We still see the glass as half full, given likely decent global economic growth, healthy corporate p...
There's Only One Way out of Debt
05/07/2013 10:21 am EST
What's posterity done for me? That seems to be our collective attitude as we refuse to fund the growth and productivity our economies will need as they age, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
It's clear that the next stage in the painfully slow recovery from the global financial crisis/Great Recession is a war between the young and old.
In the United States, for example, the sequester has left payments to the older generation under Social Security and Medicare largely untouched, while leading to a wave of cuts to Head Start across the country. And in Spain, unemployment among the population as a whole was 27% in the first quarter, but for Spaniards aged 16 to 24, it's above 50%.
It shouldn't be any surprise the next stage in this crisis—I'd characterize everything from the US mortgage meltdown to the worsening recession in the Eurozone as part of a single crisis—is about demographics. Because I think the roots of the crisis lie in demographics. Debt and demographics go together in really toxic ways, I'm afraid, that go a long way to explaining the current mess.
And I find that awfully depressing. If the cause of the global financial crisis, the Great Recession, the euro debt crisis, and the very slow recovery in the United States are all the result of an aging world, the global economy is likely to show both slow growth and destructive volatility for a long time.
There's very little we can do about the aging of the world's population. And, on the record so far, we're handling the transition to an aging world really, really badly.
Old vs. Young
This crisis is going to be even worse than it need be, if our "solution" is to pit the old and the young against each other.
In a war like that, the old are almost certain to win; in relative terms, they've got the power and the money. But that would mean starving the young—the part of the global population that we need to be as productive as possible—of the capital and intellectual resources that future productivity rests on.
Demographics isn't among the popular explanations for this crisis. There's truth in most of the popular explanations, too:
- Banks and Wall Street were too greedy and too arrogant, and they did financially engineer the world into a mortgage crisis that turned into a global financial crisis.
- Governments did run up debt because of bad financial decisions made before the crisis (the shortfall in state pension plans in New Jersey and Illinois come to mind), and they haven't been very smart in their response to the Great Recession.
- The continued wave of globalization has delivered a mountain of cheap goods, but hasn't delivered the job growth that advocates of free trade promised.
The implications of these explanations are depressing enough. Globalization will continue, and seems beyond the power of governments to control. Politicians will almost certainly continue to make bad financial decisions, driven by their desire to stay in office. We're unlikely to abolish greed and arrogance any time soon.
In other words, there's very little to suggest that we won't do this again sometime soon.
Other Problems Amplified
But I don't think these popular explanations really illuminate why we're getting this series of crises now. I think the explanation comes down to the way an aging world—and especially the demographics of a rapidly aging developed world—amplify other economic problems.
Consider Italy, often held up as the worst example (outside of Japan) of out-of-control deficit spending. Government debt in Italy was actually on a downward trend before the financial crisis hit in 2007, with government debt falling every year from 1996 to 2006-2007.
But the crisis cut government tax receipts (Italian GDP, measured in real terms, has fallen every quarter for almost two years) as Rome was increasing government outlays to fight the Great Recession, and try to avert a collapse of the banking system.
It's tempting to see the crisis in Italy as just more fallout from the global financial crisis, which led to the Euro debt crisis, which led to an extended recession across the Eurozone. But I'd argue Italy was headed for crisis before any of this hit, despite the decline in its debt-to-GDP ratio (although I'd certainly agree that the financial crisis made Italy's crisis worse).
Take a look at Italian demographics. In 1950, Italy was one of the world's ten largest countries by population. It's now 23rd. In 1950, it had a larger population than Egypt or Vietnam. Now its 61 million people are far fewer than the 85 million in Egypt or the 92 million in Vietnam.
Right now Italy's population is barely growing—the CIA World Factbook estimates growth of 0.34% in 2013. If not for immigration, Italy's population would be falling.
And consequently, Italy is aging. Quickly. The median age of the Italian population is now 44. Compare that to 29 in Vietnam or 25 in Egypt, or even 37 in the United States. Italy isn't quite as old as Germany or Japan—each of which has a median age of 46—but it's not far behind. And the country is clearly one of the oldest and fastest aging in the world.
Facing the Music
So what are the consequences? I can think of three that feed right into the current financial/economic crisis, and lay the groundwork for a series of crises that stretches as far as the eye can see.
First, as populations age, they get less productive and more expensive. Even if workers work longer, they gradually do retire. So a country like Italy—along with just about every other developed economy—is seeing a rise in the ratio of active workers to retired workers. Retirement payouts rise, and so do the costs of health care.
Second, as countries age, debt loads that were perhaps supportable—when more of the population was in the active work force, and when retirement and health-care costs were lower—become a heavier weight on the country.
