Are we going off a demographic cliff?


Harry Dent thinks so. The financial and oft-controversial pundit who tends to make very robust predictions about the market has written a new book - the Demographic Cliff (affiliate link) about a soon-to-arrive fiscal calamity, caused by shifting demographics. Looking to Japan, and his research, he says that it's inevitable that our economy is going to get hammered by the big switch as people start to retire in droves.

"Our best long-term and intermediate cycles suggest another slowdown and stock crash accelerating between very early 2014 and early 2015, and possibly lasting well into 2015 or even 2016. The worst economic trends due to demographics will hit between 2014 and 2019. The U.S. economy is likely to suffer a minor or major crash by early 2015 and another between late 2017 and late 2019 or early 2020 at the latest"

It's an easy, relatively quick read, although it does use quite a few distracting and not always necessary exclamation marks! 

His story is quite simple, which is helpful when selling books, but not entirely convincing in my view:

  • It's a bit simplistic. If the economy was as simple as he describes, things would be much less chaotic. 

  • The boomers have always changed assumptions about what different ages want, need and expect, and will continue to do so. Assuming that the peak consumption is at 45-47, and then its downhill from there is a strong assumption, given what we know about boomers. As they start to turn 65, expect them to maintain healthy consumption levels, fuelled by two decades of rising house prices. It would instead be more interesting to understand more about where the affluent 60-75 year olds will be spending their money.  

  • Japan's experience is not necessarily replicable. According to BCG, Japan's growth spurt came to an end not when the consumers reached a certain age, but when the economy reached a productivity frontier, and stopped being able to drive accelerated productivity out of their labor force.  Japan's labor force productivity has been pretty similar to America's over the past two decades. 

  • Consumer spending doesn't necessarily drive the economy. While 70% of GDP may be accounted for by consumer spending, people who've looked into this suggest there is little correlation between consumer spending and GDP.  If our economy is going to follow the 45-50 year old consumers off a cliff, we'd expect there to be a strong correlation. 

  • There's no reason to think that we can't improve productivity of people both young and old, as this HBR article suggests, in playing down the worry about aging populations. 

Anyway, although I don't see things as simple (or as calamitous) as he makes out, it's a useful input to the debate - likely to spark some conversations and ideas, and therefore well worth a read. 


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