In today’s Exponential Investor:
- A problem that is unrecognised (so far)
- A problem that is unprecedented
- A problem that could ruin governments
Today’s piece comes from Nick Hubble – first published in Fortune & Freedom on Thursday 19 January.
All around the developed world, something unprecedented throughout history is happening. Thanks to demographic change, populations are beginning their long-term decline.
This creates a set of challenges we do not know how to deal with. And which we have no experience in dealing with.
In fact, I’d argue that we don’t even have a good grasp of what the challenges are given that they’re so unprecedented. But we’re doing a good job of pretending those challenges don’t need some radical measures, and soon.
The most important one is the demographic debtpocalypse. This is a mathematically inevitable crisis posed by huge government debt burdens and a falling number of taxpayers to carry that burden.
Let me take a step back to explain just how dire the situation is…
Big economies can handle big government debt burdens. That’s why we have to compare debt-to-GDP ratios rather than just total government debt. In plain English, the key question is: how much debt does a country have relative to the size of its economy?
As it happens, I disagree with this metric. It’s the government’s debt we’re talking about, not the economies. And the government can’t just steal the entirety of GDP. Not without destroying the economy, anyway.
It’s not as if your personal debt burden is calculated as a ratio to national GDP either. It’s calculated in proportion to your income.
I think that the correct measure when considering government debt burdens is the ratio of debt to tax revenue. Making this adjustment has a large impact on the conclusions you might reach when comparing nations. But, for today, let’s do things the way economists do them, not the way they should be done…
A high debt-to-GDP ratio means that your government has a lot of debt relative to the size of its economy. You can deal with this in two ways, only one of which – the second of the two – is politically plausible. Either you shrink government spending, or you grow the economy.
There are two ways to grow your nation’s GDP. Actually, there are three, but economists can’t tell the difference between more people working and the same number of people working more hours. The second option to grow your economy is productivity – people doing more per hour.
If demographics turn down so badly that the population is set to shrink, this means less workers, and therefore less GDP. That is unless people work more hours or grow productivity fast enough to offset the challenge. Even then, the demographic shift means less GDP growth than we’re used to from previously growing populations.
Now, theoretically, falling GDP because of a falling population needn’t be a bad thing at all. We could still all be improving our living standards on a per-person basis. If productivity doubles and the population halves, GDP remains steady, but you would’ve doubled GDP per person – a huge improvement in the living standards of the individuals.
But not all things apply on a per-person basis. The burden of government debt is carried by the population as a whole, however many people there are. This means that if you halve the population, and you thereby halve GDP, the amount of government debt would remain the same. Which also means that the debt burden per person would be doubled – a nightmare scenario.
Obviously this isn’t going to happen. Not least that is because it’s going to be a much slower process than I describe. But the nature of the challenge is obvious. The debt will grow per person over time even if nations were to, say, balance the budget and grow GDP.
What makes this especially dangerous is that we are not used to this situation, and therefore don’t know what to do about it. We probably don’t even realise it is a problem at all.
In the past, population growth, and thereby GDP growth, had been a presumption. It was a presumption that allowed governments to borrow vast amounts of money under the calculation that the debt burden would be falling per person because of demographic change anyway. The risk was merely how long it would take for demographic growth to make the debt irrelevant.
But now the tailwind is a headwind. Every pound of debt we leave to our children today is more than a pound of debt in the future because there will be fewer children trying to pay it off. If they even try to…
So, what can we do about all this?
I believe the only plausible answer for developed countries is to ask foreigners to pay off our national debt for us. By which I mean significant immigration of taxpaying workers.
But this is not an option for everyone.
While financially dangerous demographics are playing out in Europe and parts of Asia, a small group of nations stand apart. There are some developed nations where populations are still expected to grow over the long term, largely because of immigration. Many of them share a particular trait. They are English speaking – the United States, Canada, Australia, New Zealand, the UK and to a lesser extent Ireland.
Of course, these are not the only countries to see some population growth. But look at the shape of population charts and English-speaking nations obviously stand out for their population growth.
Now I don’t know about you, but I don’t consider the English language to be sexy. Nor is common law likely to be particularly conducive to conceiving children…
So, what is it about English speakers that leaves us better positioned to deal with demographic decline?
I haven’t got a clue…
Let me know, along with your permission to publish, by emailing [email protected].
Yes, of course our demographics are better because of higher immigration and better fertility. But why are those factors better in English speaking nations relative to others?
It can’t be the weather, for example. we have a diverse range between the UK, Canada and Australia… And the weather is probably better in France.
Whatever the reason might be, an important dynamic is that people vote with their feet. They move to the places that offer a better life. And it’s rather tough to convince them to migrate to a place where they don’t want to be…
If you set aside all the political and ideological debate and simply focus on migration flows, you find the answers to those debates in an undeniable form.
People fled East Germany for the West. South Korea prospered overed the North. The migrants in Calais want to go from France to England. Europeans continue to move to the UK despite Brexit.
But my point today isn’t to settle old ideological debates, even if some people ignore the evidence. My point is that the future will also be determined by migration flows in much the same way. Moreover, those flows will become dramatically more important.
Those nations that struggle to attract the sort of migrants that can pay a lot of tax will struggle to avoid a sovereign debt crisis. Their debt per taxpayer will become an impossible burden.
Those countries that can attract the migrants of their choice will be able to avoid many of the demographic challenges the developed world faces. They might even be able to avoid a demographic debtpocalypse.
Now I’m sure the idea of immigration to avoid the debtpocalypse doesn’t sound entirely enticing to many of you. But, at some point in the future, it seems to me that we must choose between immigration and a sovereign debt crisis. At least we’ll have a choice in the UK…
The economist Russ Roberts of Econtalk.org, to whom I have listened each week since 2006, is fond of saying that “the solution to poverty is luggage”. He means that moving to places with better prospects is the key to improving your standard of living. And poverty rates are connected to mobility.
I believe that the solution to the UK’s coming sovereign debt crisis is the same – luggage.
Obviously immigration that worsens our government’s fiscal position would worsen the problem. That’s a simple mathematical point which should go without saying.
But English-speaking nations like the UK seem to be blessed with the opportunity to pick and choose those immigrants which can improve the quality of life of people in the UK.
It doesn’t surprise me that, after going through the political process, that we are unable to develop an immigration policy which does a good job of this. But we could fix that, while many nations do not have this option because migrants simply don’t want to go those nations.
The economic effect of migration between nations isn’t the only demographic force that investors should be paying attention to. Governments, in their attempt to make some sort of provision for demographic change have encouraged us all into making provisions for our own retirement. In doing so, they also inadvertently created a rhythm in the stock market. One which you could profit from each fortnight.
Editor, Fortune & Freedom
PS Note from Sam: Just a reminder that Exponential Investor is changing. I’m joining forces with my colleague Nick Hubble over at Fortune & Freedom, to bring you wider ranging daily market analysis.
Starting Monday 30 January, you’ll be hearing from us on a daily basis in Fortune & Freedom.
The good news is you don’t have to do a thing as part of this exciting change – except “whitelist” a new email address, [email protected], so we don’t get sent to your junk folder. If you don’t know how to do that – just click here.