China is the only country in the world whose central bank policy rates are lower than from two years ago (Figure 3). Moreover, it has also reduced its reserve requirement ratio and has allowed its currency to fall versus the U.S. dollar (USD) (Figure 4). This has taken place as China’s debt-to-GDP ratios have soared past those of Europe and the U.S., although they remain below those of Japan (Figure 5). 

Meanwhile, South Korea has the world’s lowest birth rate, which has fallen well below replacement levels. Its population isn’t as old as Japan’s yet but it’s ageing rapidly (Figure 6). Meanwhile, debt levels have increased sharply (Figure 7). The Korean won has weakened significantly versus USD in recent years (Figure 8). 

The Eurozone also resembles Japan in terms of demographics. Austria, Germany, Greece, Italy, Spain and Portugal have Japan-like demographics while countries like Belgium, France, Ireland and the Netherlands fare a bit better. Still the demographic picture is worrisome (Figure 9). 

A massive wave of retirements will hit Europe during the next decade and it isn’t at all clear how these retirements will be financed. Across Europe, debt-to-GDP ratios vary significantly from relatively low levels in Germany and Austria to quite high levels in places like France, Belgium and Finland (Figure 10).

The euro (EUR) has weakened considerably versus the U.S. dollar over the past two decades. Since 2008, EUR has fallen from 1.6 versus USD to close to parity (Figure 11). Meanwhile, the pound has fallen even more sharply despite U.K. demographics that are considerably better than Europe, China or Japan, and debt levels are similar to those of the Eurozone (Figure 12). U.K. demographics also look a great deal like those of the U.S., which has a fairly uniform number of people in each age group from 0-60 (Figure 13). The U.K. and the U.S. also have similar levels of debt. 

Over the past decade, the Australian dollar (AUD), Canadian dollar (CAD) and New Zealand dollar (NZD) declined versus USD. These declines can mostly be attributed to generally falling commodity prices since 2011. Among the three, Australia and New Zealand have debt levels slightly below those of the U.S., while Canada’s is considerably higher. Australia and Canada have high levels of household debt, much of which is connected to mortgages which are, in turn, linked to sky-high real estate prices. This may become problematic in coming decades as birth rates have fallen in Australia and Canada (Figures 14-16). 

Perhaps 30 or 40 years from now, Brazil and India’s population pyramids might look like those of the U.S. or maybe even Europe or Japan. For the moment, however, they are entering into a sweet spot for economic growth. Both have falling birth rates and large numbers of workers (Figures 17 and 18). South Africa’s birth rate remains relatively high (Figure 19). All three have higher debt levels than Mexico but far lower levels of debt than most of the rest of the world. Whether this translates into currency strength may depend upon their commitment to fighting inflation, maintaining fiscal discipline and following economic policies that promote growth and development. Of the three currencies, Brazil’s real has suffered amid weak commodity prices and slow growth. India’s rupee (INR) and South Africa’s rand (ZAR) reinvested (rolled) futures contracts have gained slightly versus USD (Figure 20). 

In China, Europe, Japan and South Korea, exceptionally large numbers of people will head into retirement during the next few decades as their working age populations shrink. In the case of the Eurozone, China and South Korea, debt-to-GDP ranges from 250-300% of GDP. The question of how they manage the combination of those debt burdens and the coming wave of retirements could have a profound impact on the value of their currencies as has already been the case for Japan during the past five to 10 years.

At the other end of the spectrum, places like Brazil, India, Mexico and South Africa have large numbers of young people and relatively few retirees. They also have a smaller debt burden. In between, there are countries like Australia, New Zealand, the U.K. and the U.S. These countries also have debt burdens of between 250-300% of GDP but their demographics don’t look as challenged as the former group of countries.

To the extent that some countries might devalue their currencies to meet their liabilities both to retirees and to creditors more generally, this could have consequences beyond currency markets. It could lead to a further devaluation of currencies versus real assets like bitcoin, gold and silver. Since the beginning of the century amid ageing populations and rising debt levels, USD has lost 81% of its value versus gold and other currencies have followed a similar path. If fiat currencies fall in value, by definition, something must be going up in value on a relative basis and those things could be hard assets that central banks can’t create.