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The Graying of the Great Powers

Neil Howe, who previously co-wrote several groundbreaking books on demographic trends with William Strauss (Generations, The Fourth Turning, Millennials Rising), published a new book in 2008 with Richard Jackson: The Graying of the Great Powers: Demography and Geopolitics in the 21st Century.

We consider Howe’s prior work with Strauss to be required reading for anyone wanting to understand the role that demographics have played in recent history, particular the interplay between the major generations (Baby Boomers, Echo Boomers, etc.). We would say the same Howe and Jackson’s new book, though readers who are already familiar with Philip Longman’s work, particularly The Empty Cradle, might find it to be somewhat redundant.

Graying covers many of the same themes covered by Longman and others — the usual doomsday (though completely accurate) scare statistics about Europe’s demographic decline, the coming pension and health funding crises and probable wave of national bankruptcies — and combines them with some of the geopolitical themes discussed by Mark Steyn in America Alone and Patrick Buchannan in The Death of the West (though without Steyn and Buchanan’s abrasiveness and charged ideology) and to a lesser extent those covered by George Friedman in The Next 100 Years.
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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Post-American World

Book Review of Fareed Zakaria’s The Post-American World

Fareed Zakaria, Editor of Newsweek International and host of CNN’s Fareed Zakaria, has emerged in recent years as one of America’s best minds in current events and world politics. His recent book, The Post-American World, touches on several issues near and dear to our research. The gloomy title aside (this book got quite a bit of notoriety when then-candidate Barrack Obama was seen reading it during his campaign), Zakaria is actually rather optimistic about the economic prospects of the United States. He does discuss the role of demographics in America’s position in the world, which is a good start.

As this book has already been reviewed by countless others, we will steer clear of the sections most often reviewed, which are generally foreign policy related and compare the United States today with the British Empire last century.  We’ll start instead with Mr. Zakaria’s commentary on the US health and pension system, which echoes our own work on the subject:

Consider the automobile industry. For a century after 1894, most of the cars manufactured in North America were made in Michigan. Since 2004, Michigan has been replaced by Ontario, Canada. The reason is simple: healthcare. In America, car manufacturers have to pay $6,500 in medical and insurance costs for every worker. If they move a plant to Canada, which has a government-run health care system, the cost to the manufacturer is around $800 per worker. In 2006, General Motors paid $5.2 billion in medical and insurance bills for active and retired workers. That adds $1,500 to the cost of every GM car sold. For Toyota, which has fewer American retirees and many more foreign workers, that cost is $186 per car. This is not necessarily an advertisement for the Canadian health care system, but it does make clear that the costs of the American healthcare system have risen to a point that there is a significant competitive disadvantage to hiring American workers.

Zakaria also makes the point that tying healthcare to employment tends to tie people to their jobs and lesson their ability to leave lest they lose their health insurance. It also tends to make them fear free trade and globalization. The result is that the American economy is less dynamic and productive that it would have been under a more fluid labor market.

Moving on, Zakaria also refers to demographics as America’s “secret weapon,” at least vis-à-vis Europe and East Asia:

All in all, Europe presents the best short-term challenge to the United States in the economic realm.

But Europe has one crucial disadvantage. Or, to put more accurately, the United States has one crucial advantage over Europe and most of the developed world. The United States is demographically vibrant. Nicholas Eberstadt, a scholar at the American Enterprise Institute, estimates that the U.S. population will increase by 65 million by 2030, while Europe’s will remain “virtually stagnant.” Europe, Eberstadt notes, “will by that time have twice as many seniors as older than 65 than children under 15, with drastic implications for future aging. (Fewer children now means fewer workers later.) In the United States, by contrast, children will continue to outnumber the elderly…. Some of these demographic problems could be ameliorated if older Europeans chose to work more, but so far they do not, and trends like these rarely reverse.”

This goes to show that, with demographics, it’s all relative. The United States does indeed have a better long-term demographic prognosis than Europe or East Asia. But that doesn’t mean that the prognosis is good. “Less bad” doesn’t mean good.

Furthermore, Zakaria falls into the same trap as most economists that have approached this issue. He focuses on demographics as it applies to workers. The Sizemore Investment Letter focuses instead on the demographic characteristics of consumers. As Japan has proven for nearly two decades, a country can still produce with an aging workforce, but it ceases to consume at the same pace. And in an economy dominated by consumer spending, this is a problem.

