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The Developed World is Dying because of Demographics, Debt, and Deflation

Aug 12, 2016


Dear Readers...

Let me introduce you to my colleague Ankit Shah. Ankit has been a research analyst at Equitymaster for nearly six years. Over the last several months, he has been working closely with me and my worldwide think-tank on a unique global project.

He has been voraciously skimming through hundreds of reports and research notes from my global intelligence network...studying the global economic engine...and connecting the dots to build a big-picture perspective of what's really going on in the world of man and money.

Over to Ankit...

Warm regards,
Vivek Kaul


Since the time I joined Equitymaster as a research analyst, I've had a great learning journey in the microcosm of the economic landscape - studying individual companies.

But companies don't exist on isolated islands. They are constantly interacting with the larger macroeconomic factors. By macro factors, I don't mean just the ones within our national boundaries...but even beyond them.

I have been very curious to study and understand global factors far beyond our borders that affect our economic growth...alter the flow of capital...cause booms and busts in our stock markets...impact sales and profits of Indian companies...and influence our daily lives in ways we cannot comprehend.

It was with this inspiration that I have been collaborating with Vivek and his global intelligence network. In fact, we've been revealing some of their ideas and insights on the world economy, geopolitics, and money in Vivek Kaul's Diary over the last few months.

Today, I want to share some insights from our global network about what's plaguing most of the major economies outside of India and a glimpse of what their future might be. And then I want to connect the dots to back home in India with an interesting piece by Vivek.

Here's an excerpt from a disturbing piece by Vern Gowdie, a renowned financial planner and contrarian thinker from Australia and an influential member of Vivek's global network (read full article here):

A Glimpse into Our Deflationary Future

  • The following graph is a bit busy, but if you take the time to 'get it', you'll have a glimpse into our deflationary future.


    The blue bars represent the 15-64-year-olds in the economies of the OECD, China, Brazil, and Russia.

    This age group is recognised as being the most economically productive in a society...we need workers to produce 'things' and pay the income taxes that support government spending programs.

    During our debt accumulation years there were plenty of new workers coming through, taking their place as the debt slaves of tomorrow. In the coming years, the economically productive demographic will shrink. You don't need to be Einstein to figure out that this is not good for future growth.

    The red line is the Everest-like debt level we owe - US$210 trillion and counting.

    The green line is global GDP. The level of economic activity supporting the debt load. Note the widening gap between debt and economic activity started in the early 1980s, and that it keeps getting wider...this gap is best described as the 'jaws of financial death'.

    The black line is the FFR (Fed's Fund Rate). The US cash rate peaked at 18% in the early 1980s; since then it's been on a downhill run to almost zero. Obviously lowering the cost of borrowing money has aided and abetted the exponential rise of the red line (our debt levels). But the question is: 'Where to from here?' Can rates go lower? Perhaps they can go into the negative...but only slightly.

    So there you have it - a future that begins with the highest debt burden in history, the prospect of a falling number of people available for productive employment, and the room left to move on interest rates (the cost of that debt load) is, at best, minimal.

    The golden years are behind us. Now we are dealing with these deflationary pressures within the system.

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India: Demographic Dividend or Doubtful debt?

So, as you saw above, Vern struck at the very core of the problem plaguing most major economies of the world, barring India. It becomes clear that demographics are a powerful economic force. And demographics are the real reason why the world's attention is set on India. India boasts of the largest working age population in the world. And this is the population that drives growth.

But is India really in a position to harness the 'demographic dividend'? Or is the demographic advantage turning out to be a doubtful debt?

My colleague, Vivek Kaul, presents a careful examination (read full article here):

  • As the 12th Five Year Plan (2012-2017) document pointed out: 'One hundred and eighty-three million additional income seekers are expected to join the workforce over the next 15 years.' This means that a little over twelve million individuals will join the workforce every year in the years to come. This works out to around one million a month. At this rate, the Indian workforce is expected to be larger China's by 2030.

