Is Peru Ungovernable?

Peruvians need firm democratic convictions to avoid being fooled by authoritarian demagogues.

By Sonia Goldenberg

          Demonstrations in Lima, Peru, in November. Credit...Sebastian Castaneda/Reuters

LIMA, Peru — In November, Peru had three presidents in 10 days. 

One lasted six days. 

We don’t know if the current interim president, Francisco Sagasti, will survive until April, when elections are scheduled to be held. 

And if he does, who will follow him? 

Is my country ungovernable?

Peru was cursed with eight military coups in the 20th century. 

But over the last two decades, the country has become a relatively stable democracy, with reduced poverty and sustained economic growth. 

And yet, corruption remains deeply rooted. 

Four past presidents have been or are under investigation over allegations that they took payoffs from Odebrecht, a Brazilian mega-construction company that corrupted virtually every country in the region. 

A feverish anti-corruption campaign calmed public outrage but exacerbated our taste for political cannibalism.

All efforts to clean up this quagmire have ended in chaos. And underlying that chaos is a fundamental puzzle: How do you fight impunity when the entire political system is rotten, not least the very politicians who are supposed to bring about change? 

It is, of course, a tricky proposition in which what is at stake is the very stability of the nation.

In these circumstances, the Peruvian drama is a cautionary tale for Latin America, a region with pervasive venality, and it invites us to mistrust any effort presented to the population as a heroic crusade to cleanse the government of corruption by promising greater accountability and stronger penalties against corrupt officials.

In Peru, political warfare reached a boiling point in the last three months. Nothing was off the table in the fight to eliminate political rivals, including new forms of coups. 

There was no need to call in the military when the Constitution provided convenient loopholes. 

For instance, the opposition in Congress can expeditiously oust a president for “permanent moral incapacity,” a vague concept that could refer to the president’s mental or moral fitness.

First, Pedro Pablo Kuczynski, a retired Wall Street investment banker, was elected president in 2016 for a five-year term. 

After less than two years in office he was impeached and forced to resign. 

Keiko Fujimori, the daughter of former President Alberto Fujimori, had narrowly lost the election and refused to concede. She used her majority in Congress to banish Mr. Kuczynski, accusing him of corruption. 

Though Mr. Kuczynski, 82, has not been charged, he has been under house arrest for two and a half years.

In stepped Martin Vizcarra, Mr. Kuczynski’s vice president, who conspired to unseat his boss. At first, Mr. Vizcarra was Ms. Fujimori’s pawn. 

But, in the name of a crusade against corruption, he crushed her party. His approval ratings soared, and peaked in September 2019 when he dissolved Congress — a radical decision that destroyed the balance of power and eliminated a corrupt and nasty, yet democratically elected opposition. 

It allowed Mr. Vizcarra to rule by decree for more than six months.

This coup was justified by progressive liberals and anti-corruption activists as a necessary means to advance political reform. The highest court, the Constitutional Tribunal, endorsed the move in a 4-to-3 vote. 

Legislative elections were then held and a new Congress, as corrupt as the previous one, was installed in March.

In November, the local news media reported allegations that Mr. Vizcarra had accepted bribes from construction companies when he was a governor in the southern province of Moquegua. Following the laws of karma, Congress impeached him. 

A few days later, a judge barred him from leaving the nation for 18 months pending investigation of corruption allegations.

Former President Martin Vizcarra in December.Credit...Ernesto Benavides/Agence France-Presse — Getty Images

Then Mr. Vizcarra surprised his supporters by announcing that he would run for Congress in the coming elections with a corrupt party whose members had voted in favor of his impeachment. 

With his unmatched popularity as an anti-corruption crusader, he will surely be elected congressman. And, additionally, if elected he will gain at least a few years of protection from imprisonment, sheltering himself with the same parliamentary privilege he had so adamantly fought against as president.

The war against corruption ended in farce. A disappointment for millions who believed in Mr. Vizcarra; a wake-up call and an embarrassment for his unconditional supporters and the media that enabled a corrupt caudillo to lead the country to an abyss for his personal gain.

There is a lesson to be gleaned from the Vizcarra debacle. Peruvians need strong democratic convictions to avoid being fooled by authoritarian demagogues. Liberal elites and our most respected democratic figures should lead the way. 

The media, civil society organizations and anti-corruption activists must have humility and integrity to reckon with the ominous damage they have caused with their uncritical endorsement of an opportunistic charlatan who in two years ruined a country arduously struggling on a path of progress and stability.

For nearly two decades Peru’s economy averaged 4.5 percent growth. Under Mr. Vizcarra it fell to 2.3 percent before the pandemic hit, producing an economic decline of 11.5 percent, one of the highest in the region. 

