Economy

Deflation, anybody?

A disturbing deflationary force is starting to boil, ironically right in the face of rising inflation worldwide…

Population decline or dropping birth rates has become a global phenomenon.

Fewer workers, fewer immigrants, and far less tax revenue will present a new set of challenges for the 21st century. For investors, adapting to the changing demographics should rise to the top of variables to monitor.

Over a year ago, we published The Greatest Threat to Our Wealth, highlighting the deflationary factors of stalling population growth.

Since then, and particularly in the past 3-6 months, Elon Musk has been sounding the alarm, regularly tweeting about the issue and declaring in April of 2022 that, “birthrate might be the greatest threat to the future of human civilization.”

It certainly could be for asset values…

US Population Flatlines

Let’s begin with the United States, the world’s largest economy, which has seen a steep decline in its population growth rate. In The Greatest Threat to Our Wealth, we wrote that the,

“U.S. population grew at just 0.474% in 2019 – the lowest since 1918!”

That was before the pandemic. If you thought 0.474% growth or about a 100-year record low was bad, check this out:

According to the United States Census Bureau, the U.S. population grew by just 0.1% in 2021, the slowest rate since the nation was founded!

While the pandemic played a role, especially on the immigration side, declining birth rates are the main problem. For many economic and social reasons, women are having fewer babies — a decision with drastic consequences for our economies.

Lyman Stone, a demographer and research fellow at the Institute for Family Studies, points out some apparent issues cited by Stephanie H. Murray in How Low Can America’s Birth Rate Go Before It’s A Problem?:

“What happens to mortgages in a country where real estate depreciates like a used car because the population is falling and we need fewer and fewer houses all the time? We’re totally unprepared for that.”

Murray continues,

“And given enough time, said Dr. Christopher Murray, director of the Institute for Health Metrics and Evaluation at the University of Washington, below-replacement fertility leads to the extinction of the human race.”

While shocking and maybe a bit sensational, it is basic math. A society with a births per woman rate heading towards 1 will soon be in peril.

The economic system relies on people who can work, consume, and pay taxes. Without a new pool of taxpayers, the trillion-dollar-plus deficits the U.S. runs seemingly every year may look like peanuts compared to what’s coming.

Luke Rogers writes in COVID-19, Declining Birth Rates and International Migration Resulted in Historically Small Population Gains that,

“The year 2021 is the first time since 1937 that the U.S. population grew by fewer than one million people, featuring the lowest numeric growth since at least 1900, when the Census Bureau began annual population estimates.”

That can’t be good news for the IRS. Expect population decline to become a constant theme for future politicians and governing bodies in the United States.

US population declines to lowest in over 200 years
Source: United States Census Bureau

Europe Even Worse | Birth Rates Collapse

While the U.S. population essentially flatlines, countries in Europe are already seeing declines. The below image says it all:

Europe birthrate stalls
Source: Zeihan.com

Europe has a serious problem, and as the boomers retire, it’s looking less likely that the next generation can hold the line.

In Darrell Briker and John Ibbitson’s Empty Planet, The Shock of Global Population Decline, they write that,

“The United Nations estimates that the nations of Eastern Europe collectively have lost 6 percent of their population since the 1990s, or eighteen million people. That’s the equivalent of the Netherlands simply disappearing from the earth.”

Crashing birth rates isn’t new for Europe. Countries all over western Europe have been witnessing historic drops that will reverberate for generations.

According to Reuters’ Angelo Amante, Births in Italy hit record low in 2021, population shrinks,

“Demographics experts say the pandemic has hastened a decline in Italy’s birthrate, with 399,431 births registered in 2021 against 404,892 in 2020 – the 13th consecutive yearly fall and the lowest number since the unification of Italy in 1861.”

One of the sticky problems with a falling birth rate is that it compounds to the downside. A shrinking population keeps shrinking faster and faster. Italy’s 13 consecutive years of decline almost guarantees another 13 years of decline. There will be fewer reproductive age women ten years from now. A declining birth rate is difficult to reverse. The chart below demonstrates this.

Total Fertility Rate in the United States From 1800 to 2020

fertility rate continues to decline
Source: Statista

Note that the only time America’s birth rate rallied was in the post-WWII era. Although government debt levels were high back then, like they are today, almost everything else was different. Taxes were falling. Government spending fell, and the cost of living was much lower, allowing a family of 4 or 5 to live a middle-class lifestyle on one salary.

As one History.com editor put it,

“Many people in the postwar era looked forward to having children because they were confident that the future would be one of comfort and prosperity.”

Sadly, few today believe the future will be one of said comfort and prosperity. Hopefully, this changes soon, and the birthrate reverses in time.

