By John Richardson
POLITICAL populism, or perhaps more accurately demagoguery, is a major concern amongst the great and good who are gathered for this year’s World Economic Forum in Davos, Switzerland.
They are worried, according to the Financial Times, about the “US building a wall to keep out immigrants, Britain leaving the EU or anybody raising tariffs or dismissing climate change [as a man-made reality]”.
But nature doesn’t like vacuums; when a vacuum happens it is quickly filled, and so many of the political leaders attending Davos shouldn’t therefore be surprised that the vacuum they have created has been filled by the political populists.
What is first of all missing is a recognition that demographics are destiny. The above chart, based on UN population data, shows that:
- The number of people in the New Old 55+ generation is rising from 250m in 1950 to 1.8bn by 2030.
- In terms of total world population, their numbers will double from 11% to 22% over the same period.
All the evidence shows that as people age their spending patterns change. They buy less new things for the sake of buying new things, and instead purchase only what they absolutely have to purchase – when something wears out. Combine this with the collapse in pension savings resulting from the global financial crisis, and the fact that, even before then, people didn’t save enough for their retirements, and you have a major problem.
This isn’t just a problem in the West. Look at China, which has lost 400m babies because of the One Child Policy. It a $64,000 dollar question as to whether its government will ever be able to afford to pay for the country’s rising number of retirees. This throws into doubt whether China will make the vitally needed transitions from an investment to a consumer-led economy.
If the political leaders assembled at Davos had recognised these demographic forces ten years ago, policies would now be in place to take advantage of a fantastic opportunity: A billion new consumers, people who would have already been dead during previous centuries, who will be alive well beyond the age of 55. Build a new economy around these people and governments and companies will be fine.
The good news is that it is still not too late. But the longer that the political establishment remains fixated on the idea that all that’s needed is a bit more central bank stimulus to return growth to normal, the more the global economy will struggle. And the more the global economy struggles, the stronger will be the appeal of populist political alternatives. The 20th century history of Europe tells us the dangers that could lie ahead.
In one respect, though, this year’s Davos is a step in the right direction: Major investors and bankers speaking at the event have expressed their frustration at the failure of central bank stimulus to achieve sustainable economic growth, according to the Wall Street Journal. These people matter hugely, of course, as they shape the direction of government policies.
One particular banker who stands out is Ralph Hamers, the chairman of Dutch bank ING NV. He said:
There may be a paradigm shift we have to accept with demographics in Europe: It’s not that bad to have zero-percent inflation. We were preoccupied with 2% inflation, but just because it’s been that way for 40 to 50 years doesn’t mean it has to remain that way.
There is no maybe about this. A hard an objective look at the data will tell you that a demographics paradigm shift in Europe is well underway. How else do you explain Greek and Spanish youth unemployment at more than 47%?
But at least Harmers raised the concept of demographics. And he was absolutely right to warn about the dangers of chasing inflation through central bank stimulus. You cannot print babies. All that you instead end up with asset and equity-price bubbles that eventually go pop, making the underlying deflationary problems even worse. This is, in short, explains why oil and chemicals markets are where they are today.