Poverty rates, steadily reduced over three decades, are rising again. 

Peru has had for months one of the highest death rates from Covid-19 in the world.

There are deep authoritarian roots ingrained in Peruvian society. Alberto Fujimori became a national hero when he sent tanks to shut down Congress in April 1992. 

Another former president, Alan Garcia, reached top ratings when the armed forces under his command crushed prison riots in 1986 by killing nearly 300 inmates who were members of the Shining Path guerrilla. 

A left-wing military coup that seized the media in 1974 was widely endorsed by intellectuals. 

There is no democratic tradition left or right. Peru needs to build one. 

There is no room for compromise with democratic values in the name of any legitimate or illegitimate cause.

The 10 days that shook Peru in November are just a dramatic example of the pronounced decay of our political class. 

No system can hold when its Constitution is used to condone the abuse of power. 

Institutions are in ruins. 

The presidency has been belittled and Congress delegitimized. 

Peruvians are demoralized and fed up with crooked politicians back-stabbing one another in the middle of a deadly pandemic.

That’s why in November thousands of young Peruvians stormed the streets in the largest demonstrations in this century. 

Unlike in Chile or Guatemala, the protests were largely peaceful. Still, two students died in the ensuing riots and 200 people were injured by police repression. 

But in six days the protests brought down Manuel Merino, widely perceived as an illegitimate president. 

Protesters are still out blocking highways in the north, east and south of Lima demanding better living conditions and higher salaries. Five other protesters were killed recently in violent clashes with the police.

Mr. Merino’s replacement, Mr. Sagasti, a highly regarded technocrat, is hoping to hang in long enough to hand over office to the next elected president. Under this backdrop, April 11, when general elections are scheduled, looks distant.

Many Peruvians say that they are not interested in any of the candidates on the ballot in an election that holds no reasonable hope for an improvement in politics. Who can blame them, considering the sharp decline in the quality of the candidates, both for the presidency and Congress? 

Three presidential candidates have been accused of corruption or murder and 68 of the 130 present-day members of Congress have administrative or criminal charges pending in the courts. 

It is a sad state of affairs.

On the eve of the bicentennial of Peru’s independence the question about our democratic governance has dampened any cause for celebration. 

Building the foundations of a democratic republic remains an elusive promise.

Sonia Goldenberg is a journalist and documentary filmmaker.

Can consumers really lead the economy out of recession?

The better-off have seen savings soar, but poor households are often struggling with debt

Stefan Wagstyl 

© iStock/Getty

Like many people, I received an email from Barclaycard last month headed: “We’re updating your T&Cs”. 

Like many people, I ignored it. I don’t normally have problems with Barclaycard and didn’t want to spend any time thinking about it.

But it turns out that this email was more important than I thought. 

When I eventually opened it four weeks later, I learnt that from January, Barclaycard is jacking up the minimum payment from 2.5 per cent of the balance to 3 per cent.

This may not sound like much if you pay your bill in full every month, as I do. 

But it’s a 20 per cent increase. 

As the email helpfully explained, on a £2,500 balance the payment would be £81.94 instead of £62.19. 

For a low-income person struggling to pay down debt while simultaneously covering everyday essentials, it could make a difference. 

Remember that the government’s temporary pandemic uplift in universal credit is just £20 a week.

In principle, it’s good to see credit providers raising minimum payments on expensive consumer debt. Barclaycard’s annual compound rate is 19.4 per cent. The quicker borrowers pay off their debts, the less interest they will pay.

But, with the economy in recession, unemployment mounting and government financial support schemes due to expire in March, it’s a tough time for tough love.

To be fair, Barclaycard is excluding vulnerable borrowers who have taken a payment break and is inviting other clients with concerns to get in touch. 

The company and other credit providers are responding to pressure from the Financial Conduct Authority, the regulator, to deal with persistent debt, which poorer customers often struggle with, sometimes for years. 

On top of this, they are reducing some customers’ credit limits in response to the Covid shock, as they informed customers earlier in the year. 

But the timing could have been better. As Sara Williams, author of the Debt Camel financial blog, says: “Higher minimums make people repay debt quicker, which is good. 

But January is the worst month to do this with Christmas bills to pay. And I think many people won't have read the email, so this may come as a nasty surprise.”

All this is a useful reminder of how precarious are many people’s household finances as we try to look forward to economic recovery. The government is relying heavily on a consumer-led surge once the vaccine rollout gathers pace. 

Bullish fund managers are betting on it. 

As Simon Webber of Schroders told last week’s FT Money investment panel, there is “a lot of pent-up demand”.

