My long term view is that after the deflationary depression of the next 5-7 years (to 2014 at least), we will have a rip-roarin’ bull market, driven in part by a new family of technologies, including mobile Internet, cloud computing, bio-engineering, and my favorite, nano-manufacturing (a whole new sort of materials assembly). After that innovation wave, however, we will be hitting some huge headwinds against the continuation of the type of increasing wealth we saw from 1870-1914 or 1982-2007. The prime headwind is the demographic demise of many of the current and future economic powerhouses around the world.
The demographic destiny of the developed countries is already baked in: Japan, Europe and Russia are on a severe downswing in population. The US, Australia and NZ are going to be flattened but not down, due to immigration. China, the purported next great economic leader, will be nothing of the sort: its “one child” policy of its bleak Maoist period combined with its unattractiveness to immigrants dooms it to an aging and shrinking population, particularly after 2020. China is not the next US, but the next Japan. Africa and much of the Middle East are not culturally nor politically oriented to make the great leap forward of China and India, at least in the next 30 years. Latin America has huge potential, but other than Brasil and Chile, seems mired in socialist economies of the sort that have run Argentina through a roller coaster of promise and problems, boom and bankruptcy, for 100 years. This leaves India and possibly Pakistan & Indonesia as the only countries with *potentially* the sort of demographic & economic profile to drive global growth.
What has not been widely recognized is the seminal importance of “20-somethings” as the driver of growth. Sure, household spending tends to increase into the 50s before slowing down, but much of that spending is on trading up to bigger houses, better cars, more vacations, and investments in children. A trade-up economy is quite different than a first-time economy. It is those 20-somethings who buy “firsts”: first house, first car, first appliances, first furniture, etc. It is those 20-somethings who drive innovation, and who support the social welfare systems for their elders. When the demographic mixture inverts from a pyramid (more youth, fewer elders) to a column (flat all the way up) or a worse to a V (few youth to support many elders), growth slows and welfare implodes.
Japan today is the model of Europe and Russia in the 2020s. China should rise then decline in the 2030s. Immigration can keep the US, Australia and NZ afloat into the 2040s, but the coming depression may bring a suppression of immigration, as happened in the US in the last depression.
What this means is a continued low return environment outside of an innovation blip in the 2020s. I have earlier commented on the demographic demise driving a low-yield environment, and on how the demographic demise will shatter the welfare state. When the Powers That Be recognize this inevitability, we might get a change of policies to promote bigger families and easier immigration. Until such a time, the demographic destiny will overwhelm most projections of future prosperity, which tend to be extrapolations of current policies based on past demographic models.
In my just prior post I discussed the long wave count, and dismissed the near-term debacle of Prechter as overly pessimistic. In the longer term, however, he may be directionally correct. The demographic demise of the West points to one final wave up during the rise of China and India – the 2020 innovation wave – and then a long plateau if not outright decline, marred by wars and civil unrest amidst failing governments drowning in unfundable commitments to the social welfare of the aging. Like any future, this one is changeable with foresight and leadership, but given the long time frame of generations, it must be changed soon or will suffer a baked-in demographic disaster. Just as nine women cannot make a baby in a month, a plethora of wise leaders cannot fix a baby bust in a generation.