Globally, populations are aging, as people have fewer children and Boomers move into mass retirement. Peter Zeihan, a geopolitical strategist and author of several books, argues this trend is set to have very negative implications for global growth and the financial structure heading into the 2030s.
Here's what he had to say in a recent interview with FS Insider (see Peter Zeihan on Why the World Is About to Radically Change for audio).
Economics Is Driven by Demographics
The underlying structure of everything we know about economic theory is based on the concept of expansion, Zeihan said, and at the root of this expansion is population growth. Since the 1500s, the global population has grown larger every year, right up until the present.
What's changed? Well, globally, populations have been increasingly moving from rural settings to cities, moving into smaller footprints in the process. The United States started urbanization as early as the early 1800s. We’ve had 200 years to adjust, along with a large amount of space to fill.
This is not playing out the same for the rest of the world. Most parts of the world have moved directly from large farms into small condos, especially in China. This directly leads to declining birth rates.
In many cases, birth rates simply collapse, Zeihan stated. This has been happening in enough places around the world, that we've reached a demographic tipping point.
“Most parts of the world now have far more people aged over 65 than they have children,” Zeihan said. “Population growth has inverted. Birth rates have collapsed and now consumption levels are dropping. … We’ve passed peak consumption and we're passing peak production all right now. If we fast forward just a couple of years, when we're on the backside of all this...consumption is done. Investment is done. Capital accruing is done. … And we are at that point in less than a year.”
The World of More Turns into a World of Less
Everything else flows from this demographic time bomb. We exit a paradigm predicated on more, and that has implications for everything that makes up the modern world.
Birth rates have collapsed. We face a world with fewer younger people, and a greater percentage of older people.
The foundation of economic growth is the idea that consumption is stable or rising, and that finance will rise right along with it. We have no experience of anything else in the modern era, Zeihan noted.
The only historical analog that is even remotely close are the conditions that played out during and after the Black Death, he added.
This setup has worked out for us during the last 30 years because we had two trends operating in tandem to support economic growth.
First, the developed world, which started urbanization earlier, was packed with people aged 40 to 65. Workers had decades of experience, added tremendous value to the economy, generated a lot of financial capital, and allowed the cost of capital to be pushed down for everybody.
Meanwhile, the developing world, which industrialized later with younger starting populations, drove consumption while more advanced countries were doing the producing.
That balance existed from 1980 to 2015, but those two trends are now over, Zeihan stated.
Timeline of Demographic Collapse
The world is breaking up and that will impact different geographies, countries, economies, and sectors in different ways. It won't be the same year-to-year.
The world's Baby Boomers are set to retire next year. At some point between New Year's 2022, and maybe midyear 2023, we don't just pass the peak, Zeihan stated, we fall off the demographic cliff.
The only question is whether de-globalization will happen faster than that deadline, or slower than that deadline.
“We are in the final era of cheap capital in our lives,” Zeihan said. “We will never recover because the Baby Boomers only had kids in three countries. We think of the Millennials being the end-all, be-all here in the United States, but really they're all alone in the night. There are New Zealand and French Millennials, and that's it. … The rest of the world will have less capital every passing year with the biggest and the sharpest drop off either next year or the year after. That is when everything that we understand about finance turns inside out, and that will ripple through every other economic sector.”
This may be one of the biggest changes facing the globe in the years ahead. To learn more, be sure to listen to our full-length interview with Peter Zeihan on Why the World Is About to Radically Change. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts 3 days/week on all things economics, finance and markets...
Written by Ethan D. Mizer