China, Debt, Demographics

The general perception of China is that they are this giant growth monster that will save the world from a stagnant economy. There are two reasons I think that is not so. Debt and Demographics.


The demographics is an easy one to point out. About 39 years ago China put in place the “one child policy”. A person who was 18 then, is now 57. 30 years old then is 69 years old now. That generation was the great generation of workers who grew china. All the while having only one child. They are now at retirement age or fast approaching it. For each 2 of them, there is 1 child.

That one child must fill all the jobs, support 2 elderly parents, and continue to grow the economy at the same rate as those 2 parents. Plus, China has suddenly realized they are in this bind, so have loosened the policy to a ‘Two Child’ policy. So some of these folks will be carrying 2 children as well.

For the next 20 years, at least, there will be fewer workers carrying more non-workers. That can not be changed. The great bubble of excess labor is retiring. Much like in the USA where the Boomers are retiring.

Both economies are going to have a shrinking labor pool and a growing ‘retired and consuming’ pool. When you have less production and more consumption you do not invest and grow at the same rate. Since growth is about 2% max (or about 0 in real terms) in the USA, we can expect a kind of stagnation for a few decades based on that Demographic Destiny. China is in worse shape as their policy had onset in one big step. They just issued expected growth targets of about 6% going forward, down from 12% the last couple of years. This will get worse, and rapidly. How do you get 6% growth out of a shrinking labor force with more “takers” and fewer “makers” every year as those 60ish year old folks stop working?

BTW, similar demographic trends apply to the EU as well.

Globally, the population with high fecundity (that is the Economic term of art for having kids) is the Muslim World. The EU needs to decide if they will stay European and accept a lower economic growth rate from reduced population; or let in the Islamic Migrants and become a part of the Muslim World in 30 years as Islam does not mix in but does have a lot of kids with their culture to replace yours. No, that is not ‘bias’. It is an abstract unemotional evaluation of the reality on the ground. A mathematical inevitability of the effect of fecundity ratios and immigration. The math doesn’t change depending on if you like it or not. “Reality just is. -E.M.Smith”. Angela has chosen a Muslim Germany. Hungary has not. Who knows what the rest of y’all will decide.


In the case of debt, the same reality applies to the EU countries, but I’m not going to go into it for them. We’ve all seen Greece and Cyprus implode. Spain and Portugal on deck. Italy in the wings.

We also all know that the USA is at about $19 Trillion in debt (about a 1:1 debt to GDP ratio as we had a $17.4 T GDP in 2014). That is about the limit of what is sustainable. Japan has gone up to about double that without a collapse, but at the expense of a couple of decades of zero growth and stagnation in the process. Greece did about double that, but is mid collapse at the moment. Usually about 150% of GDP as debt is the end of the road for any kind of decent economic performance. Less is much much better.

It is pretty well understood that the USA is on a rocket ride to debtors prison at the moment and we just passed the 100% of GDP level on the way to crashing. Obama did that in 6 years, and we have 2 more to go before anyone can change the budget (Gee, Thanks, Republicrims… and the Boehner Wet Kiss of departure…)

But this is about China.

Many of us also are painfully aware that we owe about $1 Trillion or so to China for national debt. The impression is that they have boat loads of cash and have been oh so frugal. So we borrow from them. But not so fast…

7:01 pm ET
Feb 4, 2015
China’s Total Debt Load Equals 282% of GDP, Raising Economic Risks

Pedro Nicolaci da Costa

China’s overall debt load has risen quickly since the global financial crisis. While still manageable, it raises some concerns for investors, the McKinsey Global Institute says in a new report.

The prospect of a major economic slowdown in China is among the key concerns for policy makers and investors in a turbulent global outlook. Many believe the Chinese government has the resources to manage a smooth transition to a slower growth rate without causing a financial crisis.

But the speed of Chinese debt growth, much of it related to real estate, raises risks that an unwinding of the country’s two-decade growth boom might not go down so smoothly.

