American admirers often talk about the European lifestyle. Alas, it’s all style and no life. If the EU’s deathbed demographics are becoming too obvious for even the dopier media outlets to ignore, you can bet the Chinese and other buyers of western debt are way ahead in their analyses. If you’re an investor and you’re not factoring in demography, more fool you. Tracking GDP versus median age in the world’s major economies is the easiest way to figure out where this story’s heading.
Take a “toxic asset.” What would improve its current pitiful value? That’s easy: more demand. Less supply. An asset is only an asset as long as there’s a buyer willing to buy it. If you’ve got 50 houses and 100 would-be homeowners, that’s good for property prices. If you’ve got 100 houses and 50 would-be homeowners, that’s not so rosy.
Which is the situation much of the West is facing. A bank is a kind of demographic exchange, by which old people with capital lend to young people with ambition and ideas. Who are somewhat thin on the ground in modern consumer societies. Japan, Germany, and Russia are already in net population decline.33 Fifty percent of Japanese women born in the Seventies are childless. Between 1990 and 2000, the percentage of Spanish women childless at the age of thirty almost doubled, from just over 30 percent to just shy of 60 percent.34 In Sweden, Finland, Austria, Switzerland, the Netherlands, and the United Kingdom, 20 percent of 40-year-old women are childless.35 In a recent poll, invited to state the “ideal” number of children, 16.6 percent of Germans answered “None.”36
Well, that’s a woman’s right to choose. But, in the macroeconomic picture, who’s going to be around to buy your assets? Mark Twain commended the purchase of land because “they’re not making any more of it.”37
But, in the fast depopulating eastern half of Germany, they’ve made more than anyone’s going to need for the foreseeable future.
Now look at it from a business point of view. In the United States, depending on what line of work you’re in, your sales territory may be your town or your state or the whole of America. But for Germany, Italy, and Japan, their only viable sales territory is the world. When your median age is forty-three and rising, any economic growth is down to exports. Wall Street experts talk about restoring “consumer confidence,” but in much of Europe they won’t restore “confidence” until they restore consumers—that is, figure out a way to generate sufficient numbers of them. Until then, the domestic market is too old and too small (or “inert,” to reprise Martin Wolf’s line) to support economic revival.
If you’re a German bank, to whom do you lend money? With age distribution on your home turf heading north relentlessly, you don’t have enough young people to grow your business. So you lend farther and farther afield. Not crazy farther, not Sudan or Rwanda. But far enough that you’re operating in markets where your traditional forms of risk analysis don’t apply, even if you were minded to apply them. To western bankers, Eastern Europe didn’t seem that different or dangerous, if you steered clear of the more psychotic oligarchs. Unfortunately, the post-Soviet east is even further down the demographic death spiral than you are. America? By some estimates, Germany’s Landesbanken could have to write off a trillion bucks’ worth of subprime crud from the U.S.
So, from the individual homeowner with no one to sell his home to, and the business that’s run out of domestic market, and the bank frantically loaning to jurisdictions it barely comprehends, nudge it up one last stage—to the state. In recessions, government is enjoined to spend—to go into deficit, ramp up the national debt in order to “stimulate” the economy.
Adding to the national debt presupposes that there’ll be someone to pay it off. But what if there isn’t? And do the Chinese and the Saudis already know the answer to that question? The failures of British and German Treasury auctions (not to mention near misses in the U.S. prevented only by the Fed buying up Treasury securities) prefigure a world with too much debt and too few sugar daddies willing to cover it.
In 2003, the IMF conducted a study of Eurosclerosis and examined the impact on chronic unemployment and other woes if the Eurozone labor market were to be Americanized—increasing participation in the work force, reducing taxes, rolling back job-for-life security, and generally liberalizing the economy.38 They concluded that the changes would be tough, but over the long-term beneficial.