Shares in high street retailers, restaurant chains and airlines are among those touted for recovery on the stock market.

The argument is that people in work and those on furlough with topped-up pay packets have survived the pandemic in good financial form. 

Even when incomes have slipped a bit, spending has fallen by more, especially on going out and holidays, allowing people to save and pay off debt. 

Overall, the average household is set to save 19 per cent of income this year, up from 7 per cent in 2019, according to the Centre for Economics and Business Research, a think-tank. That is £7,100 per household.

But that’s not the whole story. 

In a speech this month, Michael Saunders, a member of the Bank of England’s monetary policy committee, cited an Ipsos/Mori poll showing the gain is concentrated among the well-off — households with annual income of £55,000 and more. The average household is seeing savings fall, not increase, and the poorest are falling into debt.

Mr Saunders said: “Slightly more than 25 per cent of households report financial strains over the last year (such as falling behind on rent, mortgage payments or utility bills). 

Moreover, survey evidence suggests that among the households that increased saving, most plan to keep those savings rather than spend them.”

Now it’s the job of a central bank to be cautious. But there is much to be cautious about. 

We don’t know when lockdown policies will end, how fast vaccines will be administered, or how far unemployment — 4.9 per cent at the end of October — will grow, with the end of furlough looming large.

And then we have Brexit. Even those who predict it will somehow rejuvenate the economy are not forecasting rapid results. Mr Saunders was surely right when he said the risks were “tilted on the side of a relatively slow recovery”.

None of this precludes bouncebacks in demand among high earners. Mayfair restaurants, country house hotels and luxury cars may all see surging sales. Shares in the relevant companies may rally on the stock market.

But such a recovery may not reach those on lower and or less predictable earnings: not just staff in the battered hospitality trade but a host of freelance and self-employed workers, who have often had the least access to pandemic support schemes. 

Frequently, they are younger people in sectors where older colleagues on permanent contracts have been better protected.

Ministers will doubtless be telling us next year to go forth and spend. But they should take care that this doesn’t lead people into precisely the kind of persistent debt that the FCA is seeking to suppress. 

It’s no use Barclaycard raising its minimum payment if the government throws caution to the wind.

Stefan Wagstyl is editor of FT Money and FT Wealth


by Egon von Greyerz

2021 is likely to be a year of awakening. 

This is when the world will start to realise that the $280 trillion global debt has no value and will never be paid back.

But even worse than that, of the $280t a staggering $200t has been created in the last 20 years.

Let’s say that it took 2,000 years to go from zero to $80t in 2000.  It doesn’t really matter where we start counting since most of the $80t debt was created after Nixon closed the gold window in 1971.


Looking at the other side of the balance sheet, there will be an even bigger shock for investors and property owners as debt implodes. Because asset valuations are a function of the debt. And if debt implodes, which is inevitable, so will asset prices.

This is why prices of stocks, bonds and property will implode by more than 95% in real terms (gold) as I outlined in my article last week.

So it took just under 2000 years for global debt to grow from zero to around $5 trillion in 1971. Thereafter it took 29 years to year 2000 to grow by $75t to $80t. That was the exponential phase.

And now we are in the explosive phase with debt growing by over $200t in 20 years.

Anyone who can’t see what is happening is either blind or hasn’t studied history.

+$5t   – 1,971 years  – Year 0 to 1971

+$75t  –    29 years  – Year 1971 to 2000

+$200t  –  20 years – Year 2000 – 2020

We saw exponential debt expansion 1971 to 2000. Since then the growth has been explosive.


The next phase will be hyperinflationary and that is likely to start in 2021. Just look at the graph and table from the Weimar Republic.

Gold was 170 marks in Jan 1919, 1,340 marks in Jan 1921, 3,976 Jan 1922 and 372,000  marks in Jan 1923.

By November 1923 gold was 87 trillion marks!

This is what happens after a debt explosion when money dies. We have had the debt explosion AND THE DEATH OF MONEY WILL NOW ACCELERATE.

Remember the dollar is down, 97% since 1971, (in real terms or gold), and down 85% since 2000.

So the hyperinflationary phase could start in 2021, 99 years after Weimar. Or will it be in 2022 on the 100 year anniversary?

Hyperinflation is a currency event. This means that it arises not as a result of rising prices but due to the collapsing currency. The dollar index is already down 12% since the March high. 

The combination of the Covid crisis, debt explosion and money printing could easily start a dollar waterfall in 2021. This would mean that hyperinflation starts. And just look at history (which you can read in the table above) and you can see that once it starts it goes explosively fast.

