William Gross’ Demographic Nightmare

PIMCO's chief honcho William Gross writes,

``The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do.”

Mr. Gross puts the blame on declining population from which to justify government’s bubble policies...

``The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debt as a percentage of GDP from 150% to over 300% in the United States, for example. Lacking an accelerating population base, all developed countries promoted the financing of more and more consumption per capita in order to maintain existing GDP growth rates.”

That’s because his economic ideology leads him to believe that spending alone drives the economy.

``If anything, my thesis is anti-Malthusian in its assertion that there will always be enough production to satisfy a growing population, but perhaps not enough new people to sustain growing production.” (emphasis his)

This is plain vanilla folderol!

Despite Japan’s lost decade, [see Japan’s Lost Decade Wasn’t Due To Deflation But Stagnation From Massive Interventionism], the post-market clearing phase from failed bubble policies has revealed that Japan’s per capita income has bottomed out in 2001 and appears to be on the mend. In fact, the wealth metric seems to be showing that the Japanese are getting rich anew, despite the declining population!

So Japan’s ‘deflation’ isn't a depression, but the opposite of what mainstream expects-net wealth accumulation (as shown above from google)!

Second, markets are not circularly flowing wherein people produce goods and the consumers mechanically buy them back, thus erringly conclude consumers drive the economy. This is the circular logic behind Mr. Gross' demographic nightmare where a declining population equals lesser consumption. Mr. Gross fails to appreciate that markets in essence is about the attainment of satisfaction from voluntary exchange.

Likewise, products and markets are not homogenous. Instead, the greater depth of the market economy, the greater the wealth, as people look to provide more products in a race to satisfy the consumers (themselves).

Hence, the more the purchasing power from wealth accumulation, the broader the diversity of products to choose from.

The chart above shows that as global trade deepens, per capita income is likewise growing-meaning more products to spend on from growing wealth--despite the declining rate of population growth.

In today's world, the major trend seems to be about the transition from the industrial economy to the post-industrial or information age (digital) economy, where niche markets, competition, innovation, specialization and dispersion of knowledge seem to be the predominant order.

In contrast to Mr. Gross, we see the demographic issue as non-sequitur.