Should our economies take the road less travelled?

Photo by kakidai on Wikimedia, License: CC BY 3.0

Whenever the devil in you wants to see a spectacular economic fall from grace, look no further than Japan. After decades of strong economic growth, culminating with it becoming the world’s third largest economy in the latter part of the 20th century, growth has stalled in recent years, igniting strong fears regarding the long term future of the Asian country. From Japan’s much publicised ageing population to its astronomical debt to GDP ratio, the future looks bleak for Shinzo Abe and his countrymen, with no solution to its financial woes foreseeable. Regardless, if much of the developed world want to stop themselves from plunging into the same economic quicksand that Japan finds itself in now, they need to look at the country, and examine exactly where it went wrong. Only then can they stop history repeating itself, but with them being the victims, rather than the country across the waters. This is because the Japanese have many of the same problems that many developed countries such as the UK and USA have, but are simply feeling the pinch sooner, rather than later. To save ourselves from an economic depression, we need to learn from Japan’s horrendous situation, rather than simply standing by and watching.

One of the media’s most publicised stories about Japan is its ageing population. With 1 in 4 Japanese being over 65, it is clear that the Asian country does not have much in the way of a substantial workforce. The main problem with an ageing population is that it means that there are simply not enough people of a working age in a particular country, decreasing the total productive capacity of that country, hence decreasing GDP and GDP growth. When this is combined with the increased dependency ratio that Japan now faces, the problem seems almost insurmountable. However, the most worrying thing about this is that the exact same thing is set to happen to many developed countries such as the aforementioned UK and USA. By 2050, the number of Americans aged over 65 is projected to reach over 80 million, with their percentage of the total population going over the 20% mark. From these harrowing figures, it is clear to see the direction in which the USA is going with regards to age, and therefore with regards to productive capacity. For a nation which is as dependent on industry as the USA, the problems associated with their population getting older, and hence their numbers of industrial workers dwindling are huge, and could perhaps result in economic growth completely grinding to a halt, or maybe even turning negative; a massive roadblock for one of the biggest economies in the world.

It has long been an economic axiom that debt is a large impediment to the growth of an economy, and this is proved even mores true when you look at Japan. In 2013, public debt of Japan increased above a quadrillion yen (over $10 trillion), bringing their debt to GDP ratio to over 200%. This carries with it massive economic implications: nearly all the money that the Japanese government receive will have to go towards paying back its monstrous debt. This means that Shinzo Abe and his fellow policymakers will not have the funds to spend and improve Japan’s public services and infrastructure, thereby decreasing the standard of living for many Japanese citizens. This is a financial ailment which is echoed by their US counterparts, with their debt to GDP ratio reaching 102.98% in 2014. Although not as severe as Japan’s, this is still growing and is showing no signs of stopping, with senior US policymakers acting as if they have an infinite debt ceiling, and eventually, it is a huge possibility that the US’ situation could very well reach the gigantic proportions that Japan’s has. This does not just have immediate ramifications confined within US borders, but given the US’ global stature, it has the potential to cause shockwaves all over the world, very possibly triggering another global depression.

A great reduction in aggregate demand has also been one of the prime factors behind Japan’s downfall. It has long been well known that Japan has a severe lack of consumer spending, with the Asian nation having consigned its citizens to hoarding, rather than spending. With the reduction in real purchasing power that the Japanese have seen in recent years, it would be illogical to blame them for not spending as much as they would otherwise, as they simply do not have the sense of economic security that they once did. However, the real surprise regarding this lack of consumer spending is that the exact same thing, again, is beginning to happen in the USA. In December 2015 in the USA, spending on both durable and non durable goods dropped by 0.9%, a clear indication that many Americans are turning to saving rather than spending. Of course, this results in a decrease in John Maynard Keynes’ positive multiplier effect, leading to a reduction in economic growth, a reduction in the purchasing power of the average American and also a reduction in overall standard of living. If they do not amend their ways, America has a real chance of ending up like Japan, a nation of could-have-beens. Although the USA has achieved a great deal in its time, they must look east to their Asian counterpart if they want this prosperity to continue.