Here are some key facts from the report.

Total Debt Equals 282% of GDP: That’s how big China’s total debt load, including borrowing by the government, banks, corporations and households, had gotten by the middle of 2014, the report says. That’s far above the average for developing countries and higher than some advanced economies including Australia, the United States, Germany and Canada.

They are already past “Going Japanese” in this regard.

In short, we borrow from them as THEIR central bank prints money like crazy and others borrow from US as OUR central bank prints money like crazy.

It is all one giant Ponzi Scheme of Debt.

In reality, there isn’t any real wealth to back up all that debt. We are each writing IOUs to the other based on nothing.

Once that reality sinks in, and as the Demographic Wall forces it to be undeniable, there will be some major issues that can no longer be ignored. Like how do you cash out that debt, to pay the retirement for all those folks no longer working, when each ‘retirement account’ is full of IOUs to the other one?

Social Security has no assets. It is a promise to pay where the old folks expect the young ones to do the paying. Which (or what) ‘young ones’, in a shrinking demographic? The same is true for IRAs and 401ks and Japanese Annuities and whatever China has in place. Real goods and services must be delivered. They can ONLY be delivered by the real workers at the time of delivery. Paper in a box doesn’t do that.

So all at the same time, from the EU to the USA, to China and Japan: The demographics do not support the reality and the promises; and no amount of mutual money printing and mutual lending can fix it. There just are not enough “young workers” globally to do that. (Where there are enough, they don’t want to work so much as kill and destroy, and will not support the legal structure behind the ‘obligations’ anyway. Their social contract is to Allah and The Imam, not to Social Security or Chinese bonds and pensions. Germany has decided to ‘learn this the hard way’, so at least it will be interesting to watch… In the USA, the Democrats and many Republican Establishment folks think a flood of young Mexicans will fix it… Maybe, but be ready to have hot enchiladas in the rest home and learn to ask for your meds in Spanish. Oh, and hope that they don’t vote to change the law taxing them to death for your retirement.)

In Conclusion

That’s the basic problem facing the world. Demographics do not support the intergenerational promises made by politicians who long ago retired on fat pensions. The Fed and other Central Banks trying to paper over this with money printing can only drive up the price of paper assets, not create real jobs, real workers, real retirement homes, nor provide bodies to change the bed pans and cook (nor grow and deliver) the dinner.

They can, and have, and continue to, drive debt to insane levels as they attempt to do so. This further distorts markets and economies until they collapse (see Greece as only the most recent of many such events in history).

What is the trigger for catastrophe? For Greece, they owed money to bankers who were not under their political control. For Japan, they owe debt to themselves, largely. When the banker says “stop spending or else” is when it is a SHTF moment. Or when there isn’t anyone left willing to lend. Essentially when it is clear to all that it’s a bad deal. That point is about 300% Debt / GDP but varies with the reputation of the borrower and the smarts of the lenders. The European experience with debts from the 1500s to date argues folks can be pretty dim sometimes.

Now in the present case, we have a unique circumstance in that the demographics are fairly synchronized globally. That adds its own timer. IMHO, that timer is hitting right now, but takes about a decade to bite.

Somewhere between now and 2030 we hit a hard demographic wall, and there is nothing that can be done to fix it. You can not give birth to a 20 year old worker. (There is a small chance robotics can help. Japan is betting on this big time). Perhaps putting a ‘wage tax’ on robots to pay off the debt and retirement promises can fix it, but don’t bet on it.

IMHO, during that time, the only real choice for Central Banks is going to be a near zero interest rate. There will be no ‘overheated economy’ to cool off, and when you owe 200% of GDP, any rise in interest becomes lethal to the budget. At this point, move rates to 3% and you bust the Federal Budget, collapse the paper economy, and break the ability to fund a military and social security (pick one to keep…)

It will not matter if it is The Fed, The BOJ, The EU Central Bank, or the Bank of China. ALL of them have the same problem. Governments drowning in debt trying to turn paper into real product.