The Post-American World is full of other interesting points that deserve more space than we can offer here. We highly recommend this book for your summer reading.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Follow-up to Israel and Turkey: How Changing Demographics are Affecting International Relations in the Middle East

As a follow-up to my prior post on how demographics are affecting the calculus of international relations in the Middle East—and between Turkey and Israel in particular—I’d like to start with some comments from Mark Steyn.

Steyn is a bit of a controversial shock jock—the Howard Stern of conservative commentary, if you will—so I hesitate to quote him too regularly. Still, despite his rhetorical bluster, he is a man who has a firm understanding of demographic trends and what they mean for the future. (His 2006 book America Alone, though a bit of a political screed, is also an astute look at global demographic trends and what they imply for geopolitics.)

Writing for Investor’s Business Daily (link to article) on the Mavi Marmara incident, Steyn writes,

[W]hat was most striking was the behavior of the Turks… Ten years ago, Turkey’s behavior would have been unthinkable. Ankara was Israel’s best friend in a region where every other neighbor wishes, to one degree or another, the Jewish state’s destruction…

Making me reminisce about some of my own late-night bar conversations in Istanbul, Steyn continues,

I remember sitting in a plush bar late one night with a former Turkish foreign minister, who told me, in between passing round the cigars and chugging back the Scotch, that, yes, the new crowd [the AK Party led by Prime Minister Erdogan] weren’t quite so convivial in the wee small hours but, other than that, they knew where their interests lay. 

Like many Turkish movers and shakers of his generation, my drinking companion loved the Israelis. “They’re tough hombres,” he said admiringly. “You have to be in this part of the world.”

Six years later, the Turkish state is tacitly supporting a “charity” organization suspected of ties to terror groups and has gone so far as to threaten breaking the Israeli blockade by force—an overt act of war.

Turkey has essentially turned its back on more than twenty years of friendship with Israel and by proxy more than eighty years of friendship with the West in order to pursue an independent foreign policy nearly 100% at odds with its former allies.  Some have called Erdogan’s policy the “re-Ottomanization” of Turkey.  We’ll return to this theme shortly.  But first, we will return to Steyn.

Steyn asks rhetorically, “Who lost Turkey?”  His surprising answer is Kemal Ataturk, the founder of the staunchly secular post-Ottoman Turkish state.

Steyn writes,

The short version of Turkish demographics in the 20th century is that Rumelian Turkey — i.e., western, European, secular, Kemalist Turkey — has been out-bred by Anatolian Turkey — i.e., eastern, rural, traditionalist, Islamic Turkey.

Ataturk and most of his supporters were from Rumelia, and they imposed the modern Turkish republic on a reluctant Anatolia, where Ataturk’s distinction between the state and Islam was never accepted. Now they don’t have to accept it. The swelling population has spilled out of its rural hinterland and into the once solidly Kemalist cities.

Some readers might have heard the expression “Young Turks.”  For those unfamiliar with the term, the Young Turks were a reform movement in the late 1800s that sought to modernize the Ottoman Empire, making it more Western.

But as Steyn puts it, the Young Turks are now the Old Turks.  The new Young Turks are less modern than their forbears.  Call it the “demodernization” of Turkey.

The Re-Ottomanization of Turkey

How can we explain Turkey’s diplomatic break with its decades-long allies?  In short, Turkey is doing it because it can.  With EU membership now highly unlikely, Turkey has decided to change it focus to its other frontiers.  Rather than being an unwanted periphery member of the West, Turkey sees an opportunity to reassert the role it played prior to World War I the leader of the Islamic world and of the broader Middle East.

Writing for the Financial Times, Josef Joffe writes,

Next to Iran, Nato member Turkey is now the biggest headache for the west. With Egypt sinking into torpor and Riyadh firmly ensconced on the fence between Washington and Tehran, Turkey has seen the leadership of the region up for grabs – and is going for it. It has drawn Syria into its orbit and has reached a nuclear deal with Iran, its rival for hegemony.

What better way to pursue this end than to lead a crusade against the Jewish state? Going after the “Little Satan” is the card that trumps them all, and it embarrasses the “Great Satan” to boot. The real game is about dominance at the expense of America... The US must learn that the real contest is between itself, Turkey and Iran. It is now up against both. 

So, Turkey’s war of words with Israel has little to do with the Palestinian cause and everything to do with reestablishing Turkey as the preeminent power in the Middle East a role it has eschewed for nearly a century.