Older countries have trouble carrying as much debt as they did when their populations were younger. Such countries use savings rather than accumulating them, for example, and that means that gradually a country like Italy with a huge base of domestic savings will need to attract debt buyers from outside its borders.
That's a problem if other developed countries—including the United States, which has a proportionally smaller pool of domestic savings—need to attract global capital too.
Third, countries in which government at all levels, businesses, and individuals are in this position become exceedingly vulnerable to wishful thinking, pie-in-the-sky assumptions, and schemes of dubious credibility.
In the US mortgage crisis, sophisticated investors from pension funds to insurance companies were willing to believe that Wall Street could bundle together mortgages to produce products with higher yields and less risk. National governments in Spain, Ireland, and the United States, to name just three, were willing to believe that they could extend economic booms on a wave of credit even as incomes stagnated.
Meanwhile, pension programs at the national, local, and corporate levels were willing to believe that could finance hefty payouts because returns would be 8% a year. Individuals were willing to adopt a "What, me worry?" attitude about their future finances, because rising asset prices would make up for slow or no growth in incomes.
What's the Alternative?
The alternatives—cutting benefits, raising taxes, using earnings to fund pension plans—were much more painful than simply believing that the snake oil being peddled as medicine would work.
These aren't isolated events. It's not a coincidence that they come together now. They're all fueled by a similar dynamic.
As societies age, growth falls. As the number of workers in their prime working years falls as a proportion of the total population, and as the number of dependents (the very young and the very old) climbs, growth slows.
And that slowing growth takes place just as the society as a whole needs to pay out more to take care of an aging population. The result is a global funding crunch that, for a while, we bridged using a variety of Ponzi schemes, ranging from subprime mortgages to rising national debt-to-GDP ratios.
There is a way out of this—but it is manifestly a way that we aren't taking. First, we do have to cut spending wherever we can, so that we can actually pay the burden that an aging global population imposes.
And second, we have to increase spending wherever it would increase future productivity. In other words, we need to tighten our retirement belts so we can invest in future growth.
There's absolutely no evidence that any developed country in the world is doing this. Yes, some countries are raising the retirement age or tinkering at the edges of retirement benefits. But the savings from those efforts are being used to pay down debt—and not to finance future growth.
In the United States, that has meant slashing support for junior colleges—which should be a key resource for upgrading the skills of our work force. We've cut Head Start and other preschool and child-care programs, which makes it harder for parents just to get and keep jobs, let alone find the time and energy to upgrade their skills.
We've cut college loan programs or made them more expensive, so that fewer people can afford to go to college and more graduate with a crushing load of debt. That's not exactly a formula that will lead younger workers to invest more money in upgrading their skills.
Where it Leads
The result? Younger workers, the very people an aging society needs to produce more growth and more wealth, are falling behind economically. Workers 25 to 34 are the only age group, according to the Labor Department, with lower average wages in 2013 than in 2000.
Not surprising, because 26% of US workers between the ages of 26 and 34 don't have jobs. And who are those unemployed younger workers? Well, by and large they're the least educated members of that age cohort. The official unemployment rate for 25- to 34-year old college graduates is just 3.3%.
I think that "official" unemployment rate understates the extent of the problem, even for college graduates. Among the recent college graduates I know, a high percentage are working at temporary or part-time jobs. Or at jobs outside their educational field. Or at internships that would be jobs in another economy.
Just take a look at the US jobs numbers for April, reported May 3, that the global financial markets found so cheery. The number of employed did rise by 293,000 in the month—but almost all that increase came from the number of people working part time, but who would like to work full time. The number of part-time workers climbed by 278,000.
This stage of the crisis isn't sustainable. So far in the United States, at least, young workers—and prospective young workers—still believe, by and large, that their situation is temporary. If they do the right thing—go to college, for example, or get the right training after college (another unpaid internship)—the jobs will eventually come.
Right now they or their parents are willing to fund that incredibly expensive training because they believe that, contrary to much current evidence, it will be worth it.
Where it Ends
But for how long?
For how long when the cost of that training is rising, because public financing is falling? For how long when too many of the jobs that come at the end of that training don't pay enough to support the debt load?
For how long when society is essentially telling its young workers, "Sorry...we (the older generation) spent it, and now you'll just have to pay the bill?
None of this seems a formula for producing the higher growth and higher productivity that developed economies need as they age. It is a formula, however, that even you as read this is working to produce the next round of schemes that promise higher returns and less risk.
I don't know what form those schemes will take. But I am absolutely certain that if we continue to refuse to make the hard decisions and the painful investments that offer the only real path out of this crisis, the global financial system will flock to the next scheme that promises a quick fix.
And we know how that ends.
Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of December see the fund's portfolio here.
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