IFF we are lucky, it will be 20 years of stagflation as the “obligations” are erased in an inflationary POOF! and if we are not lucky, it will be a USSR implosion reset in one go. (Perhaps one way in the USA, another in the EU, and who knows what in China…)

Until that day, at least you know to look at who is putting IOU’s in their bank backed by IOUs from another bank that is backed by IOUs from the first bank…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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14 Responses to China, Debt, Demographics

  1. hillrj says:

    EM: How about a biological/benefits fix that will enable more folks to have bigger families? There are a lot of women who decide to start a family too late in life. And there are others who would like more kids, but are too old. Surely the Japanese are thinking of this. The French have big benefits for larger families.

  2. E.M.Smith says:


    Small Problem: ANY fix had to be done 20 to 30 years ago…. That’s the reason for the phrase “Demographics is Destiny”. It’s already a done deal, you just get to wait 20 to 30 years for them to reach the workforce… or for those in it to retire… or for any other ‘generational change’ to move through the snake.

    Want more kids? Don’t let women have an education or work. (Again, for anyone who isn’t used to me yet: That isn’t advocacy nor denigration. It is a statement of facts. Fecundity is most strongly correlated – negatively – with women’s education and financial position. You don’t have to like something to understand it.) The ‘advanced economies’ have a demographic problem precisely because we have education for all and opportunity for all. Islam has huge population growth precisely because they suppress women’s education and ability to work.

    Everything else is small fudges around the edges. So far such programs of money for kids have not reversed the dominate trend in places like the Germanic countries.

    (And no, I’m not advocating for “bare foot and pregnant”. Economics is called The Dismal Science precisely because of the dismal facts of demographics – and demographics is a core part of economics. I recognize this reality is a dismal one, but that doesn’t let me deny it exists. My wife, my daughter, and the spouses twin and her daughter all have lots of education. It is also highly unlikely that any of them will be having any more kids. So far it’s only the son who’s on track to have the first grandkid. So from the lot of us, 1 grandkid. Such is demographics. Were I advocating, I’d have an ignorant wife and be quoting from a different book…)

  3. Larry Ledwick says:

    This is a classic case of a stitch in time saves nine.

    If we could have convinced the feebie vendors to scale back the giveaways a few decades ago, it would have been fairly easy to fix. Social Security was fixable in the 1960’s, it was salvageable in the 1980s but since then all the options have grown progressively less desirable and hence less likely to be taken. I remember giving a speech in high school in the late 1960’s where as a teenager I could already see that that the math of Johnson’s great society and the expanded entitlements along with social security obligations did not work out. It was clearly a ponzi scheme 50 years ago. It was pre-ordained in the late 1960’s that if no action was taken to reduce the bleeding that eventually the patient would die.

    There is one other fix to the demographics dilemma that people don’t want to talk about and that is the net effect of both birth rate and death rate. We are making the low birth rate worse by extending life spans, so that the children have to support parents for ever longer periods.

    Partially that has been mitigated by folks in my generation that are working on through their “retirement years” and so are artificially inflating the employment pool. This is also aggravating the worker participation rate as more and more people cannot find a good paying jobs as the turnover due to retirement is diminishing.

    This leads to the 1984 solution of creating consumption and production through perpetual war, (is china heading this way?) where the only way you can create enough demand to give jobs to the willing is to make stuff and then blow it up over and over again. This then feeds back into the economy as deficit spending for defense and you make another loop in the vicious cycle.

    The only way out of this is some dramatic change in the variables. Create lots of virtual children with robots to do elder care or create some mass form of consumption like China has recently building empty cities, or the worst case, trim the population via disease, collapse of the economy or warfare.

    I see those as the only options to break the cycle and get things back in balance.
    As mentioned above robots for production increase output but who are you going to sell it to? they also divert profit to the owner of the business rather than to workers, so you have a few really rich management types and lots of workers fighting for menial jobs.