Hyperinflation is guaranteed. It is only a question of when.

We have had the debt explosion and after that it gets dramatically worse as I show above.

Here is even more confirmation of the coming hyperinflation in the form of US M1 Money Supply. In 2009 when the Great Financial Crisis was over M1 was $1.5 trillion. 

Then 11 years of “economic boom”??? saw an increase in M1 of $2.5t to $4t in March 2020.

Clearly not a real boom but just debt induced.

Then in March 2020 it all exploded with M1 up to $2.5t by Nov 30th.

So it took 11 years from 2009 to March 2020 for M1 to go up by $2.5t

And from March 2020 to Nov 30 we have seen a further $2.5t increase in 9 months.

Money production has clearly become extremely efficient! Just in the last 2 weeks of Nov M1 jumped up by $1/2 trillion.

This will clearly end badly!


So now everything is in place for hyperinflation. Velocity of M1 is still low but that will soon change as the dollar collapses.

We have of course seen the first part of the currency slump already. A fall of 97% since 1971 certainly looks like a collapse to me. Now the time for next fall of 99% or more is here. Anyone who doesn’t see that denies history. (Sadly, denying history or even rewriting history has become very popular currently.)

It is quite ominous that 100 years after Weimar, the world is standing on the cusp of a  similar debt and currency collapse with hyperinflation as a consequence.

100 years ago it was primarily the problem of one country whose debt the world could afford to  write off. Well they had no choice since it was worthless anyway.

But this time it is a global problem with every country in the same situation. There will be no one to save individual countries or the global financial system. Yes, all major central banks will print endless amounts of money. But that will only exacerbate the situation.

A debt problem can never be solved with more debt. And a dying currency cannot be resurrected.

So the world is in for a major shock in the next few years. The problems will be at all levels – financial, social, political and geopolitical.

The easiest level to solve for investors who have savings at whatever level is to buy some insurance in the form of physical gold.


There is a major debate going on between BTC and gold. Investors, including institutions,  are putting major amounts into BTC.

I am not a Bitcoin expert. But I am very clear that the reasons for recommending gold as the ultimate form of wealth preservation cannot be fulfilled by Bitcoin.

I have stated many times that BTC could be a spectacular investment and go to $1 million as for example Raoul Pal (RealVision) advocates. He is a very smart investor and bases his forecast on stock to flow.

On the other hand, in my view, BTC could go to zero if central banks ban it as they introduce their own digital currencies. Since BTC is not backed by any asset or any central bank it would be worthless if it was banned. Sure, there could be a black market but that wouldn’t serve much purpose if virtually no one would accept payment in BTC.

The degree of wealth preservation required to preserve capital depends greatly on where we are in the investment cycle.

If investment markets are sound and not overvalued as a result of speculation or false markets, stocks and bonds can represent sound wealth preservation.

However in the present bubble markets, all assets are overvalued as a result of unlimited credit expansion and money printing. As I stated above, the risk of a 95% fall is much greater than a 100% gain.

Government bonds, used to be the ultimate form of wealth preservation. Many investors have still not realised that heavily indebted governments, who are totally dependent on money printing to make ends meet, are an extremely poor risk.


So we are now in a period when wealth preservation requires the application of very strict criteria.

Let’s look at some of these:

The wealth preservation asset must not be dependent on electricity, internet, or computers

The asset must not be hackable

It must not depend on a code which is crackable

It should not be traded online

So these four criteria clearly exclude any digital form of money or other digital  asset.

I will not go into the detailed reasoning behind the above criteria but to an investor who wants the safest foundation for his wealth pyramid, as well as the best insurance possible, they should be obvious.

The ultimate wealth preservation asset must be (as my good friend Simon Mikhailovich states):




The above points 1-4 partly define independence. But more importantly, physical gold doesn’t need the financial system. Even less so when the system is totally dysfunctional like currently.

Bitcoin is definitely not independent based on the 1-4 criteria.

Gold is clearly scarce. 190,000 tonnes ($11t) have been produced in history. Virtually all of that is still here. Around 1.5% is added annually in new mine production.

Investment gold is only 43k tonnes or $2.6t. That represents 0.5% of world financial assets – a minuscule part.

So this is the one thing that gold and Bitcoin have in common – they are both scarce.

Where physical gold is superior to any other financial asset is its Permanence.

Gold has been money for 5,000 year and is the only money which has survived in its original form.

Again we are back to history. If only one currency has survived for 5,000 years, it clearly proves that it has the right attributes. Anyone who wants to argue that Bitcoin or other crypto currencies can assume the mantle of gold after 11 years’ existence is premature by a few thousand years.

