by Peter Zeihan
The vast retirement preparation efforts of the Boomers have deluged the world with financial fertilizer. Territories that could never attract capital previously, even under global free trade rules, found themselves awash in it. Economic development kicked into high gear on a global scale. If the Bretton Woods era is atypical, then the Boomer boom is an aberration. Marry the atypical to the aberrant, and wealth and security have never been on offer for so many people at such a low economic and political cost. Marry the atypical to the aberrant, and we get the shape of the modern world.
It is a weird shape.
• The American dictum that its Bretton Woods partners get along suspended normal geopolitical patterns. Military conflicts among economic powers declined from the norm in the pre–Bretton Woods era to being unheard of once countries joined the network. Since 1946, the only participants who have engaged in direct, substantial conflict with each other are India and Pakistan, both countries that were very late to—and never fully embraced—the game of free trade. In fact, very few Bretton Woods participants have engaged in any sort of military action unless it was under the banner of an American military effort. This suspension of military activity has allowed for the existence and even thriving of many countries that would otherwise have been crushed under the heel of larger powers. Countries as varied as Slovakia, Macedonia, Korea, Bangladesh, Papua New Guinea, Latvia, and a host of Sub-Saharan African states had a chance to exist, despite their problematic geographies and often predatory neighbors.
• The removal of military tools from international competition turned most attention to economic development. The Germans and French and British could now not only avoid war, but also form a supranational economic alliance that in time evolved into the European Union. Cheap capital and large markets enabled the EU to expand beyond the more advanced Northern European powers to the weaker countries in Southern and Central Europe, and led to economic interactions with those even farther removed. Countries and companies that would normally be starved for capital could suddenly access it, regardless of their physical location, track record, or business plan (or lack thereof). First-generation immigrants to Spain with no credit histories qualified for 100 percent mortgages. The Greek government gorged on euro guarantees to build out its welfare state. Russia, despite having sovereign defaults on its record and a history of defrauding everyone, discovered that its state firms could borrow at rates that a large, reputable borrower like Walmart couldn’t have achieved just a few years earlier.
• Mass financing plus mass trade lowered the bar to entry for countries looking to manufacture goods for export. High global demand, leveraged by cheap capital, meant that any country that could muster a modicum of organization could sell vast volumes of manufactures to a hungry global market without having to strike political bargains to secure market access. Mass demand enabled mass supply, and the purchase helped a broad array of countries lift themselves out of poverty. Korea and Taiwan shot up the value-added scale, advancing from two of the world’s poorest economies to two of its richest in a mere five decades. Bulgaria and Romania emerged from the Soviet wreckage to join the rich man’s club that is the European Union despite having per capita GDPs of but one-third that of Mississippi.
• Industrializing and modernizing such a vast list of countries required raw materials in unprecedented volumes. Demand for everything from oil to tin became so high that commodities prices exploded over the past twenty years, with nearly all at least tripling. Because of the Boomers’ financial boom, those purchases could be financed. Huge volumes of cash flowed to the commodities providers. Some of that income was spent locally, bringing political quietude to traditionally fractious cultures in places like Colombia and Oman. Copper revenue inflows single-handedly made the Chilean government’s investments into education and infrastructure possible. Some of the funds were spent on aggressive foreign policies. Venezuela’s government used its energy prowess to subsidize a wide array of ideological allies from Cuba to Bolivia to Argentina. Saudi Arabia used part of its $1 billion a day in oil revenues to fund its efforts to refashion Lebanon, Syria, Iraq, Pakistan, Afghanistan, and even southern Russia in its image. And a great deal of these funds were simply reinvested into the global system, augmenting the Boomers’ already heady investment inflows, inflating the system at all levels. Not counting the far larger monies available to the royal families of the Arab oil states of the Persian Gulf, conservative estimates put the government-accrued nest eggs alone in those countries at over $3 trillion.
• Everything doubled down with the aging of the Boomers. Bretton Woods pushed international activity from the military to the economic field, and the Boomers’ capital surplus lathered everything to a froth, vastly expanding the scope of what was possible, and the geographic reach of where it could be. There were pipelines across Kazakhstan, industrial development in Sichuan, ports in East Africa, economic nationalizations in Bolivia, banking empires in… Ireland and Iceland1—all floated by a developed-world credit boom. And of course any location that the free trade system had already unlocked waded in ever greater volumes of ever cheaper capital.
• Many of these imbalances have built upon themselves, creating houses of geopolitical cards. China’s ability to tap global markets—for imports, exports, and capital—has allowed it to expand into a great industrial power. Its consumption is now sufficient2 to move global markets all by itself. Part of that “movement” has spiked prices for commodities far higher than they would have otherwise, strengthening countries as varied as Oman, Vietnam, Venezuela, Zimbabwe, Norway, Uzbekistan, Gabon, Angola, and Argentina. China’s export income has also generated yet another mountain of capital that has allowed China to push back the development line from the economically questionable to the economically laughable. Feasibility has fallen to the wayside. Projects that would have been seen as folly before World War II, or even as too dangerous as recently as the early 2000s, the Chinese boldly embraced: prospecting in war-torn Ethiopia; oil production in genocidal Sudan; copper mining in Zambia; soy production in interior Brazil. Many such projects made—at best—scant economic sense, but because capital was so cheap and demand was so strong, they were attacked with gusto.