    The only peaceful solution would be to invent a new labor intensive industry that can’t (or won’t) be automated to give jobs to the under employed, and which also creates some form of sales demand, like maybe building space colonies or some other productive output that is preferable to grinding up resources in warfare.

    I have no clue what the final outcome will be, but of all the options which come to mind a very small subset are what I would call beneficial / benign and desirable. Like that general sense of foreboding folks get before a big storm, a lot of folks I know are holding their breath and waiting for the bump in the night which will show how this system is going to break.

  4. John F. Hultquist says:

    All very interesting.
    Social Security says low inflation this year so no cost of living increase for those of us now takers. Meanwhile, Elizabeth Ann Warren, the senior United States Senator from Massachusetts wants to increase the payout by 3.9%. Sure, why not? I did not see her call for new taxes but that is likely the case.

    Lots of new wealth in China had to find a place. Many apartments (condos ?) were build with much surrounding infrastructure, often near existing old cities. Do a search for — China’s ghost cities —
    Here’s one link:

  5. Larry – if all the production is automated, the government can create jobs for the humans by creating more rules, regulations and laws that need to have forms filled in, so there will be things to use all those human man-hours that would otherwise be wasted by people making music and other arts or in research of various types. With the current set of rules and regulations being more than any one person could reasonably read and understand in a lifetime there would be many new jobs in the legal profession, too, with many specialists. As they say, ignorance of the law is no excuse for breaking it, so everyone’s time would be fully-occupied. Any maker would need to employ at least a dozen lawyers in order to avoid some pratfall.

    EM – thanks for the pointers on the demographic time-bomb, since although I was somewhat aware of it I hadn’t realised that it’s basically applying to a lot of countries at the same time. Also thanks for the comment about rich/not rich at which, again, has had me baffled for a long time – it’s nice to know that this is also baffling to you and is actually hard to make any one decision about. Any of the answers you give can be justified, after all, and they all have a degree of truth and a degree of missing the truth.

    One thing that really strikes me is that governments seem to confuse money with wealth. The money can be counted to the penny, but the wealth is not so easily estimated. Automated production can produce all the goods we want at no large cost in man-hours, but unless enough people can earn the money to buy them they can’t be sold, so the system as it stands will break down. For sure new jobs and industries will spring up where people can train or teach themselves for the positions, but such jobs will be temporary until someone finds a way to automate them and then the people will again need to re-train.

    Money has changed. Whereas it used to be a real value, and the Pound Sterling was literally a pound of Silver and the Copper coinage was actually of sufficient weight to be a penny, groat etc., money these days is a notional value only and commodities vary in price daily. Still, money currently is a reward for man-hours spent and the value of that time. With automation, I think it’s going to be necessary to give people some form of unearned income sufficient to just live on, and if you want more to get luxuries then you need to find some non-automated job you are good at that people will pay you for. Yep, there will be people who sit back and take the money and do nothing, but at the moment the same thing happens but it is more hidden.

    The demographic time-bomb can be defused if we produce good-enough robots to perform the tasks that are currently human-only. We’ll also need to change the way we distribute the goods and services so that we both avoid a massive “unemployment” problem and also provide rewards for those people who find new jobs to do and do them well. The long-term future should be good if we can over that hump of the changeover, but there could be some pretty bad times coming if we don’t adapt and just keep on with business as usual.

  6. David A says:

    Robots, hmmm?; massive shortage of workers??.

    Can not these two things work together, with production increases through robotics keeping declining populations employed?

    I am confused at how Europe thinks there is such a shortage of workers, when unemployment is so high?

    So, as our host well explains, it is the debt obligations that cannot be met.

    How does Germany think importing millions of Arabs looking for Goverment welfare ( there is unlimited demand for free food, shelter, and medical) will pay off the debt?

    BTW, in a free enterprise economy of Robotic production, a service economy of people’s wants will produce unending jobs, as human desires are unending.