Cryptos/digital currencies are such a new development that even if they survive, there will be 100s or even 1000s of mutations over time. So permanence is very unlikely.

The risk with digital currencies, whether it is BTC or issued by a central bank, is also that they can disappear in a millisecond. Anything from EMP attacks (electromagnetic pulse) to quantum computers can make this form of money just vanish.


The Chinese have just invented a quantum computer that is 100 trillion times faster than current computers. It is also 10 billion times faster than the computer that Google is working on. The risk of the Chinese hacking or destroying major parts of the global internet and the digital financial system must be major.


Gold ETFs are a very risky way to invest in gold. Many of them don’t have the gold. Please see my article “BUYER BEWARE – GOLD ETFs LIKE GLD OWN NO GOLD.”

Ronan Manly of BullionStar just tweeted about troubling developments at the biggest  gold ETF – GLD.

According to Ronan, the GLD CFO resigned one day before the financial year end on 29 Sep 2020. Never good news when the finance chief resigns at critical times.

Also, data on amounts of gold held at the Bank of England was omitted. And finally, the auditors KPMG have raised a “Critical Audit Matter” pertaining to the existence of GLD’s gold holdings held by sub-custodians.

So my advice is the same, gold ETFs have nothing to do with wealth preservation and should be avoided.


Finally, my position hasn’t changed for over 20 years – The only way to hold gold is in physical form, outside the banking system with direct access to your gold.

That is the only true and history tested form of wealth preservation and therefore critical at a time when the survival of the financial system will be severely tested.

A Global Economic Ice Age Is Coming

Cashflow Capitalist


- The last ice age lasted a very long time and caused a significant regression in the biological advance of life on earth.

- I think we are on the verge of entering into a new kind of ice age — an economic one — around the world today.

- debt loads weigh down the economy in every sector, forcing central banks to fight tooth and nail to keep interest rates low.

- Meanwhile, demographic researchers recently posited that the peak of human population on the planet is coming much sooner than previously expected and will decline rapidly afterward.

- Though GDP growth should remain sluggish, at best, some asset classes should perform well in an "economic ice age" environment.

Ice Ages, Old And New

The last ice age ended around 14,000 years ago, according to the geological consensus, during the Pleistocene Epoch. It lasted a long, long time. In fact, some remnants of the last ice age remain today. Glaciers in Greenland and Antarctica have been slowly receding since the Pleistocene era.

During an ice age, glacial ice sheets advance from the poles toward the equator, never covering the entire planet. Actually, the glaciers were constantly in flux, advancing and receding and advancing and receding, although that flux would barely be noticeable in a human lifetime.

During an ice age, the earth overall was much colder and drier. Variations in the weather sometimes caused the ice to advance faster than many species could adapt or move, and many went extinct because of it. Around three-fourths of all large animal species (mainly vertebrate mammals) completely died out during this period.

Saber-toothed tigers, mastodons, and woolly mammoths are examples. Much plant life also perished, even in areas that weren't covered in ice. Whole forests were consumed by the glacial advance. Entire ecosystems disappeared. The biological progression of life was put on pause, or even reversed, during this cold, dour period.

But scientists also believe that it was the Pleistocene ice age that formed humans into basically the creatures we are today. As migratory herds of animals moved toward the warmer parts of the earth around the equator, humans followed. 

Over many generations, these hunter-gatherer bands developed tools and complex clothing and learned to survive wherever they went. They were forced by a harsh environment to become smarter and more advanced.

You may already see where I'm going with this metaphor. For multiple reasons, I believe the global economy is now entering what I think of as an "economic ice age."

Just as the ice age of history caused a long pause or even contraction in the biological progression of life on earth, I think the "ice age" we are entering will cause a long pause or even contraction in humanity's economic progression. For a long time to come, our standards of living will rise at a crawling pace or perhaps even remain flat. Innovation will be incremental and concentrated in certain areas rather than the widespread leaps and bounds of advancement enjoyed over the 20th century.

There are several factors at play in the global economy today that bring me to this view, even while I remain optimistic about certain asset classes going forward. In this first installment, I want to discuss two of the biggest tectonic forces at play in the economic world today and finish with three predictions.

Just like the humans of the last ice age, we investors will need to become smarter and more adaptive in the years and decades to come.

1. The world is caught in a debt trap.

Interest rates are sitting at zero, making credit cheaper. Cheaper credit spurs ballooning debt, even while investors around the world are desperate to find yield, thus keeping yields and interest rates low. But more debt, especially when it is taken out to fund consumption rather than productive investment, cripples the economy's ability to expand.