The last seventy years have been incredible. But the trends we have both witnessed and enjoyed are nevertheless temporary. And they are nearly over.
Surfing the Peak
But not quite yet.
Most people think that October 16, 2007, was just another Tuesday. Taking the kids to school, picking up groceries, business trip, and so on. Me? I was most likely still in awe of the iPhone that I had just purchased two weeks prior. But one woman in New Jersey did something remarkable. Kathleen Casey-Kirschling applied for Social Security benefits for the first time. This wasn’t remarkable because of what she did, but because of who she was. Born seconds after the apple fell in Times Square in 1946, Ms. Casey-Kirschling is America’s oldest Baby Boomer. The aging of her generation is the single biggest reason our world is holding together. And she and her cohort’s retirement is the guarantee that it will fall apart.
While the current system is a highly atypical moment in history, things are actually going to get weirder before they shift back to something closer to historical norms. The reason is almost purely demographic. As workers age, they gain more experience, become more productive, and as such earn higher incomes, but as they approach retirement they tend to consume less. While a fifty-five-year-old might put a big chunk of her large income into savings, a sixty-one-year-old will sock away an even greater proportion of her even larger income because retirement has nearly arrived. This trend toward ever higher savings rates and volumes continues right up until the very day that a mature worker receives her final paycheck.
And then the inflows simply stop. In literally one day, a mature worker’s financial contribution to the broader system shifts from the most she has ever contributed to nothing. Worse than nothing, in fact, because the day after she retires, she starts dra
wing money from her pensions—whether government or private—rather than paying into them. It is the financial equivalent of hiking up a mountain for weeks only to reach the top and leap off the cliff.
Timing is everything. The early wave of Boomer retirements doesn’t signal capital scarcity, but rather its opposite: extreme capital richness. The world won’t flip until the majority of the 200 million developed-world Boomers jump off the financial cliff into their Boca and Barcelona condos. The lemming-like charge has already begun, but the big plunge won’t happen until around 2020.
Shifting from an incredibly capital-rich system to an insanely capital-rich system will make the future seem brighter—much brighter—than it actually is. Demand for everything from lead and platinum to wheat and rice and cars and tablets will actually increase, and in many cases increase sharply. Capital supply will be sufficient not simply to finance purchases but also to underwrite additional industrial production in everything from manufacturing to mining. The general rules of the past seventy years (that global market opening justifies nearly all development), as well as the aberrant rules of the past twenty years (that money is available for any purpose), will continue to hold true.
This is surfing the peak, and it is wonderful. It is a grand time to be alive. The view up here is unparalleled and the air exhilarating. With a pocket full of cheap money, humanity is truly achieving things beyond all precedent. The pace of technological change, buttressed by massive markets, a globalized system, and unprecedentedly deep supplies of capital, has never been faster.
But from such great and unprecedented heights, there is nowhere to go but down.
The Descent
The global financial wave will crest at some point between 2020 and 2024. Between now and 2019, Poland and Russia will join Japan in the ranks of the demographically impoverished. Between 2020 and 2024, thirteen of the world’s top twenty-five economies3 will be in the ranks of the financially distressed. The new arrivals will include Canada, Germany, the Netherlands, South Korea, Switzerland, the United Kingdom, and of course the United States. With over 90 percent of the developed world in that unfortunate basket, the availability of capital and credit for all will plummet.
Pair the coming demographic dearth with the end of the free trade era, and the future is as bleak as it is readily visible.
Aging demographies will sharply and suddenly contract credit availability to a level that has not been witnessed since the 1970s—in the best case. Interest and mortgage rates will climb into the teens in the developed world, and higher in the developing world. Consumer activity will plunge, due both to the lower volume of twenty-and thirty-somethings as well as sharply higher credit costs. But while economies will contract, government’s role in them will increase. The unrelenting surge of people in their sixties will drastically increase government outlays on health care and pensions, even as the sudden dearth of people in their fifties will drastically lower governments’ tax take. At the same time, the rising need of governments to borrow combined with the lesser supply of capital to lend will drive government financing rates ever higher.
The pace of technological change will screech to a halt. Boomer retirement means fewer researchers and above all less capital. Fewer and smaller markets mean less commercial impetus for technical advance. Higher government outlays on retirees plus fewer young people mean fewer government dollars available for tertiary education. Everything from universities to corporate labs will slow.
Governments the world over will have to make ever more difficult decisions. One route is to placate the aged with the levels of income support and health care that they have been promised, but to do so by increasingly taxing an ever-shrinking pool of workers and therefore enervating the economy. The other is to dispossess retirees in an attempt to husband the economy’s ever-shrinking size and strength, not a likely outcome considering that most of the world’s democracies are aging into gerontocracies. Regardless of path, lower standards of living will be on deck for most segments of most societies.
