Maynard Keynes on Japan – “Very Disastrous”

“In an era of declining population, demand tends be below what is expected and a state of over-supply is less easily corrected. Thus a pessimistic atmosphere may issue; and although at long last pessimism may tend to correct itself through its effect on supply, the first result to prosperity of a change-over from an increasing to a declining population may be very disastrous.”

John Maynard Keynes
General Theory - 1937

 And now in 2010 we get the following headlines:

I will leave you to conclude whether Keynes’s forecast for Japan will come true. Keynes wrote his thoughts on population in the context of equity prices. Generally speaking, the Nikkei has been down for the last twenty years.

There are many components to the make up of population. The death rate and immigration are factors. But the big one is the fertility rate. Some fuzzy math: If each female has 2.3 children in her lifetime the population will be steady. (.3 mortality). If each female has 2.6 children, then the population is growing.

The CIA provides updated information on fertility rates for most countries. The information is interesting. There may be some clues in it if you believe Keynes. The link is here. A few highlights:

-The EU has a broad based problem. Germany’s fertility rate is 1.41, the UK at 1.66.

-The US is at a ratio of 2.05. Well below the rate for indigenous population growth. Our numbers look better when the death rate (declining) and immigration (legal and illegal) are taken into consideration. It will be interesting to see this year’s census data. I think the illegal population is way down. The US looks good compared to most other industrial countries.

-Russia is at 1.41. This country does not do well on the longevity statics either. Good thing they have tons of oil. Hint - buy Resources not Retailers if you want to invest here.

-Afghanistan and Iraq have fertility rates of 6.5 and 3.9 respectively. They are having lots of babies. Iran on the other hand had a fertility rate in 2009 of just 1.71. That probably confirms something we already know about the domestic situation in this country. If you were calling the shots in Iran and were looking at this number, you might just conclude that it would be better to make a 'move' sooner versus later.

-India is a standout. Not only do they have a big population, they are having babies. The fertility rate is 2.72. The population is climbing steadily. This will continually boost domestic demand.

-China was the big surprise. The fertility rate is one of the lowest. It stood at 1.79. The UN has a forecast that it will remain at 1.8 for the next fifteen years. China is trying to create demand domestically as they have lost a lot of exports. They do that with deficit spending, but it is not supported long term by the fertility rate.

-Japan is near the bottom of the big countries at 1.35.

-Brazil looks good on this list at 2.4.  This country keeps popping up when you think of where money should go.

I’m not sure of the importance of this. It certainly does not mean anything in a given month or a year. But over the longer-term these are powerful forces. The fertility rates have come down in almost all countries on a steady basis for the past 25 years. We are still growing globally, but at a lot smaller pace. It’s hard to assume that “productivity” is going to make up for these declines. It’s easier to conclude that average global growth in the next twenty years will be lower then it was in the priort two decades.


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