Developed nations face a perilous balance, teetering between the growth and death of their financial futures through their underlying demographic trends. These trends are almost impossible to reverse and can take decades to play out, since it is quite difficult to get the public as a whole to significantly alter their reproductive choices. While production efficiencies are certainly important when growing earnings, it is raw sales that drive the bottom line.
Just recently, the US Census Bureau showed that the population of the country has slowed to an annual 0.71 percent growth rate, the lowest since 1937. With the population projected to be just above 317 million heading into 2014, it becomes apparent that the pie-in-the-sky four percent GDP growth projections will probably never materialize without there being some form of significant government manipulation. Population growth in mature economies is what drives most earnings growth for the majority of businesses — since these new mouths to feed eventually become a business’s future customers.
This demographic time bomb of falling births is exploding all over the world, with most countries facing the prospect of financial stagnation. The landscape of shrinking populations, saddled with higher taxation to support their respective welfare states, will undoubtedly reach critical levels — impairing growth, not a pretty sight. Current projections of rising dependency ratios would not be so bad if there existed a large rainy-day fund that was established and fully funded while times were good, but saving for a rainy day runs counter to human nature in many cultures, especially when they’re run by Keynesian bankers. Unlike a few exceptions, like Norway — which due to its oil wealth boasts a sovereign wealth fund (SWF) totaling over $818 billion to split among its five million citizens — more than likely, the heavily indebted countries will be forced to reduce benefits and/or increase the burden each taxpayer will have to bear. For example, France has deteriorated to the point where, in response to its budget imbalance, it approved a 75 percent millionaire tax. Talk about drastic measures.
These types of “solutions” will only further stymie needed wealth accumulation. The winds of favorable demographics that helped carry our country’s economy forward in the past century peaked in the 1960s. They have since reversed and become a headwind. While productivity improvements are important for capital formation, the fact that couples today are not having enough babies to replace themselves will more than likely trump those improvements.