Jeremy Siegel has explained the impact of ageing population of the developed countries on financial markets. It is an excellent analysis of the events to come.
He says there are 2 questions that need to be answered:
1. Who will produce the goods for workers and retirees to consume?
2. Who will buy the assets?
He focuses on the second question and says economists usually say retirees will finance their old-age via the wealth they have accumulated and this is where most problems lie.
….when people are asked what they are going to live on once they retire, they answer, quite naturally, that they are going to live off their wealth. They give such an answer because they have been told that humans accumulating wealth for retirement are similar to squirrels hoarding nuts for the winter. When winter comes, we live off our wealth. In simpler human societies where wealth consists of livestock or stored wheat and corn, the analogy works well enough. But in a modern society, the only way to live on wealth is to find someone else to buy that wealth because wealth, in the form of capital, has no intrinsic consumption value. Investors cannot eat their stock or bond certificates. They cannot eat the factories or the machines of the businesses in which they have invested. A modern society builds capital, and that capital must be sold before consumption can occur. The only way to live on wealth in modern society is to have workers who are earning money and have enough disposable income to buy assets for their own old age. They can then buy the assets (or wealth) of retirees who can then spend that money and consume.
Now in developed countries, where maximum people are going to be old, who will buy these assets? So what is the solution?
He says we need to understand that developing countries are the ones who have younger population and are the ones who can buy the assets of the elderly in developed. Now, developing can only buy assets if they continue to grow. Hence, sustainable growth of developing countries is important not just for their people but developed world as well.
In other words, the solution for the above two questions is one- developing world. Hence, developed world should make efforts to ensure that they support globalization, let developing countries grow etc.
Excellent analysis from Siegel. He also points out to his model which shows that developed world’s contribution to world output would shrink from 53.3% to 22.9% in 2050. This kind of long-term analysis is a specialisation of Jeremy Siegel. His analysis of historical returns across asset classes (where he shows equity returns the most) is a part of finance folk-lore.
Read the entire speech.