The international economy will spasm and contract. The loss of the developed world’s capital surplus as well as the developed world’s consuming demographics will force harsh decisions on every economic entity, whether state or private, across the world.
Consumption of both raw commodities and finished goods will plummet. Countries dependent upon exports for their livelihood will suffer immeasurably. Lower demand for finished goods in the developed world will leave droves of firms and workers in both the developed and developing world destitute. But lower demand for the inputs that go into the infrastructure and industry that make global manufacturing possible will not necessarily reduce their price, just their sales volume. Without the rubric of the free trade order or the active management and protection of U.S. forces, the shipment of commodities will no longer be a risk-free venture. Between higher capital costs and higher insurance costs, only the lower-cost producers will have a relatively secure place in the market, and that assumes that either they or their clients are able to guarantee passage. The stage will be set for lower and more erratic supplies of industrial commodities, but not necessarily at lower price points. The one exception to the rule will be energy supplies sourced from shale in North America. The mix of local political stability, local supply, and local demand will prove the magic mix to uncouple North American oil prices from global pricing patterns, much in the way that the early years of the shale revolution did the same for natural gas prices.
Everywhere, American power will be overwhelming by its absence. For countries like China, which are dependent upon exports to the American market, the pain will be direct and permanent. Others—Central Europe comes to mind—will suffer from the withdrawal of American military support. Others will have different sorts of dependencies, many of which will be overlapping.
Take America’s role in global energy markets as but one example. One of the oddest conventional wisdoms is that the United States is heavily dependent upon the Middle East for crude oil supplies. In fact, the United States has only rarely sourced more than one-quarter of its imports from the Persian Gulf. In 2012, the figure was only 20 percent, with nearly half of that being supplies that the Saudis prepositioned in the Gulf of Mexico in order to prove their commitment to the American alliance. American involvement in the Persian Gulf has not been in order to secure energy supplies for the United States, but instead to supply energy for its energy-starved Bretton Woods partners in Europe and Asia. Put more directly, the Americans do not protect the Persian Gulf kingdoms and emirates so that the Americans can use Middle Eastern oil, but so that their Bretton Woods partners in Japan, Korea, China, Taiwan, Thailand, India, and Pakistan can.
In a world in which Bretton Woods is the linchpin of American global strategy, this is quite a cost-effective strategy. In a world in which the Americans reconsider Bretton Woods, however, it is a page from a strategic playbook that will itself be destined for the dustbin of history. American withdrawal from its guarantor role will simultaneously trigger economic and energy crises for Europe, East Asia, and South Asia and financial and security crises for the Persian Gulf states.
In many countries, positive economic growth will become a coveted dream of the past. With fewer jobs, lower incomes, higher costs, fewer services, and higher taxes will come diminished political legitimacy across both the developed and developing world. The dislocations and political disintegration of places like Greece and Syria in recent years are symptoms of the chaos to come.
And that is the positive scenario, because it assumes that everyone gets along. It is far more likely that they won’t.
For seventy years the world has not had to worry about access to markets or commodity sources. Now it will. Countries far removed from supplies of food, energy, and/or the basic matrix of inputs that make the industrialized world possible will face the stark choice of either throwing themselves at the mercy of superior local powers or throwing what force they can muster at the resource providers.
In their desperation, many will realize that American disinterest in the world means that American security guarantees are unlikely to be honored. Competitions held in check for the better part of a century will return. Wars of opportunism will come back into fashion. History will restart. Areas that we have come to think of as calm will seethe as countries struggle for resources, capital, and markets. For countries unable to secure supplies (regardless of means), there is a more than minor possibility that they will simply fall out of the modern world altogether.
This may sound harsh. It is harsh. But consider the degree of economic interdependence that globalized trade, cheap credit, and free security have generated. Of the thirty-odd European countries, all are industrialized, but only one—Norway—is self-sufficient in oil or natural gas. Germany, France, Spain, Turkey, and the Czech Republic import nearly all of their petroleum, as do such other varied countries as Chile, South Africa, Taiwan, Morocco, Japan, and South Korea. Europe won’t be facing starvation, but the concept of affordable electricity for all—and cars on the road—will fade in more than a few places.
By contrast, much of the Middle East can produce its own energy, but nearly all of it risks famine: Of the twenty-odd Middle Eastern countries, none save Israel is industrialized, and not one, not even kibbutzy Israel, is remotely self-sufficient in foodstuffs. Each East Asian state has struggled mightily to retain self-sufficiency in rice—all save Malaysia have broadly succeeded—but few can support their other food needs. Along similar lines, Venezuela, Colombia, Singapore, Jordan, Saudi Arabia, Cuba, Iraq, Japan, and South Korea import two-thirds or more of their grain needs. All of these areas stand to be hard hit in the coming years, but East Asia—home to the greatest concentration of the world’s manufacturing capacity but only a moderate amount of its agriculture and a starkly limited share of its raw materials or energy—will suffer on all fronts.