The Immigration Stopgap

From Greece (1.35) to Spain (1.24) and even places like Finland (1.35), we are seeing historically low birth rate levels.

Places like Canada (1.4) and Australia (1.6) have relied on immigration for decades to fill the gap. But, as we are now witnessing for the first time, even India — by far Canada’s top source country for immigration — has a birth rate of about 2 – below the critical 2.1 replacement rate.

India’s Birth Rate Drops Below Replacement Levels

birth rates decline rapidly in India
Source: Wikipedia

India’s birth rate is declining rapidly.

Some say the decline has led to higher levels of education and control for women in some of the world’s poorest places. But is the expectation that birth rates will automatically stabilize after crashing for decades? We find this unlikely, to say the least.

China’s Population to Halve in the Next 45 Years?

China’s long history of meddling in its population levels is turning into a hard lesson.

In late-2021, the Bangkok Post published China’s population could halve within next 45 years, a new study warns. The writer, listed as the South China Morning Post, is working off of actual birth rates, not the elevated UN projections.

According to the article,

“The projection was based on the official birth rate of 1.3 children per woman last year…” And that, “If the fertility rate drops to 1, in 29 years the population in our country will fall by half.”

Here is a chart highlighting the decline:

natural birthrate of Chinese population declining rapidly
Source: Robert Ward via Twitter

In a desperate attempt to reverse a falling birth rate, Chinese citizens were ‘permitted’ to have two children in 2016; then three children in 2021. Despite these moves, China’s birth rate has continued to fall.

The Bangkok Post article continues,

“People dare not to have children due to increasing economic pressure,” they wrote. “There are also severe shortages in supporting services for childbearing and care.”

Finally,

“Another study in August suggested that in China, each 1,000 yuan (5,200 baht) per square metre increase in property prices reduces the likelihood of having one child by 2%, and that of having two children by 5%.”

Sadly, many Canadians and Australians can relate. Housing affordability is often the lifeblood of an economy and encourages young people to buy a home and start a family. Affordable housing and an overall lower cost of living have long been key to higher U.S. birth rates. At least it used to be.

North Americans Turn to Fur-babies?

As the prime birthing generation forgo having kids to work harder or party longer, they are turning to man’s best friend, the canine, for love and support.

In Fur-baby boom? 7 in 10 Gen Z adults would rather have pets than kids, Chris Melore from Studyfinds.org outlines a scary reality,

“A new poll reveals seven in 10 young adults in Gen Z would rather adopt a pet than have their own children.”

All one has to do is look around to see this trend in full bloom.

Canada Witnessing Dramatic Birth Rate Decline

While pundits like to blame the pandemic, the rapid decline began years ago. Check out Canada’s last four years, courtesy of Macrotrends:

  • The current birth rate for Canada in 2022 is 10.148 births per 1000 people, a 0.74% decline from 2021
  • The birth rate for Canada in 2021 was 10.224 births per 1000 people, a 0.74% decline from 2020
  • The birth rate for Canada in 2020 was 10.300 births per 1000 people, a 0.73% decline from 2019
  • The birth rate for Canada in 2019 was 10.376 births per 1000 people, a 0.73% decline from 2018

The decline is astonishingly uniform, almost predictable. As mentioned earlier, declines lead to more declines.

Canada’s fertility rate entered its descent in the late 1960s, falling from nearly 4 to just 1.6 by the early 1980s – far below the replacement rate of 2.1.

Consequently, Canada has been reliant on immigrants for the better part of the last forty years. And as noted above, in the long run, we could face stiff competition for those immigrants since countries we’ve historically relied upon are grappling with population declines of their own.

Where Do We Go?

A society with a fertility rate bearing down on 1 is headed for extinction, or a halving of its population every generation. Scary but true.

For investors, understanding this looming crisis is important. As populations decline, specific areas, likely more rural ones, will see property values plummet.

Populations need a birth rate of 2.1, assuming no immigration or emigration occurs, to remain stable. The West and most of the world (outside parts of Africa) said goodbye to this level many years ago.

Now, rather than fighting over a decreasing pool of immigrants, now may be the time for politicians and society at large to ask ourselves: why are birth rates falling unabated each year?

There’s no easy answer, but a lower cost of living sounds like a reasonable place to start. When young people can no longer afford homes, like in many parts of the Western world, it becomes quite daunting to start a family.

Moreover, as populations decline globally, a deflationary force, the likes the world has never seen, may be unleashed, finally bringing to heel runaway asset prices.

All the best with your investments,

 

PINNACLEDIGEST.COM

 

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