Given the regional alternatives, Turkish hegemony might not be the worst outcome.  Turkish hegemony would certainly be preferable to Iranian or Saudi.  Though drifting towards soft Islamism, Turkey is still a constitutionally secular republic.  And despite Steyn’s grim words, secular Turks are not exactly dying out.  Were Erdogan to lose the next election (which could happen if the Kemalist opposition found credible leadership),  Turkey’s anti-Western lurch could come to an abrupt end.

Outside of Israel, Turkey also has the most developed and diversified economy in the region and has its most important city in Istanbul.  Among emerging markets, Turkey remains one of Sizemore Capital’s favorite investment targets.

Still, shifting geopolitical relationships promise to make this region highly volatile in the decades ahead. And if we intend to invest in this part of the world, we must understand the changes taking place.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Israel and Turkey: How Changing Demographics Are Affecting International Relations in the Middle East

Years ago, when I was earning my master’s degree at the London School of Economics, I had a memorable conversation with a classmate of mine from Istanbul named Deniz. Over a couple beers at the Three Tuns, Deniz explained Turkey’s two most pressing problems—the rise of political Islam and the Kurdish separatist movement—and he tied both to one primary factor: demographics. (The Three Tuns is one of the few bars in the world where young men talk equally about normal bar topics, such as sports and the attractive young female at the next table, and topics as arcane as Turkish demographics.)

“When Atatürk founded Turkey, there was no Kurdish problem,” Deniz explained, “because there were practically no Kurds. But because the Kurds have had larger families for decades, they’ve become a larger percentage of the population. The next thing you know, they’re wanting independence and we have a problem. Ocalan, the leader of the PKK (Kurdish separatist group), is said to have suggested that every Kurd must either grab his gun every morning…or grab his wife every night.”

The rise of political Islam follows a similar storyline. Turkey is constitutionally secular. In fact, the separation of church (or mosque) and state in Turkey is in some ways significantly stricter than in the United States or in virtually any European country but France. (Atatürk used secular France as a model when he founded the Turkish Republic).

Turkey has become distinctly more Islamic in recent years, and this is largely a demographic phenomenon. Naturally, some formerly secular Turks have decided to grow out their beards and observe Ramadan. But much of the shift has been due to the simple fact that devoutly Islamic Turkish women have more babies and at younger ages than their secular sisters.

I recollected this conversation years later after reading Tobias Buck’s May 22, 2010 article in the Financial Times: “Secular Israel senses threat in rise of the ultra-orthodox.”

Ultra-orthodox Jews are easy to spot in a crowd. They wear wide-brimmed black hats, full beards, and distinctive side locks of hair that nearly stretch to their chins. To the casual gentile observer, they look a lot like the Amish or Mennonites. And they are becoming an increasingly large and restive percentage of the Israeli population.

Like the Amish in Pennsylvania, the ultra-orthodox are in the State of Israel but not of it.

As Buck describes the situation, “The ultra-orthodox have always had a troubled relationship with Israel. A minority reject the secular Jewish state as a religious abomination and refuse to vote or pay taxes…. Mostly, however, the two sides [secular/moderately religious and ultra-orthodox] have kept to an intricate set of live-and-let-live agreements. Crucially, the ultra-orthodox have their own stream of schools, and those in a yeshiva, of Jewish seminary, are exempt from military service.

“But that deal is starting to unravel because of the sharp increase in the ultra-orthodox population. Once a tiny minority, the community now accounts for at least 8 per cent of the Israeli adult population. It is forecast to double every 16 years.”

This is becoming an economic problem for Israel. Two thirds of ultra-orthodox men do not work, and for good reason. They learn no marketable skills in their religious schools. The only thing they are qualified to do is sit in a synagogue and read. So, ultra-orthodox families are becoming larger and larger burden to Israel’s welfare state.

By now, you might be legitimately wondering why any of this matters. I assure you that it does.

Turkey and Israel have had one of the strongest alliances in the greater Middle East for over two decades. The made sense for a number of reasons: Turkey and Israel were both secular, Western-oriented countries with world-class armies and dynamic economies. And perhaps more critically, both have a deeply-rooted fear and dislike of their Arab and Persian neighbors. (As another old LSE classmate, a Turkish Cypriot from Nicosia, explained it, “We Turks have never forgiven the Arabs for siding with the British in World War I. It’s their fault that we lost the Ottoman Empire.”)

