Sustainability has had a bad press because it is often associated with climate change and arguments about whether carbon emissions being spewed out of trains, planes, automobiles or cows’ bottoms are leading to global warming. But sustainability is much more than carbon emissions. A fairly broadly accepted definition of sustainability is “meeting the needs of the present without compromising the ability of future generations to meet their own needs”, so it doesn’t have to have anything to do with climate change. In fact you can apply sustainability to all sorts of areas.

If you invest in a development and it does not take account of the damage you might be doing to society or the environment, you may be maximising your short term returns, but at the cost of the long term economic environment and future generations. In fact, looking at the Chancellor’s Autumn Statement, you could read it as saying that the current very high level of debt (a result of over-borrowing during the boom times) is the current generation borrowing from future generations.

There are potentially very serious consequences of borrowing from future generations. Not only does it mean that future generations have less, but this generational divide can potentially lead to conflict as the younger generation resents having to pay more for what the previous generation had. The public sector unions going on strike in theUK, which amongst other things was a protest about pensions, is a good example of how this is already happening. Public sector employees are worried about the level of their pensions and that they are going to have to work longer for less.

The announcement in the Autumn Statement by the Chancellor that the retirement age was going to have to go up to 67 years from 2026, while not a surprise, is going to be seen by them as being exactly that. Of course, as with everything, it is not that simple because one of the reasons the state pension retirement age is going up was because people in the UK are living longer, so it seems reasonable to increase the retirement age too. When in the late 19th century German Chancellor Bismarck first introduced the retirement pension at age 70 years, life expectancy for a man was around 65 years, so not that many actually lived to draw their pension at all!

Demographic shifts are exacerbating these generation divides: The fact is that populations in most developing and emerging markets are ageing, with the “baby boomer” generation reaching retirement and birth rates slowing. There are a number of consequences of this phenomenon, some of which touch on the current global financial crisis. The first thing to say is that the time when the “baby boomer” generation have been working has been a golden era for financial markets.

Global growth has benefited from the increased number of people of working age and the investment industry has benefited from the increased savings these workers have made, which has fuelled the rise in stockmarkets, particularly in the last two decades when the baby boomers were coming up to retirement and did most of their saving. You can point to the growth in asset prices inJapanin the 1980’s as being a result of this development and in theUKin the 1990’s. The rapid growth inChinaand the bubble in property prices there can also be seen as a consequence of the increase in numbers of 45-65 year olds in the working population. However, on the back of this high level of savings there has also been a huge rise in public and private sector debt, the extent of which is causing us our current financial angst.

The lower population growth from these economies means that while the world population doubled from 3.5 billion to 7 billion in the last forty years, over the next forty years the population is only expect to grow by around 30%. For those “Malthusians” who believer that the human population as a whole has passed the numerical point where all can live in comfort, and that we have entered a stage where many of the world’s citizens and future generations are trapped in misery, a slower growth in population would probably be seen as a good thing.

However, there are worrying implications for the global economy of this slowing and consequent increase in median age of the population. What it will mean is that the number of over 65’s in the world will have tripled to 1.5 billion people by 2050, to say nothing of the number over 80’s – who are expected to number 400 million, compared with around 105 million now. More importantly, the working population as a proportion of the total population will fall and, unless there are increases in productivity, this will inevitably lead to slower growth per capita.

Another consequence of an ageing population is the emergence of “dis-saving”. As the baby boomer cohort reaches retirement, they start to use their savings and this shrinks the amount of capital available for investment, leading to further pressure on global growth.

We mentioned Japan as being a beneficiary of this effect in the 1980’s but its very low birth rate means that, of the major economies, it is the one whose population is ageing fastest and who can expect the effects of lower growth and dis-saving to impact most. Behind Japan come Italy, Germany, France, Russia, Spain, the UK and the USA where, with the exception of Russia which has a wealth of natural resources to fall back on, a falling working population is going to be very unhelpful to bringing down debt levels. But it is not just developed market economies which are facing this grim outlook.

Just behind these countries in terms of the ageing demographic come China, Brazil and Indonesia. They are at an earlier phase in this cycle than the developed economies we have mentioned; they still have a high ratio of working population to those who are “in-active” i.e. under working age or retired, but their fertility ratio is lower than the replacement rate, so they will be moving into the later phase of the cycle in a few year’s time.Chinain particular is likely to feel the chill as the effects of their “one child” policy work through.

Clearly the demographic dividends that have been enjoyed up to now are not going to be as generous for the future generations and it will be interesting to see how the balance between the generations is redressed – or not. The recent “Occupy” protests and the public sector union strike suggest that there is some popular support for it but, with the financial crisis currently looking closer to tipping over into disaster, meeting the needs of future generations may have to take a back seat.

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And finally… only in America (Reuters) – A Wisconsin man who allegedly attacked a fellow guest at a Thanksgiving Day dinner after she ignored his claim to a specific chair at the dining table has been charged with attempted homicide. Kendrick Carr, 23, allegedly pulled a foot-long butcher knife on the woman after she refused to stand up from the chair he said he wanted to sit in, according to the criminal complaint filed in Racine County Circuit Court on Monday.

The woman defended herself with a broom and was unharmed, according to the complaint. When the woman declined to give up the chair, Carr, who is 5-feet, 4-inches tall and weighs 110 pounds, began to throw things around his girlfriend’s apartment, where the dinner took place. He then ran into the kitchen, grabbed the knife and returned to the dining area where he allegedly tried to slash the woman while Carr’s girlfriend ran to a neighbour’s apartment and called police.  In addition to attempted homicide, Carr also faces disorderly conduct, criminal damage to property and first degree reckless endangerment charges.

Have a good week.

Camilla Ritchie
Senior Investment Manager
Seven Investment Management Limited