The trends in the USA, UK, Europe and Australia are similar. Japan moved into this cycle around a decade ago.
Looking at this in terms of government revenues and expenses, and labour availability, is one perspective. Dent studies the trend from the angle of consumer spending and borrowing. His observations make for arresting reading.
The post-war baby boomers induced the great boom until 2008. Their movement into their retirement phase of life is creating the largest debt deleveraging and consumption drop witnessed since the 1930s. Consequently, we are in a phase of an unavoidable, demographically induced, prolonged economic decline. Dent labels it a Great Depression.
This is probably an unwanted thesis because it's not what most of us would want to hear. It suggests that governments and economic regulators can't do much to stop the economic downturn. This may of course be wrong. But it would seem unwise to ignore Dent's analysis.