Peter Zeihan – How Demography Impacts Investing

Birth rates are declining and older generations are moving into retirement, creating an aging population. Peter Zeihan, a geopolitical strategist, believes that the trend toward aging demographics can have some negative implications and consequences for the economy and available capital.

Although quantitative easing and global political instability contribute to this potential economic decline, demographic issues are at the core of the economic shift.

Demography and Investing

The United States started expansion early, with the economy growing as people moved into urban centers. Skilled and valuable workers aged 40 to 65 added value to the economy and generated enough capital to drive down costs. Meanwhile, countries with younger populations drove consumption.

This proportion of young consumers and borrowers has offset the capital-driving middle-aged workers and maintained economic balance. But with centralization in urban areas leading to declining birth rates, this balance won’t continue.

Shifting Demographic Proportions

Following the second Industrial Revolution, people centralized into urban environments. With stable birth rates and increased life expectancies, populations have grown larger every year. Until now, anyway.

In most of the developed world, birth rates have shifted downward and no longer meet the replacement level. This decline increases the overall proportion of mature workers in global demographics. Mature workers possess the most savings, which represent much of the economy’s working capital.

Portfolio Shifts

This demographic shift to a larger proportion of mature workers presents a problem for the capital structure. As this group moves toward retirement, they build their portfolios with less risk. This means less venture capital and more bonds.

Across bonds, government-issued bonds carry the least risk. With many boomers opting for these bonds and buying capital in government debt, government bonds have been pushed solidly into the negative. But will it last, and for how long?

Rising Capital Costs

Boomers are set to retire in mass quantities as of 2022. As they exit the workforce and no longer have access to fresh income, they’re unlikely to contribute the same lending power to government debt.

The result? With less supply from mature workers, capital costs will inevitably rise. Even in an otherwise politically and economically stable world, this capital inflow decline can have significant global effects.

Global Outlook

There are a few factors to consider in the current political, economic, and demographic climate. Japan has an aging and shrinking worker pool, birth rates continue to trend low, and Europe has its own political turmoil.

Not to mention, the United States isn't known for passive economic strategies. With mature workers aging out and not enough millennials to replace lost capital, we might be looking at a brand-new financial market.