    A reset of some kind must happen?

  7. Larry Ledwick says:

    How does Germany think importing millions of Arabs looking for Goverment welfare ( there is unlimited demand for free food, shelter, and medical) will pay off the debt?

    I think the fundamental problem here is a variation of the normalcy bias. Unconsciously folks in Europe and America are assuming that all the immigrants will do the same thing that earlier immigrants did, ie work hard and merge into the system as productive members of society. They simply cannot wrap their head around the idea that many of the immigrants have an entirely different view of civilization and what they aspire to achieve.

    It is simply not comprehensible to them that these immigrants will not only not blend in and join the existing culture but that they have a 1400 year history of replacing other cultures with an entirely different view of the world and civilization and on achieving a “perfect world” outlined in the 6th century.

  8. Graeme No.3 says:

    Larry Ledwick:
    even our MSM in Australia have not been able to disguise those “refugees” are very well acquainted with the provisions of social security. Amounts, free medical and dental, and the waiting period before the rest of the family can be brought in.
    Germany already has an underclass of left overs from the 1975 downturn – instead of kicking the unemployed “guest workers” out back to their origin like the Swiss – they gave them social welfare. Now they have areas (can I call them ghettos?) of third and fourth generation social welfare recipients, many of whom cannot or will not speak german, poorly educated and adding nothing to the national economy.
    And Merkel wants another 4 million (minimum) – Germany is doomed.

  9. Larry Ledwick says:

    In America we have a good historical example to relate it to. The Mariel boat lift saga where Cuba dumped the contents of their prisons and a lot of covert agents on us in the guise of a humanitarian effort. Likewise the 1991-94 Haitian refugee crisis which resulted in the wet feet dry feet decision. It is worth noting the the highest crime rates in the U.S. occured in the early 1990’s shortly after these two huge influxes of uncontrolled emigration.

  10. Power Grab says:

    Re: “Want more kids? Don’t let women have an education or work.”

    It doesn’t have to be that way. In my church this year, I can think of 3 families with 7 or more children in each family. The wives often worked to provide additional income, but not necessarily full-time. They were college-educated, too. The thing I keep hearing from these wives is that, once you have more children, the older ones help with the work.

    Once this summer, after 2 families left for new challenges, someone quipped that we had lost 20 members in one week – and that was only 2 families’ worth! We look forward to seeing them again, eventually.

    Another family I know of (but don’t know personally), in their first pregnancy, had triplets. In their second pregnancy, they had twins. So they were blessed with 5 younguns with only two trips to the hospital!

    Maybe the thing to remember is this: For evil to win, all that is necessary is for good people to stop having children.

  11. Power Grab says:

    Oh, wait…one family is waiting for the arrival of their tenth child. I lose count. I’m sure they don’t, though.

  12. J Martin says:

    A well written assessment of the twin impacts of robots and demography on jobs.

  13. E.M.Smith says:


    It doesn’t have to be, but that is the relationship globally across all societies with only minor deviations. It is just a statistical fact, but not immutable to human effort.

    @J Martin.

    I’ll take a look. thanks.

  14. E.M.Smith says:

    Read it. Generally agree, but their graph of who will be automated is wrong.

    They ignore desires, so the fact that people prefer human interaction in services is ignored. That is why the automated checkout stations have less use despite the checkout clerk handing your groceries less carefully than you do. For that same reason, teachers are not gone, replaced by more effective computer self paced instruction.

    They also show managerial and professional as low risk. That ignores partial automation. Spreadsheets and word processing caused manager productivity to rise a lot, letting fewer do more. (I could not have done a dozen written performance reviews all in one batch without them). Similarly, look at the impact of CAD software on demand for Engineering Draftsmen. Any job centered on information is the more easily automated. Hardest is fine motor skill, vision, and decision in complex variable environments. Things often found in services.

    But other than that, their economics are pretty good.

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