as part of our
The following is an excerpt from the January 2013
HS Dent Forecast
"The message was clear-deflation was the fault of Japan's
inadequately fertile womenfolk, not the officials of the Bank of
-Financial Times, January 12, 2013
Economics is usually a gentlemanly topic, but if there is one
subject that irrationally makes me want to roll up my sleeves and
slug the first person that walks by, it is the subject of prices-or
specifically inflation and deflation.
With all due respect to the late Milton Friedman-a fine
economist and policymaker whose body of work I take seriously-his
claim that "Inflation is always and everywhere a monetary
phenomenon" is some of the most flawed logic I have ever seen in an
economics book (and let me stress that economics books are not
short on flawed logic).
Friedman reveals an arrogant "Fed-centric" view of the universe
in which Ben Bernanke is an all-powerful godlike figure who can
manipulate prices at will, like some sort of cartoonish James Bond
villain. And it completely ignores the role played by
demographics and the millions of buy and sell decisions made by
For a man that preached free-market economics, it was a
remarkably Soviet mindset.
Unfortunately, due in part to Friedman's fame, it also happens
to be the prevailing mindset among economists and most financial
journalists. The quote above about deflation being caused by
the lack of fertility among Japan's "womenfolk" is absolutely
correct. But don't tell that to the Financial Times.
The writer used those words to mock the Bank of Japan for failing
to stop the deflation that has been wrecking the Japanese economy
for the past two decades-again, a central-bank-centered view of the
universe. (As a point of reference, prices in Japan haven't risen
since Bill Clinton was the governor or Arkansas.
Seriously. It's been that long.)
Whenever a male writer uses words like "womenfolk" and notes a
lack of fertility, it can come across as being a little parochial
or even sexist. I have no interest in criticizing Japanese
family planning decisions or in telling a Japanese woman how many
kids she should have. It's none of my business. But I
am here to explain what Japan's birth dearth means for inflation
and economic growth.
A low (and falling) birthrate since the 1950s has caused Japan's
population to age beyond anything seen in the modern world.
Imagine the age demographics of Boca Raton, Florida…but spread
across a country of 120 million people.
Our buying and selling decisions as consumers are largely a
product of our age. I bought a house last year. Why did
I do something so phenomenally stupid? Because I'm 35 years
old and have two rowdy young boys who need a backyard to run
in. I also recently bought a new couch. Why? My
three year old spilled grape juice on the old couch and ruined
My father, on the other hand, just turned 70. He's looking
to sell his large suburban house. He doesn't need the
space and is tired of paying for the maintenance and taxes.
And he has no interest in buying new furniture. If anything,
he'll be selling some of his existing furniture when he
Why do I share this? Because every other family in the
developed world goes through a similar consumer lifecycle.
And in the case of Japan, aging consumers have not been replaced
with young families-which has led to lack of consumer demand and
We're not the only people who have studied Japan's demographics
or to suggest that changing demographics have had a major impact on
the Japanese economy. But, to be frank, most everyone else
misses the point entirely.
Another (male) Financial Times writer wrote a headline titled
"More Women in the Workplace Can Help Restore Japan's
(Mure Dickie, December 18, 2012).
Hey, I'm all for giving equal opportunities, and Japan's
attitudes towards women are several decades behind most of the rest
of the developed world. And certainly, Japan's stodgy old companies
could benefit from fresh ideas and fresh talent, be it male or
Yet Dickie's argument suggest that all Japan needs to jumpstart
growth is more workers. He should be careful what he wishes
for. More workers-and more production-in the absence of new
consumer demand will simply lead to more oversupply and more
Sagging demographics or not, Japan may finally get inflation…and
get it in spades. Prime Minister Abe is embarking on some of
the loosest fiscal policies in modern Japanese history, and he is
putting major pressure on the Bank of Japan to push down the value
of the yen.
At some point, Japan's creditors will lose faith in its
abilities to make good on its gargantuan debts-which are roughly
double the size of America's debts, adjusting for the size of the
economy. And when that happens, the yen will fall and
interest rates will soar to levels that make debt service
Japan will get inflation at that point. But it won't be
the mild 1-3% inflation they're hoping for. It will be
That day of reckoning may take another couple years. Until
then, expect more of the same-flat-to-slightly declining prices and
a sickly domestic economy.
The Incredible Shrinking Russia
Japan isn't alone in fighting a demographic war it can't
win. Its neighbor to the west-the Russian bear-has had a
distinct shortage of cubs in recent decades. Since the end of
the Cold War, Russia has lost nearly 5 percent of its population to
early deaths, emigration, and-most critically-to a lack of new
If the Japanese attitude towards women is a little behind the
times, I'm not sure there are words to describe Russia's. In
a recent speech on Russia's demographic crisis and its lack of
children, President Vladimir Putin stopped to comment that
"Our women know what to do and when."
You gotta gift, Vladimir. Youuuu.
I didn't see the speech, but I'm assuming the comment was
accompanied with a wink and probably some inappropriate hand
gestures or pelvic thrusts. (Though to be fair, this is
Vladimir Putin we are talking about, not Silvio Berlusconi.)
You can say what you want about Vladimir Putin, that he is a
thug, a dictator, a nationalist… But I will give him credit,
for whatever it is worth, for one point. And that is his
realization that Russia's demographic decline is a major
Putin pushed one of the most aggressive pro-natal policies in
modern history in one of his prior terms as president. He
proposed paying Russian mothers $10,000 per child for every child
after their first. And remember, $10,000 goes a lot further in most
of Russia than it does here. That is roughly equivalent to
one year's wages for the average Russian worker. An
equivalent sum in the United States would be closer to $30,000.
Putin also recently blocked the adoption of Russian children by
American parents. His public rationale was the high-profile
death of a Russian orphan due to negligence on the part of his
adoptive parents. But given the content of his speeches in
recent years, I would say his real motivation is keeping more
Russians in Russia.
Russians have a history of being stoic in the face of seemingly
hopeless battles, as anyone who has studied World War II would
agree. But this time, the battle is truly unwinnable.
Russia had a mini baby boom during the perestroika years under
Gorbachev, in the 1980s. These Russians are now in
their peak years for family formation and childbirth. That
should be good news, right?
Well, despite the large bulge of Russians in the family
formation stage, the increase in Russian births of the last few
years hasn't been big enough to push Russia above the replacement
rate. As of 2011, the fertility rate was barely 1.6 babies
per woman. You need 2.1 babies just to prevent your existing
population from shrinking.
And it's about to get a lot worse. The number of women of
childbearing age is projected to decline by nearly 10% between 2011
and 2020-just seven years from now. And it will decline by
another 10-15% by 2025…and another 10-12% by 2030.
If Russia has fewer potential mothers every year from now until
2030, it's hard to see them turning their population decline
around. Each remaining woman of childbearing age would have
to have more children to compensate, and it would be an
understatement to say that this would be unlikely.
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