About that Pacific Future

In the Japan office, there is a lot of discussion about a growing relationship between Japan other Asian nations concerned with China. There is a lot of talk about their military potential if they just gave another percentage of GDP to defense.

The China office likes to count GDP growth, military spending growth, new and existing programs. There is also talk about how important a potential market they are, economic interdependence, etc.

Well ... that is all nice theory - but I don't think those are the most important things out there in WESTPAC. In the background are some very cold facts. You can fudge some things, quickly spend and buy equipment ... but one thing you can't quickly do is make kids and change a population's age.

Along those lines, keep these facts in line when people start to get too excited about either Japan or China. Don't dismiss ... but keep in mind;

• After a decade of double-digit GDP growth, China’s economy will grow by just 6 per cent to 8 per cent this year. Eventually, China’s leadership will have to deflate a property bubble and prop up household income lost in the Great Recession without unleashing ruinous inflation. And the world will not indefinitely tolerate China’s manipulation of its currency, kept artificially low and a thief of jobs in Southern Ontario and the U.S. Midwest. Economically speaking, China presents one of the most difficult of management challenges.

• China is hurtling toward demographic disaster. A consequence of the 33-year-old “One Child” policy, says the U.N., is that the ratio of working people to dependents will almost halve between now and 2065, to a mere 1.0. What that means, says economist Leith van Onselen of Australian investment letter Macro Investor, is that “China will get old before it gets rich.”
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But one country that worries American military strategists will also face serious demographic challenges. China’s rise over the last generation has been stunning, but straight-line projections of its future power and influence ignore that its birthrate is 30 percent below the replacement rate.

The Census Bureau predicts that China’s population will peak in 2026, just 14 years from now. Its labor force will shrink, and its over-65 population will more than double over the next 20 years, from 115 million to 240 million. It will age very rapidly. Only Japan has aged faster -- and Japan had the great advantage of growing rich before it grew old. By 2030, China will have a slightly higher proportion of the population that is elderly than western Europe does today -- and western Europe, recall, has a higher median age than Florida.
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Its society has relied heavily on trust relationships within extended-family networks. In a country where fewer and fewer people will have uncles, those networks will rapidly atrophy. The government, meanwhile, relies for its legitimacy on a level of economic performance that demographic trends imperil.

All in all, Eberstadt concludes, “we might want to have some additional new friends and allies in the world.” America’s growing ties to India, a nation he describes as “aging moderately,” strike him as promising. But he warns that it has not made the most of its population: “India has an appalling education deficit.”

Foreign-policy thinkers can often lose sight of demographic trends, Eberstadt says, because from a policy makers’ view “they tend to look really glacial. If it’s not happening in the next 48 to 72 hours, it’s not in the inbox.” But “population change gradually and very unforgivingly alters the realm of the possible.”

Someone really needs to talk Japan in to getting their freak on.

Demographic trends are prompting Japan’s Government Pension Investment Fund to trim its debt holdings. That’s huge news in bondland. The fund oversees $1.45 trillion of assets, an amount greater than China’s holdings of U.S. Treasuries and more than most sovereign-wealth funds have to invest. This bond whale makes the $263 billion Total Return Fund run by Bill Gross of Pacific Investment Management Co. look like a minnow.
Dumping Debt

The pension fund’s move may signal a weaker yen in three ways. First, as Japan ages, huge pension funds will have to invest more abroad for higher-yielding assets. Second, the Bank of Japan will have to add more liquidity to the financial system to absorb large bond sales, which is essentially another quantitative easing. Third, it means the big money will be bidding less on government debt auctions. All of this may have other major debt holders, Japanese or otherwise, considering sales of their own. And selling debt today might lock in much richer gains than a year from now.

From demographic implosions not seen globally since the 14th Century - and for the first time not caused by one of the four horsemen - combined with a global debt problem no one really knows how we can back out of, I am increasingly backing away from traditional thoughts about what the medium-term future holds.

We are, I believe, moving in to a time of great uncertainty with a bias towards the negative. This is very different from an the last era of certainty following the fall of the Soviet Union, that had a bias towards the positive.

With uncertainty one needs to keep the futurists at a good distance. One needs to be careful of anything that is of narrow focus. Flexibility, moderation, depth, and distance are the keys. That gives you the ability to readily pivot and adjust as whatever comes out of the mist of uncertainty.

Geography has blessed our nation with depth and distance; flexibility and moderation you have to make happen yourself.