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Toys ‘R’ Us and the Demographic Deficit

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March 19, 2018

Dear Reader,

Two stories hit the web last week, perfectly illustrating the enormous impact of the demographic transition. One covers the human tragedy taking place in Japanese prisons. The other is the slow collapse of the venerable toy retailer Toys ‘R’ Us, which we’ll start with.

Toys ‘R’ Us closing is not just the bankruptcy of another major retailer. It’s the end of an era, and I’ll tell you why.

To be sure, Toys ‘R’ Us faces many challenges. Aside from the fact that Amazon has harmed many brick-and-mortar chains, increased competition from the other big-box stores also contributes to its problems.

However, the most important factor in the company’s troubles is the shrinking number of toy-consuming children.

I don’t think many analysts really understand the Toys ‘R’ Us value proposition. The company wasn’t just selling toys—it built mini-theme parks that utterly entranced children and, indirectly, their parents.

I don’t know how many hours I spent with my two kids in Toys ‘R’ Us stores. Both of them loved these temples to toys and treated them as local Disneylands. Whether a trip ended with the purchase of a new toy or not, every visit was an event. We toured the entire store, marveling at displays that were, of course, sales pitches but also extensions of my kids’ favorite movies and TV shows. Universal Studios and Disneyworld aren’t substantially different, only in scale.

Even a minor toy purchase required serious analysis, finally culminating in an outburst of consumerist ecstasy. And it was great for us grownups too. After all, Toys ‘R’ Us wasn’t just a place to get toys. It was an experience that could entertain children for hours, with no entrance fee or ridiculously overpriced food like real theme parks. I can’t remember a single instance when my kids left one of the stores without an argument.

You don’t get that experience in the aisles of stores that also sell groceries and housewares. All my friends with similarly aged children have the same affection for Toys ‘R’ Us. Alas, we’ve aged out of the target demographic, which is representative of the company’s real problem: demographic aging.

For years, I’ve been frustrated that the public hasn’t grasped the reality of sub-replacement birth rates. When I tell people that US births have dropped below replacement since the early 1970s and are at all-time lows, the response is still often surprise.

This is not an unimportant bit of trivia. Falling birthrates combined with the rapidly aging Baby Boomers is the biggest macroeconomic event of our era. The financial consequences go far beyond toy sales—they profoundly affect everything from Social Security’s solvency and insurance premiums to pension planning and the healthcare industry.

The Washington Post covered the bad financial news with the headline, “Toys R Us’ baby problem is everybody’s baby problem.

The article’s author, Andrew Van Dam, points out low birth rates as the strongest correlative factor: “The change in the number of children born in the previous 12 years (and thus sitting right within the Toys R Us demographic) tracks closely with the company's changing annual revenue.”

Note that his final paragraph, while good, misses half of the big picture: “In the end, Toys R Us will just have been the first of many businesses of all descriptions facing the same hard demographic truth: Economic growth is extremely difficult without population growth.”

In fact, the population is growing, but it’s due to longer lifespans. The population of 65-plus-year-olds is growing even faster than the number of babies is falling, globally as well as in America.

As Toys ‘R’ Us’ finances go, so does the federal budget. Simply, a shrinking population of workers cannot forever pay the skyrocketing medical and retirement costs of a rising population of older people.

Japan: Prisons as Nursing Homes

The other story I want to talk about appeared a few days after the Toys ‘R’ Us articles. It covers a phenomenon that I’ve written about for years: Japan’s elderly crime wave.

Though it may sound like a Monty Python sketch, financially stressed elderly Japanese are committing crimes for the sole purpose of being arrested and institutionalized.

Japan’s criminal justice system is near collapse. The government is converting prisons into elder-care facilities to cope with what is now the largest criminal class in the country. This Bloomberg story, written by Shiho Fukada and titled, “Japan’s Prisons Are a Haven for Elderly Women,” explores the human tragedy caused by the new demographics.

Somehow, thinking specifically about elderly women who lack families capable of caring for them makes this problem more poignant. The Fukada article includes truly heart-rending case studies. The quote, “I was 84 when I came to prison for the first time,” is painful to read.

To realize the full extent of this tragedy, we must understand that Japan once had one of the highest birthrates in the world. The elderly women committing crimes just to be incarcerated with their peers remember a time when an abundance of children and grandchildren cared for older family members, financially and emotionally.

Those days are gone. South Korea, incidentally, is also experiencing a geriatric crime wave, as are other nations. Absent major changes, Canada and the United States will see the same phenomenon. That’s a prediction.