Shrey Srivastava, 15


By Shrey Srivastava

A finance and economics enthusiast, and someone who wants to share his views with the world.


  1. Hello Shrey,
    As always it is a pleasure to read one of your articles. I often must remind myself of your age as you write like that of a much more mature person.
    I have some questions for you ( I hope that is okay). With the advances in medical technologies people are living longer, contributing to precisely what you spoke of. Do you believe there will be market corrections in Japan and USA similar to what we saw during the US’s most recent financial upheaval? In your opinion, what would be the most likely sectors affected by such a correction?
    Really superb work Shrey!


    1. Thanks very much for the comment 🙂 I definitely think that the ageing population of both Japan and the USA will result in a severe market correction (we’re already seeing some of it in Japan). I think the industrial sector, producing goods, would be affected the most by such a correction as they are the most labour-intensive. Thanks very much again for the comment! 🙂

      Liked by 1 person

      1. The US’s more service-based economy will also be affected because service industry jobs rely on people who can stand on their feet for long periods and that’s not the elderly.

        But worse, there’s no actual money in the Social Security trust fund, so kids like you and my two will have to support the older generation in retirement while also feeding themselves. This will leave no money for economic expansion or personal goals like buying a house. It’s a economic crisis in the making.


      2. You are very welcome Shrey! I really enjoy economic discussion. Do you believe there is anything that could be done in the short term to prevent further damage, or has the problem been allowed to persist for so long that collapse is inevitable?


  2. Hi, Shrey. Thank you for dropping by my blog. I enjoyed this article very much. You have a great talent for writing and you seem to understand the concepts you have learned. Because you’re young, I’m going to offer some advice and resources. I’m not an economist and I don’t pretend to be one, but whenever someone invokes John Maynard Keynes and claims that one of the problems afflicting Japan’s economy is savings and then says America should not go that way, I know they have more to learn about the real study of economics.

    Keynes has been the rage for a long time. I studied him in high school too, but I was fortunate enough to study under a classical economist in college and that’s been where I’ve found the most real-world correlations in my studies.

    I want to suggest that the reason national debt has grown so astronomically in the United States is that we have been force-fed Keynesian nonsense. Lack of savings drives credit-based spending — at the private level, but also at the state and national level. If my car blows up and I don’t have money in the bank, I put the repairs on my credit card which is DEBT. Since I haven’t got the money in the bank, I’ll spend several years and approximately 3x the original cost to pay off that credit cards. Private citizens in the US carry mountains of debt, which to a great extent led to the 2008 crash. What might have been an economic hiccup became a crisis because nobody has any non-retirement savings anymore AND most of us were already maxed out on our credit cards. So when the credit markets contracted, small businesses and individuals were unable to secure more debt (uh, credit) and so were forced into bankruptcy. People lacked the means to weather a recession. What you referred to as hoarding is not only understandable, it’s good sense, because those people will eventually spend it on a durable good that they won’t pay interest on. In other words, they will pay the real value of the item they’re buying rather than the inflated Debt value of the item plus 3x interest. That is what people used to do when America had a thoroughly robust economy (say, in the 1950s).

    So there are a whole lot of classical economists you ought to read. Check out any writings by Frederic Bastiat, but particularly That Which is Unseen is a good primer on the philosophy behind classical economics. Then check out Mises Institute for a good introduction to the Austrian school. Friederick Hayek’s Road to Serfdom does an excellent job of explaining why government-planned economies don’t work (Keynes being all about government planned economies). Generally, anytime you can catch an article by Walter E Willliams, you will get a little snippet of economic common sense written in a personable way.

    I think you have a great future and I don’t want to see your talent squandered by not balancing your studies. The Keynsians will say that all the people I have listed are wrong, but what I experienced when I read them for the first time was a recognition that they were describing real life. I could observe what they were talking about in my own finances and in the finances of the small businesses I am familiar with. The Keynsians want us to believe that one set of economic principles work on an individual and small business level, but are too simplistic for the whole economy, so therefore you need a completely different set of principles for the economy and that individuals and small businesses should have to cut their own throats to “stimulate” the economy. There is no logic to that and I think we’re finally seeing the limits of Keynsian philosophy. The countries that went whole hog for his theories are now deeply in debt with economies that are not growing. That includes Japan, Europe and the United States.