In the days when nationality trumped religion, the Turkish-Israeli alliance was natural. But with religion increasingly filling the identity void once filled by the state, many Turks are starting to question why they are allied with Jews against their fellow Muslims.  The recent incident in which Israeli soldiers clashed with a group of Turkish pro-Palestinian activists at sea vividly illustrates how badly relations have deteriorated.  In protest over the clash, in which at least nine activists were killed, Turkish prime minister Tayyip Erdogan labeled Israel’s actions “inhuman state terror” against unarmed civilians while Israel defended the actions as being in legitimate self defense against armed agents provocateurs who were anything but innocent.  I suspect that once investigations are done, the Israeli explanation will prove to be closer to the truth (Israel has already released footage of its soldiers being severely beaten by the pro-Palestinian mob), but in the end it doesn’t matter.  The damage to the relationship between the two countries is done.

Of course, any war of words in the Middle East has to be viewed in a broader context. Some of Erdogan’s rhetoric is no doubt aimed at pleasing the core of his electoral support, Turkey’s devout Muslims. Some is likely aimed at buying other friends in the region.  But no small part of Erdogan’s motivation is his desire to assert a Turkish foreign policy in his own image.  By bashing Israel, Erdogan is asserting his independence both from Turkey’s traditional Western allies and from its own recent past.

Turkish-American relations in the wake of the Iraq War are at the lowest point since the Turkish invasion of Cyprus in 1974, and Turkish-European relations are likewise rather strained by the EU’s stonewalling of Turkey’s negotiations for membership in the bloc. It could be that the recent Turkish antagonism towards Israel is more of a blowback against the West in general than an attack on Israel in particular. But from the Israeli perspective it is disturbing nonetheless.

For Israel, losing Turkey as an ally would be a major strategic setback. It would leave Israel increasingly dependent on the United States and Europe for diplomatic, financial, and military support, and Europe has proven over the years to be an unreliable ally when allies are actually needed.

That leaves the United States. While both the Republicans and the Democrats are currently staunch supporters of Israel, the country is still taking an enormous risk by depending so heavily on one foreign ally. It reduces Israel to the status of a client state and reduces its room to maneuver. Should there come a time when the strategic goals of the United States and Israel diverge, Israel could find itself isolated. Given the country’s precarious existence in a hostile neighborhood, this could literally mean the difference between life and death.

All of this is speculation, of course. Demographics, however, are cold, hard facts. And the facts show that the Middle East is changing. The decline of the Lebanese Christians over the past three decades was one of the first major shifts (see “Changing Global Demographics: Christians and Muslims in the Mideast” ). Today, we see Turkey and Israel becoming distinctly more Muslim and more Jewish, respectively. This subtle shift away from their secular identities will make it increasingly harder for these two nations to cooperate in the future.

This is not to say that I am necessarily bearish on the economic prospects for either country. In fact, I’m actually quite bullish. Both have world-class companies and increasingly open and competitive economies, and I see both prospering in the years ahead. I’ve even recommended Turkish stocks in the recent past.

The changing demographic picture does, however, add an interesting wrinkle. And understanding this wrinkle will go a long way to helping understand the mystery and intrigue of Middle Eastern international relations.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Terrorism, Russia, and Geopolitical Concerns for the Decades Ahead

Over the past decade, the focus of the news media has been on Islamist terror organizations such as Al Qaeda, and understandably so. The September 11, 2001 attacks were the biggest acts of terror in history, and every American remembers well the site of the twin towers falling to the ground. It was a traumatic experience that set into motion a chain of events that culminated in the Iraq War in 2003.

But as devastating as the 9/11 attacks and their aftermath were, they must be taken in context. Al Qaeda, even were the organization to acquire contraband nuclear devices, has never had the ability to seriously threaten the existence or power of the United States. And all of the rhetoric about weapons of mass destruction aside, a nuclear-armed rogue state like Iraq under Hussein, Iran, or North Korea would likewise lack the ability to seriously threaten the existence or power of the United States. They could potentially destroy one or more major cities, kill millions or tens of millions of civilians, and severely disrupt our economy, but annihilate us? Not a chance. The only country today that could credibly be said to have that power would be Russia—though in the not-too-distant future, China may too share that distinction.

The most serious threat to world security and peace is not terrorism but great power rivalry. At least this is the view of Steven Rosefielde and D. Quinn Mills, authors of Masters of Illusion: American Leadership in the Media Age.

According to Rosefielde and Mills, “Conflict of the great powers, when it comes, is the greatest danger mankind faces. For this reason it is essential always to keep our eye first and foremost on the great powers.”

I appreciate a historical perspective. As I wrote in the April 2010 HS Dent Forecast, I truly believe that King Solomon had it figured out 3,000 years ago when he concluded that there was nothing new under the sun. Continue Reading →

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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