I've written about this on many occasions in the past. (See, for instance, "The Monetary Death Spiral.") There are basically three ways to pay for government spending: tax revenue, debt issuance, or money printing (which is inherently inflationary). 

All else being equal, fiscal deficits soak up domestic private savings, which reduces economic growth by crowding out private investment. But it can also be funded through increased trade deficits: Foreigners give us goods, we give them dollars, and they buy our government debt.

It's easy to see how this forms a self-reinforcing cycle: more debt leads to lower growth leads to more debt leads to lower growth. This leads to the inability of central banks to let rates rise, because in a highly indebted economy, even a small rise in rates causes debt service costs to soar.

As we can see in the chart below, federal government debt to GDP is now higher than at any time in our nation's history, including the peak of World War II.

Zooming in to the period from 1990 to today, we find that total credit market (public and private) debt has increased at roughly double the rate of GDP:

In my view, the persistent focus from policymakers on increasing consumption, even at the expense of a higher debt load, is short-sighted. It isn't that more government spending and stimulus can't produce temporary bursts of growth or fill the chasm in consumption caused by the pandemic. It can.

But there are two problems. First, such spending necessarily must come from either taxes (private sector income), debt (private savings), or an increased trade deficit (foreign investors that cannot be relied on permanently). Money printing is not legally an option for the government at this point. Second, it misunderstands how economies grow over time.

By necessity, private savings go to funding fiscal deficits first, because government debt is "risk free" (except for the risk of inflation). So when fiscal deficits rise faster than private savings, private investment—the fuel of economic growth—inevitably diminishes. Compare, for instance, US net national saving (private savings minus public deficits) and net capital formation (a proxy for private investment) to GDP:

Notice how both metrics peaked around the same time in the mid-1960s while also passing together into negative territory for the first time in the post-war period during the Great Recession. 

Around the year 2000, total debt reached a critical mass in the United States such that the peaks and troughs of private investment took a dramatic step down. Now, predictably, with net savings in negative territory and an ongoing pandemic, private investment has once again plummeted.

2. Peak global population (and subsequent decline) is in sight.

Probably the most predictable of the social sciences is demography. And of all inquiries in demography, population growth is among the most predictable measurements. If you know how many babies are born, how many immigrants are coming in and going out, and the average lifespan, it's fairly easy to discern what population numbers are going to be into the future — at least as far out as a human lifespan.

Why does population growth matter? Because it has acted as a crucial component of economic growth over the last few centuries. For two reasons, one pertaining to consumption and the other pertaining to production.

More people in a certain country means more mouths to feed, more bodies to clothe and shelter, more demand for all kinds of goods and services (the consumption side). But more people also correlates with a larger labor force (the production side). More organic growth in demand via population growth (rather than debt) leads to more jobs.

The formula for GDP can be broadly thought of as:

Total labor force x labor productivity.

Flat labor force growth combined with rising labor productivity results in economic growth, as does a growing labor force combined with flat labor productivity. 

But if there is little or no growth in the labor force or in labor productivity, then neither will there be GDP growth.

To estimate future economic growth, then, it'll be useful to look at productivity and the labor force.

US labor productivity growth (year-over-year) averaged around 2.5% from the end of World War II to the mid-1970s, then took a step down to around 1.5% from the late 1970s through the 1980s.

This elevated labor productivity growth had multiple causes, including America's unique position as the world's industrial powerhouse after other developed nations had been obliterated in WWII. Another—not insignificant—factor, in my opinion, is the high private sector investment to GDP level enjoyed from 1950 through 2000.

Then, from the 1990s through the mid-2000s, labor productivity growth averaged a little over 2% again, though it was on the decline even in the years before the Great Recession hit.

Notice, however, how weak productivity growth was in the post-Great Recession decade of the 2010s, averaging only slightly above 1%. If not for the spike in annual productivity growth in the wake of the recession, the average would be slightly under 1%.

As total private and public debt levels rise, we should expect to see labor productivity growth continue to drop over time.

How about the labor force? Well, as stated previously, growth in the labor force is largely dependent upon growth in the total population. This requires either births, net migration, or a combination of the two to significantly and sustainably outnumber deaths.

But even maintaining a stable population requires a fertility rate of 2.1 children per woman, assuming zero net migration and no changes to the mortality rate. Globally, childbirth per woman has been falling steadily (aside from a brief pause in the early 1980s) since the mid-1960s.

Researchers at the University of Washington recently projected that the global fertility rate would fall below 2.1 around 2030 and slump further to about 1.5 by 2100. Around 1.4 or 1.5 children per woman is where the researchers expect the long-term fertility rate to settle.