    I’m hoping your generation will change that.


  3. Shrey, what a pleasure to read your article. I’m impressed beyond words at your insights and wisdom, especially when I see your age! I’m looking forward to your next post.


  4. Shrey, think about what an economy with Japan’s average age is going to look like, vs. an economy with a lot of 20 and 30 yr olds. The older group will have bought and mostly paid for housing and furnishings, won’t be buying as many automobiles or the latest electronic gadgets, and as they get older will be cutting back on vacations and dining out. The only thing that can be expected to rise is medical expenses. I guess what I’m saying is that Japan’s economy looks about what I’d expect an aging society’s economy to look like.

    Also, there are places in the column and in some comments that seem to miss the distinction between public debt and private debt. Public debt and private debt have very different consequences in a fiat currency environment, with private debt depressing demand in ways that public debt will not. Private debt carries with it the necessity of repayment and the threat of bankruptcy, and forces debtors to forego consumption or face that consequence.

    Public debt* on the other hand is simply a number: in particular it is just the number of currency units the government has spent buying goods and services from the private sector, and has not yet taken away from the private sector through taxation. In other words, it is exactly equivalent to private savings. Public debt does carry with it the necessity of accepting those currency units in payment of tax liabilities, but there is no threat of bankruptcy or default and no constraint on further spending, as long as sellers of goods and services are willing to accept the currency.

    *People usually consider “public debt” to be the sum of outstanding government bonds only. That’s a distinction without a difference. Paper money and coins, bank reserves, and government securities are just different kinds of money; walking around money, checking account money, and savings account money respectively.

    Liked by 1 person

  5. Really enjoyed this piece. “With 1 in 4 Japanese being over 65”–That’s a disturbing statistic isn’t it? The fact that the U.S. is catching up signals a real need for change.


  6. Dear Shrey,

    Just a few observations I would like to make about Japan’s ageing population:

    – one reason for the rapidly ageing population is that social policy in Japan towards older people is much less developed than in Western countries. The assumption has long been that women take care of older people. However in Japan, tradition and economic context combine to make looking after elderly people difficult for women. Traditionally women look after their husbands’ in-laws but with costs of living having been high for most Japanese families over the decades, very few families have had more than one or two children and this often means Japanese women are faced with the unenviable fate of looking after their own parents (if they have no brothers) and looking after their husbands’ parents. Many Japanese women deal with this dilemma by staying single or going abroad to find foreign men.

    Result: very low birthrates and low fertility rates in Japan.

    If Japan wants its women to stay in the country and have families, the government must adopt policies that ease the economic burden of having children on both men and women, and consider ways of supporting the elderly that take the burden of their care off their families.

    – Japan has traditionally discouraged immigration as well and the fact that the country has a small immigrant population compared to other Western countries is bound to influence its demographics as immigrants tend to be young and in their child-bearing years.

    Also I support what Moslerfan says about the difference between public debt and private debt. The levels of government debt in Japan may be astronomically high but for years rating agencies like Moody’s did not see this as a bad thing. This is because most government debt in Japan is spent on infrastructure maintenance and improvement, and such activity is expected in the long term to help stimulate further economic activity and generate revenue. It could be said that in some parts of Japan the government spends too much on infrastructure in order to stop rural areas from losing young people to the cities because they want jobs. This debt is very different from the situation in other countries where politicians might seize loans intended for other purposes and park the money in accounts held in overseas tax havens. From the home country’s viewpoint, this is obviously dead money, lost to investment and development.

