Baby Boomer Bust

While it may be poorly understood, a country's demographics are critically important to their fortunes.  Most governments, including our own, are built on a series of ponzi schemes, meaning that growth is dependent on having the age structure pyramidically shaped.  It's very positive when a small percentage of the population is old while a  large percentage of the population is young.

The primary reason for the importance of demographics is what economists refer to as "household creation".  Younger people tend to buy houses, buy appliances, buy cars and have children.  On the other hand, older folks are savers, sell houses, sell appliances and DON'T have children.

"Household creation" is critical to driving growth via the multiplicative effect of the accumulation of possessions through "household savings" from employment income.  While older folks are retired, living off savings and assistance such as medicare and social security, younger people are buying, saving (hopefully) and, in general, contribute to the major forms of assistance to the old, such as social security, medicare, disabiltiy and others.

So, as a country's population "grays", or grows older, it becomes at greater risk for economic problems.  For example, Japan, which has, to my knowledge, the "grayest" of demographic structures, began its bust in 1990.  And, it has yet to even recover.  Europe and the U.S. came next as their demographics were a bit more favorable.  In fact, I've long advocated the allowance of "illegal aliens", since they have helped keep the pyramid alive longer than would have been possible without them!!

Countries like India, which have booming populations are quite fine.  However, my suspicion is that China, which has taken extreme population control measures, will NOT be fine for very long despite evidence, at the moment, to the contrary.  Once these population control measures affect its pyramidal population structure, the pheonomenal growth experienced there will start to ebb and it will be subject to the very forces that are affecting the U.S. and Japan today.

The evidence I've cited is circumstancial, but I maintain it's WAY too coincidental to be false. The fact is, that nearly every country's fortunes are dependent on the relative number of old people to young people.  While this may seem counter-intuitive, I assure you that it is indeed, quite true.

I hope you've enjoyed reading this essay as much as I enjoyed writing it.  I love your comments, pro or con, and will continue to respond to each and every one of them.

Marko's Take

P.S. Given the wild action today in Gold, I'll be covering it tomorrow.