    This is India's demographic dividend. As these individuals enter the workforce, find work, earn money, and spend it, the Indian economy is expected to do well. When economists and politicians talk about an economic growth of close to 10% per year, they are hoping that India's demographic dividend will play out as expected.

    But the question is - will it?

    Have countries that were expected to benefit from the demographic dividend actually benefitted from it?

    As Ruchir Sharma writes in his new book, The Rise and Fall of Nations - Ten Rules of Change in the Post-Crisis World: 'The trick is to avoid falling for the fallacy of the "demographic dividend," the idea that population growth pays off automatically in rapid economic growth. It pays off only if political leaders create the economic conditions necessary to attract investment and generate jobs. In the 1960s and '70s, rapid population growth in Africa, China, and India led to famines, high unemployment and civil strife. Rapid population growth is often a precondition for fast economic growth, but it never guarantees fast growth.'

    Sharma then talks about the Arab world, which, despite being poised to, did not benefit from a demographic dividend: 'The Arab world provides a cautionary tale. There between 1985 and 2005 the working age population grew by an average annual rate of more than 3 percent, or nearly twice as face as the rest of the world. But no economic dividend resulted. In the early 2010s many Arab countries suffered from cripplingly high youth unemployment rates; more than 40 percent in Iraq and more than 30 percent in Saudi Arabia, Egypt, and Tunisia, where the violence and chaos of the Arab Spring began.'

    Indians need to be aware of this. The demographic dividend benefits a country if the government of the day is able to create the right environment for jobs to be created.

    As Sharma writes, 'In India, where hopes for the demographic dividend have also been sky high, ten million young people will enter the workforce each year over the next decade, but lately the economy has been creating less than five million jobs annually.'

    If this were to continue, there will be no demographic dividend for India.

So there are two important takeaways here...

First, we have to be mindful of the demographic patterns of the major economies outside India...because these patterns have a bearing on their consumption, expenditure, economic growth, public policy, and so on. And this has a bearing on India's international trade and exports.

Two, we must not blindly accept India's demographic dividend story. Yes, we have the largest and expanding working age population. But are we able to create enough productive jobs for this bulging workforce? The answer is no. And if this does not change soon, it will not only impede growth, but it will also pose massive socio-political challenges. And as I said earlier, businesses do not operate on isolated islands. They are intricately interlinked with all local and global variables. So watch out...

Ankit Shah (Research Analyst), has been a research analyst at Equitymaster for nearly 6 years. In the past, Ankit has been the driving force behind our learning initiative Equitymaster's Secrets. He has also travelled extensively across India with Richa and the Hidden Treasure team to identify winning small cap stocks. He now works closely with Vivek Kaul and his global network of independent thinkers, analysts, and economists.

Besides being an ardent follower of the Warren Buffett and Peter Lynch style of investing, he is a keen student of the Austrian school of economics. He is deeply fascinated and inquisitive about the workings of the human mind...and all the bizarre things that conspire when it comes in contact with money and power. He follows the multidisciplinarian approach to thinking and learning, drawing ideas and insights from fields as diverse as quantum physics, evolutionary biology, history, neuroscience, behavioural economics, and the ancient arts and sciences of India and the rest of the world.

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1 Responses to "The Developed World is Dying because of Demographics, Debt, and Deflation"

krishnan vc

Aug 14, 2016

Sir, Would it be out of place to mention that cost cutting methods like automatio/ robotics etc are plahying a major part in the non availability of jobs. If you look at the US and western economies it is no longer the cost of flipping burgers that create employment it is the absence of a great developmemnt like new factories for new type of products and also products which have been in existence for more than 2 decades which many people in the Africa and India would have had access to. It is the non existence of the MADE IN THE US label that has made the US a 210 trillion debtor. The people see that all products are manufactured by American Companies but in China and hence they are not willing to invest in the products when they can source the items from Made In China or Taiwan or Malaysia dierectly. I think that there is a great need for US corporations to look inwards and feel the difference. No amount of theories will make any difference.

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