We're all living longer .... that must be a good thing, right? Well of course ..... up to a point.

Thursday 11th August 2016

We're all living longer.... that must be a good thing, right? Well of course..... up to a point.

ref:- "More Old Than Young: A Population Plague Spreads Around the Globe" Bloomberg Markets

ref:- "Now We Know Why Germany Inc. Won't Invest", Bloomberg Markets

Demographics is very hot amongst economists just now, in particular the topic of aging populations. Well, it would be wouldn't it? Government bonds across the globe have always been the mainstay in the investment portfolios of pension funds and insurance companies, but plummeting bond yields mean that the returns are just not enough for many of these organisations to meet their obligations. It's a huge global problem that shows no signs of going away  --  and won't do until sustained growth and inflationary pressure reverse the downward path of rates. Outside of the US (and even within it), it's hard to be confident of when that might be and more than a few are convinced that the pensions issue is one of the most destructive time bombs ticking away out there.

So whilst your Auntie Ida's 100th birthday may be a joyous occasion, confirmation that we're growing older as a species has some less happy connotations. If you are prepared to call anyone of 65 or more OLD, and those under 15 years old YOUNG, then by 2030 the old will outnumber the young in no less than 56 countries, according to the UN's former head demographer Joseph Chamie. To put it into some context, such a phenomenon was noted for the first time only in 1995, in Italy. It's known as the "historic reversal" apparently, and gives every impression of being irreversible itself. It's not just the older, industrialized nations with well-publicised problems such as Japan and Germany either ..... within the next 10 years, countries like Cuba, South Korea and Thailand will be home to more old than young and for those with a long-term bent, the global population will pass the mark in 2075.

Beyond the falling yields issue, it's not rocket science to see where problems with an ageing population arise. In essence, it boils down to a shrinking workforce no longer able to support the cost of the pension bill. The example given is that 30 years ago (say), one might have expected a ratio of 10 workers for every retiree. We're now reaching the point where very soon in places like Italy there could be as few as three to shoulder the same burden. From an income versus expenditure angle, this leaves politicians in something of a bind  --  whether to increase taxes or reduce benefits. Neither course of action would be popular, but doing nothing is not an option.

The poor oldies are copping flak on a number of fronts (none of it ill-meant, we're sure). In some quarters, the blame for poor levels of productivity is being laid at the door of  ageing workforces. As is the stubborn reluctance of consumers to spend rather than save, since it's generally accepted than the old spend less freely than the young. (Before you say it .... yes, we know. That's hardly surprising if your pension is suddenly inadequate). Anyway, there's a report from Bank of America Inc. that diagnoses the cause of a lack of capital expenditure by companies in Germany as essentially the same as the lack of spending amongst older individuals.

Frankly, it doesn't feel right to overly criticise the corporate sector in Germany, whose economy has long been the most dynamic, innovative and successful in Europe on a sustained basis. It certainly seems a bit rich to throw Germany's high savings rate in with the damaged Eurozone banking system and  high sovereign-debt ratios in southern Europe as the prime causes of Europe's economic slump, as this article suggests. But undeniably, despite decent growth and profit prospects the German corporate sector has refrained from the kind of investment that would seem logical and by doing so has depressed demand and fostered deflationary forces.

And the reason? Pensions, of course. With pension schemes unable to find the return on investments required to satisfy their commitments, companies are retaining profits on their balance sheets for that purpose rather than using them for capital expenditure. In its way it's perfectly understandable of course, and the Germans might quite reasonably advise some of their European partners to get their own house in order before flinging any mud. But the "LOW YIELDS  leading to LACK OF CORPORATE INVESTMENT leading to DEPRESSED GROWTH, DEMAND AND INFLATION leading back to LOW YIELDS" scenario looks a lot like one of those vicious circles we talk about quite often. And if there's one thing we can be sure of having read Mr Chamie's report, the phenomenon of aging populations is only going to intensify.

It's a poser, all right .....