    It would probably do you some good to read an economic history of Japan (especially since 1867 which is when Japan abolished the shogunate, restored the Emperor as head of government and began its Westernising program) and also read an economic history of South Korea since 1961 (when President Park Chunghee embarked on a series of 5-year plans to industrialise the country) for comparison. If you feel that’s not enough, you can try reading about Singapore’s development after independence in the 1960s. In all of these countries, economic development and industrialisation (with an emphasis on exports and suppression of local consumer demand) was initiated and led by government policy;


    1. Thanks for the lengthy comment; I really appreciate it and will definitely take the time to read the accounts you sent. However, I don’t feel that some of the things you listed about Japan, for example its social policy, change the fact that the USA is still heading down the same direction as Japan, as we can see from the statistics. Japan’s much publicised “Abenomics” has been failing for the past few years and so I still definitely feel that the USA needs to take these lessons from Japan if they are to continue to flourish as a country.


      1. As a person who will turn 65 on my next birthday, I hope the US does follow the Japanese demographic model as it relates to me personally at least. I’m not ready for the alternative yet.


      2. Social policy is just one reason out of a number responsible for Japan’s declining and ageing population.

        Incidentally all Western nations (and increasingly East Asian nations too – China’s population is projected to start ageing rapidly after 2030) face the same problem of population decrease, ageing population and low fertility rates among women. The rate at which these problems are developing will vary from one country to the next for different reasons, though it’s possible that the overall phenomenon (of decreasing and ageing populations) might have an underlying cause common to all these countries’ economies (the cost of living outpacing wages growth, over-reliance on private debt and privatisation of public services forcing people to delay having families and having smaller families).

        In western Europe, Italy, Spain and Germany are notorious for having low fertility rates and most eastern European countries also now have the same problem. The reasons though are different for all of them: compared to other parts of western Europe, Italy and Spain’s social policies with regard to families are very poor, perhaps (and ironically) due to the Roman Catholic influence, plus of course those countries have huge debt and unemployment problems; and eastern European countries have to deal with a double whammy of poverty and being part of the EU (which means being part of visa-free Schengen zone which enables young people to travel in search of work – and probably never returning home).

        Likewise in East Asian countries, the low fertility rates, stagnant population growth and ageing populations can have different and multiple causes all acting together or separately. In China, the phenomenon will be aggravated by the past one-child policy, the fact that there’s still a lot of poverty in parts of the country (meaning that some very poor areas will have a lot of elderly people and few young people to care for them, and no social welfare net available to support them all – because the local government there is poor) and the huge gender imbalance in some areas caused in part by the one-child policy.

        So there may be lessons the US can learn from Japan and the rest of the West, more in the vein of “don’t do what we did”.


  7. Hello Shrey! Just a couple of comments about this post:
    1. What is the birth rate in US and UK? What is the rate of increase in labor force per year? What is the projected % of labor force in 2050? Might I suggest that when presenting a projected % of the ageing population, it would help if readers see whether the mentioned ageing population is being sufficiently replaced/compensated by a younger, able-bodied labor force.
    2. About aggregate demand, esp consumer spending: Perhaps it would be clearer to present several years’ % of consumer spending instead of just 2015. It might just be something punctual but if a downward evolution is observed for, say, 6 trimesters in a row, then we could start talking about a decrease in that variable.


  8. A wonderfully written and thoughtful analysis. I have no doubt that you understand the finer points of contemporary economic theory better than I do. Economics is indeed ultimately all about demographics, mein kind.

    Our American situation is ironic. It is ironic because America’s demographic profile, and hence it’s long term economic strength, is being profoundly altered by massive immigration, illegal and otherwise. The irony is that this immigration is being opposed by bigoted and unintelligent persons. America is being flooded by millions of healthy young aspiring workers who are already paying taxes and rapidly assimilating into American society. This is actually good for America’s economic future.

    We are not Japan. We are Denmark with a vast and growing workforce:

    The amazing, surprising, Africa-driven demographic future of the Earth, in 9 charts.


  9. “The one really hopeful case is the United States, which, as you can see, expects pretty healthy, sustained growth. Immigration to the U.S. is the big factor here, the thing that helps inure the U.S. to the demographic decline haunting the rest of the developed world. Usually, countries see their populations decline as soon as they get rich, making their success almost self-defeating. Immigration helps the U.S. to do what very few other countries, including China, has yet figured out: how to be a rich country with a growing population.”


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