Detroit’s debt default and probable Chapter 9 proceeding culminates a slow-motion fiscal train-wreck, the causes of which may be at least partially linked to a tragic decline in population. Those statistics are well-publicized by mainstream media, so I won’t rehash them here, but I want to draw a striking parallel with a much, much bigger fish – Japan.
First, a brief review of why a declining population (in particular, working population) creates such challenges:
All three of these issues, in contrast to a stand-alone debt overhang, cannot be “fixed” through engineered inflation. We can calculate the increases in productivity necessary over the course of a generation in order to make up for losses in working population, but these measures are in real terms, not nominal. Society’s costs, perhaps obviously, are inflation-linked.
Demographers illustrate population trends using pyramid charts, named for the shape they exhibit in a traditionally “normal” population, one which is increasing in both size and working-age cohorts. Below, please observe pyramid charts for Japan, lifted directly out of a report from Japan’s National Institute of Population and Social Security Research. These shapes are known as “kites” and for policymakers, they might be considered alarming. In 2010, there were 2.8 workers to support each senior resident. By 2030, that ratio is projected to shrink to 1.8, i.e. each senior will lose an entire worker.* Japan’s working age population peaked in 1995, and the government is already borrowing ~100% of their expenditure ex-debt service and social security (see #2 above).
In a previous blog post, Tragedy of the Commons, I outlined my argument as to why I believe Japan is, over time, pursuing a policy of outright JPY debasement, as their only exit from the enormous unsustainable and unserviceable debt burden. Obviously this policy is inflationary, deliberately so, but inflation makes the demographic problem even worse. Inflation, by its nature, is a wealth transfer mechanism which moves wealth from those who have saved (retirees) to those who have not. By extension, deflation is, if anything, helpful on the margin by slowly improving the purchasing power of accumulated savings. Frustratingly, Japan’s debt stock appears destined for default under sustained deflation such that Japanese policymakers have found themselves in a quandary. Some commentators have likened Abenomics to “don’t just stand there … do something” policy. I tend to agree, and like a novice billiards player with no shot: policymakers will smash the cue ball forcefully and see if the disruption uncovers new options.
Detroit’s collapse was bigger and slower than it needed to be, because the market credulously continued lending to them over a period of many years. Japan’s starting point, as their population tips into decline, appears more tenuous.