The primary drivers of the falling global fertility rate are education for women and access to contraceptives. 

Although, as I've argued elsewhere, consumer and education debt as well as stagnant real wage growth also play a significant part in the decline. In 1950, the global fertility rate was 4.7 children per woman. By 2017, that rate almost halved to 2.4.

How about the fertility rate for the United States specifically? Despite a sharp drop in the birth rate from 1960 to 1975, US fertility has held steady and even risen slightly since the trough in 1976. At least, that was true up until the Great Recession, after which the birth rate began falling again.

In 2018 (and 2019), the US had a fertility rate of 1.73 live births per woman, slightly lower than the lowest point hit in the 1970s. 

While births in 2020 are likely to come in somewhere in the same range as the previous few years, there is strong evidence that births will fall by about half a million in 2021 due to COVID-19, say Brookings Institution researchers.

Luckily for the United States, net migration (immigrants coming in minus immigrants going out) has offset a birth rate under 2.1 children per woman and allowed the US population to continue growing. Not-so-luckily for the US, net migration has been falling off rather rapidly since 2016:

Hence we find that total US population growth slowed from 2014-2016's 0.7% to 0.6% in 2017 and 2018 and 0.5% in 2019. Last year's year-over-year population change marked the slowest growth in exactly one hundred years—since 1919.

If you think that's bad, look around the globe. Between now and 2100, the US population is expected to grow slightly or remain roughly flat. Many other nations are not so fortunate, according to the forecasts.

One recent expert population forecast, contrary to the last major forecast put out by the United Nations, projects the global population peaking well before the end of the current century and gradually declining thereafter.

In 2064, the global population is projected to peak and plateau for a few years at 9.73 billion people. Thereafter, it is expected to decline by nearly one billion people by 2100.

The situation is worse in many individual countries. The populations of Spain, Japan, and China are expected to halve between their 2017 populations and the year 2100. 

Meanwhile, astonishingly, the population of Nigeria is forecast to be higher than that of China by the end of the century, while the US population remains roughly unchanged.

Okay, so population growth is slowing and will continue to slow around the world until hitting roughly zero in the US and negative territory in many other parts of the world.

Let's revisit the labor force.

Like slowing population growth, we also find a strong secular decline in labor force growth. Measuring total labor force growth by decade, we can see when the Baby Boomers flooded into the workforce in the 1960s, 1970s, and 1980s, with labor force growth falling off thereafter.

1950s: 11.5%

1960s: 18.4%

1970s: 29.6%

1980s: 17.2%

1990s: 12.6%

2000s: 9.2%

2010s: 7.5%

The falling labor force growth is not solely due to slower population growth, though the two are linked. Falling labor force participation among those of working age is also a factor. 

Interestingly, after 2000, at which time the critical mass of debt began causing drags on other growth metrics, the labor force participation (LFP) rate also began dropping. A severe slide occurred in the wake of the Great Recession, with very little rebound in the late 2010s.

It very well could be the case that the COVID-19 pandemic/recession will permanently reset the LFP rate lower.

Notice above how LFP slightly edged upward from around 2003-2005. If we look at the age dependency ratio, which shows the number of retiree-aged Americans (65 and up) as a percentage of the working age population (15-64), we find that slightly edged downward during this same period of the mid-2000s, ending around 2005. 

Afterward, the ratio of retiree-aged Americans to the working-age population has shot up dramatically.

In 1960, the retiree-aged population made up about 15% of the working-age population. Today, they make up about 25% of the working-age population, and that percentage is set to continue rising over the coming decades.

This is what is sometimes referred to as the "silver tsunami."

In combination with a falling fertility rate, this trend of a rising dependency ratio is worrisome, as seniors require a lot more transfer payments than working-aged people, and transfer payments make up a majority of developed countries' government spending. 

This makes it highly unlikely that government spending will be cut, and thus deficit spending will likely remain as well.

So, we have an aging population and declining labor force growth, and we also have declining labor productivity growth.

Unsurprisingly, then, we find that annual growth of real GDP per capita, a proxy for the national standard of living, has declined during every expansionary period since 1990.

It would not be surprising to see real GDP per capita rising at under 1% per year during the next economic expansion.


Never in recorded human history has the global population shrunk over a sustained period of time. Neither has there been any period of history in which the world has carried as much debt as it does today. 

The confluence of these factors is truly unprecedented. But, like the glacial advance of an ice age, it is happening at a slow enough pace to prevent raising as much alarm as is merited.

Predictions are very difficult to make in such unprecedented circumstances, but a few seem merited.

