It's Going To Get Ugly

Demographics Are Poor

My friend Todd recommended I read the book “The End of The World Is Just The Beginning” by Peter Zeihan. I read it. I think it’s worth a read to make you think.

It’s interesting. I do not agree with all of it, but Zeihan makes a compelling case for the problems the world is going to have. It starts with demographics.

When I was at Chicago Booth I had the good fortune to interact with some great economists. A funny saying about Booth is “It works in practice but does it work in theory?” My bias going into my MBA was that free markets worked better than a centralized authority. At Booth, I saw how it was mathematically proven.

When I was an undergrad, I was taught economics from the Keynesian perspective. The way Keynsians look at things and Classical economists look at things is totally different. John Cochrane always likes to ask the Keynsians where they get the dollar they are spending.

But, I asked more than one economist how much of the theory was total bullshit if demographics didn’t consistently increase? Without population growth, it is kind of hard to increase gross domestic product.

They agreed.

The book has a thesis that the world is screwed when it comes to demographics. We had the baby boomers and then people didn’t have children. The millennials are a nice pop in population, but not big enough and most of them are choosing to have fewer children or even no children. They also have children later in life than their predecessors.

The biggest quibble I have with the ideas in the book is it seems to assume a static pie. Often, people looking at large macro issues do that to make the analysis easier. It simplifies things.

Except, when there is strife or trouble, humans innovate. They always have and they always will if they are given the freedom to do it. It seems to me that the book assumes no real innovation breakthroughs. For example, Peter consistently looks at supply chains and the time it takes big ships to go from one place to another on the ocean. What if there was an innovation that allowed them to go faster?

I also think that given his forecast into the future, he totally diminishes innovations like cryptocurrency and the role they might play in civilization. Today, it’s clear they play no role. But, twenty years from now, it might change. I don’t think Zeihan took the time to truly understand how they work and what impact they might have.

I also think that there will be gigantic steps forward in industries like agriculture and medicine that could change his outlook.

At the same time, you get back to demographics.

Too long don’t read, China is fucked and so is the EU. I think that Xi knows they are screwed and that’s why he is doing what he is doing. I think it is a question of time before he tries to use his military to lash out. Zeihan says they won’t be able to do that because of Japan. Japan’s navy is significantly stronger than China’s according to Zeihan. Japan can project power globally, but China can’t.

Of course, recently, China has tried to form some sort of a partnership with Russia which is also screwed by the way. But, Russia’s army is no juggernaut. Russia does have a lot of commodities that the world needs though so if they can figure out how to trade with the rest of the world it will alleviate some pain.

Who is sitting in the catbird seat?

North America. The tri-country alliances between the US, Canada, and Mexico combined with the indigenous commodity and skillsets the countries possess will make them dominate in the next epoch. It’s possible the UK forges an alliance with them to be a part of it. Countries like Colombia and Brazil should rise.

According to Zeihan’s analysis, Asia is just totally screwed.

However, the US can screw itself. Never underestimate the ability of the government to get it wrong. If you think of it as a building, you start at the foundation. How should our government be thinking to buffer our population against the coming storm, and continue to dominate at the same time.

1. Energy production and access to cheap energy are crucial and strategic. The Biden Administration currently has the US on the exact wrong path. The path forward is nuclear. Everything hinges on energy. Economies grow on the back of cheap energy. Think $2/gal gas, not $4-$6.

2. Debt to GDP ratios has to come down. China is screwing itself and all the deals it is making in Africa and other places will cave when their economy caves. It’s going to cave because they import most of the stuff they need. Their exports aren’t high-value add and can be easily replicated. Their demographics stink. The US cannot continue on the unsustainable spending path its on.

3. Good immigration policy is essential to the US. We want people to come here because the US has similar challenging demographics. We need to get this right and in a hurry. It’s not open borders. It’s also not good to not let anyone in. Immigrants are valuable. But, there is a supply and demand for them so we ought to recognize that and codify it in policy.

4. Food glorious food. It’s not just a song in the musical “Oliver”. Making sure we give farmers access to water, and technology, and setting up farm policy so it is not intrusive will make agriculture more productive. That means desalination along the Pacific Coast. It means figuring out ways to get water into places that are flat, dry, and basically warm. Think the Central Valley of Calfornia, but it could include places like Arizona or Nevada as well. 40% of the Colorado River water goes to California now, is diverted from the farmers to save a snail, and pumped into the ocean. That’s stupid given what we are faced with.

5. Climate change. It’s not a religion so it’s not whether you believe or don’t believe. It’s what you do if temps go up or down for a long period of time. Currently, Zeihan says they have risen 1.1 degrees Celsius which is slightly more than 1.8 degrees Fahrenheit if my math is correct. The data shows this increase in temp has made a state like Illinois wetter, but Australia dryer. The rise in temp might actually pay dividends for the Corn Belt. They might be able to get two seasons of crops planted instead of one. At the same time, we want to understand the opportunity costs compared to the costs of doing things. We want as light a touch to the environment as we can have but still providing for people at a low price. Zeihan talks about the environmental wackos that want to go to purely organic farming with no innovation. They are idiots and not dealing in reality. For a real-time example, check out Sri Lanka.

6. The change in rainfall patterns will lead to big changes in crop production. You can’t grow rice without water and if Zeihan’s prediction is correct, Asia will get a lot less of it. Rice also takes a lot of fertilizer, and Zeihan predicts that world wide supply chains will break down so it will be hard to get fertilizer for crops like rice. In the old days, human/animal poo was used and rice-producing economies might have to utilize it again.

7. We are going to need a very strong defense to protect ourselves against other countries that might have the idea that they can attack and steal some resources.

Zeihan predicts that the US will pull back and become more isolationist. The last 80 years of world history have been dominated by the US and its tacit guarantee that supply chains would be safe. Pirate activity has been significantly reduced since 1945 compared to the ages before. That era ends.

That means shorter supply chains and less specialization. It means countries near each other are going to have to figure it out without being able to ship stuff or import stuff from far away ports of call.

It is a provocative read for sure.

My friend William recommended another book and I will get it.