In the words of the legendary bluesman Taj Mahal (aka Henry Saint Clair Fredericks), “If you ain’t scared, you ain’t right.”

However, predicting what will happen is easier than predicting when it will happen, so I think a lot about this problem.

Crushing Debt Ahead

Forecasting a timeline is complicated because the world is interconnected, and Japan’s demographic problems will affect the United States as the country’s economic growth rate suffers. Moreover, the same demographic dynamic is driving the world’s growing debt crisis. Both US household and national debt have reached unprecedented levels.

If it isn’t solved, the consequence will be global financial default and depression. Once again, the big question is, how long do we have to fix this problem? 

In Ernest Hemingway’s novel, The Sun Also Rises, the character Bill Gorton is asked how he went bankrupt. His answer: “Two ways. Gradually, then suddenly.”

While those who go bankrupt may share that sentiment, it’s not actually true. Bankruptcy usually involves the steady accumulation of debt that increases exponentially due to interest charges. Going broke is a continual process that involves two psychological stages.

In the first stage, the growing debt is still theoretically manageable. Since it hasn’t yet had a significant impact on the borrower’s lifestyle, they can still deny it and continue to spend and borrow. The second stage occurs when lenders realize that the borrower can’t or won’t do what’s necessary to fix the problem. They abruptly cut off cheap credit, and the borrower panics.

Most of us have seen people ignore their debt problems until they become insolvent. Failing to reduce spending early on, they face much more serious and involuntary reductions later.

And this is not limited to individuals—it also happens to entire nations. In fact, it’s happened dozens of times in the last century.

Greece, for example, can no longer borrow funds at low enough rates to produce real economic growth. Venezuela is close to defaulting on major payments. International aid groups may step in, but their programs do little to address the misery of the people who live in economies that lack access to capital.

Aging, if not addressed, will continue to push the world to the brink of bankruptcy. I believe it’s too late to make the fiscal changes needed to prevent massive insolvency and the pain it would entail. I see no evidence, in fact, that the political class has any intention of fixing the spending profligacy that grows the debt.

That leaves only one solution: anti-aging biotechnologies that can keep people healthy long enough to avoid dependency on failing programs. Right now, the bankruptcy is still gradual despite clear signs from the proverbial canaries in the coal mine, such as Toys ‘R’ Us and Japanese prisons.

We’re getting nearer to the “suddenly” stage every day, though. That’s when desperation will lead government to the biogerontologists who are already waiting with the solutions needed to eliminate the demographic deficit.

Patrick Cox
Patrick Cox
Editor, Transformational Technology Alert

Mauldin Economics


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John Schuyler 82353269

March 20, 5:45 a.m.

This was an especially fine column and wake-up call. I want to add a note about the “staggering” federal debt.

Most think of the official $20 trillion or so Federal debt. As John Mauldin wrote previously (Oct 07, 2017), that’s only a small portion.

To fully-fund Social Security, Medicare, and Medicaid promises would cost $150-350 trillion. We can never pay for these promised entitlements. The sum of the country’s household net worth is only about $100 trillion.

We’re broke, and we don’t know it yet. Rapids ahead!

Willis Smith

March 19, 4:19 p.m.

Giving people longer lives is probably achievable, but the productive part is the big question.  With the wave of robots and artificial intelligence systems, 10s of millions of people in this country will be out of work or working for subsistence wages.  People with small children will probably be given priority in the job market when they qualify for the jobs instead of 85 year olds.  Productively pursuing one’s hobbies in the added years depends on having sufficient income to afford them.

March 19, 3:18 p.m.

Assuming these bio-medical innovations become widely available, affordable and effective enough to achieve what you propose, why would politicians’ behavior change?  They could decide,
(1) Oh thank God, these amazing developments will allow us to deal responsibly with our debts in a gradual, orderly way, or
(2) Oh thank God, we politicians can avoid any potentially career ending pain until the next generation takes over.  Mostly we politicians don’t know how to do anything but politicking anyway, so kick that can again and party on !

Are you really going to bet on #1 ?  Why would we expect a political reformation to accompany a biotech/medical reformation?

March 19, 12:05 p.m.

While the demographics might have been disadvantageous, the main reason ToysRUs didn’t have time to pivot was its debt.  I can think of several ways in which it might have re-invented itself if it didn’t have the burden of impossible debt.  This is a cautionary tale for all of us - whatever your station in life, there are changes coming and your ability to thrive in spite of them might depend in large part on how badly you are leveraged. I see no reason why our seniors with a negative net worth will have a different experience than those in Japan and even though all my elders have already passed on, they didn’t die broke, alone or in prison and for that I am profoundly thankful.

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