First, governments around the world will move heaven and earth to prevent deflation. Of course, fiscal policymakers won't call it "deflation" but instead will use more politically popular language like stimulating the economy or creating good jobs. 

Monetary policymakers, who more often come from the banking world, know that sustained deflation is a grave enemy. 

All else being equal, mild deflation has a lot of benefits. But in an economy that runs on continual debt-fueled consumption, the damage done to borrowers (who have to repay their debt in more valuable dollars) is highly destructive.

Second, the proxy metric for the standard of living, real GDP per capita, will continue to see duller and duller growth in the decades ahead, just like it has in Japan over the last few decades. 

It's simply a function of slowing labor force growth and slowing labor productivity growth. Less population growth, combined with generous transfer payment systems and other factors that make it feasible for some people to opt out of the labor force, translates into less labor force growth. 

And profligate deficit spending crowds out private investment, which will dampen labor productivity growth.

Third, at some point, economic pressures will force developed nations to switch from a posture of immigration restriction to one of desperation for immigrants, especially high-skilled ones. In fact, we are already at that point, but political pressures are holding back the economic pressures in many countries.

As a Millennial, I will probably live to see the peak of human population, although I will be part of the "silver tsunami" by then. If all of the above data and predictions are accurate, then my lifetime is likely to be an economically and geopolitically eventful one. Of course, even the next 10-20 years should also be interesting.

The more I think through the situation ahead, the more bullish I become on high-yielding but relatively safe assets, as these will be in high demand among the massive and growing older population that want to retire in comfort. 

My pessimism for the global economy translates into optimism for the relatively safe yields of well-chosen REITs, utilities, business development companies, and other dividend stocks.

At High Yield Landlord, these assets have been our exclusive focus and will remain so in the years to come. 

The Market the Central Bank Bought

The Bank of Japan becomes the country’s largest stockholder.

By The Editorial Board

A Japanese national flag flies at the headquarters of the Bank of Japan in Tokyo.

The Federal Reserve’s Open Market Committee is meeting this week, and we’ll learn Wednesday if it will expand its purchases of Treasurys and private bonds. 

Which makes it a good moment to point out that the Bank of Japan is now that country’s largest single owner of equities. 

This is a milestone worth marking since pressure inevitably will mount on other central banks to follow where Japan’s excessively innovative monetary authorities lead.

BOJ holdings of exchange-traded funds hit around 45 trillion yen ($432 billion) in November, Shingo Ide of the NLI Research Institute calculates. Mr. Ide estimates the BOJ holds some 7% of listed shares by market capitalization. 

The Government Pension Investment Fund (GPIF), which can buy company shares without going through ETFs, also owns about 7% of market capitalization.

That’s a large portion of an economy’s stocks to be owned by any two entities, especially entities controlled by the government. And that figure understates the influence this ownership creates for government in Japan’s ostensibly private economy. 

An analysis by Nikkei in 2016 found one or the other of the government investors directly or via ETF holdings numbered among the 10 largest shareholders for 96% of listed companies. The BOJ owns about 90% of all ETFs in Japan.

No one knows how this is affecting Japan’s market or the economy. You’d expect it to have some effect, and there’s evidence investors sometimes spend more time betting with or against the central bank than poring over corporate financial statements. 

The BOJ has been buying ETFs for a decade, and changes in its investment strategy—such as buying more ETFs that include shares in smaller companies—have swung share prices.

Traders seem to believe the BOJ and GPIF aren’t currently swaying the market in part because Japan’s stock market has not consistently outperformed anyone else’s. 

But it’s hard to say how far the market would have fallen, or how high it might have risen, without this intervention. The GPIF, for instance, does not lend its shares to short sellers.

Concern also is mounting over distortions to the marketplace for ETFs. 

Such funds have proven popular among retail investors in other countries. But the BOJ’s practice of buying from all asset managers has muted competition, especially on the fees managers charge. 

The management fees for the largest ETFs tracking the Topix index clock in at 0.11% of assets per year, compared to 0.09% for the popular SPY ETF tracking the S&P 500 in the U.S. Cheaper alternatives in Japan charge 0.06% but Americans can buy cut-rate S&P 500 funds with fees as low as 0.03%.

After three decades of meager growth, Japan’s economy can look like a lost cause. That dulls one’s capacity to be astonished at developments such as the central bank eating the stock market. 

But policy makers elsewhere still think Japan is a role model for some reason, and many central banks have followed the BOJ’s lead on quantitative easing, negative interest rates and the like.

The Fed has dipped into the ETF marketplace, with small purchases of corporate-bond funds over the summer. 

If Congress doesn’t put restraints on what the Fed can buy, watch for more in the next panic if not sooner.