Watching the Tape: A random walk through recent economic, market and business headlines, November 12, 2015

“History”, a philosopher once said, “is the story of unintended consequences”.


  • Prohibition outlawed alcoholic beverages in America. Unintended consequence: Prohibition created a new class of outlaws: the mafia.

Speaking of unintended consequences…

  • Kudzu was planted in the South to control erosion. Unintended consequence: Kudzu eventually conquered more real estate than General Sherman.

Economic history is replete with unintended consequences. We were reminded of this a couple of weeks ago while reading about the proposed new Chinese birth control policy.

You know about the old policy, One Child. Created in 1978, the one child policy penalized Chinese parents who chose to procreate more than once. The idea was to slow down population growth, reduce demand for resources, food, etc…

There were unintended consequences of the one-child policy, and most have had economic impact. For example:

Unintended consequence: the Chinese household savings rate has increased exponentially.

Root Cause Analysis:

  • Chinese men now significantly outnumber Chinese women. The reason for the imbalance is gruesome and we’ll leave the details to other writers.
  • The surplus of men increases the competition for brides. If every eligible Chinese woman gets married today, there will still be an estimated 40 million or so eligible Chinese men “left over”.
  • Wealthier men are considered more eligible in China. (Maybe everywhere.)
  • Therefore – many Chinese parents are hoarding money to enhance the eligibility of their one male child. This hoarding has become a significant economic problem: The Chinese government wants to increase consumer spending, not consumer saving.

One more…

Unintended consequence: by the mid-21st century, personal productivity won’t sustain the Chinese economy.

Root Cause Analysis, the 4-2-1 Rule:

2015.11.16 WWT pic5

  • By the middle of this century, each Chinese child may be responsible for the care of two non-working parents, without sibling help.
  • Potentially those two parents may still be taking care of their aging parents.
  • The grandparents-to-parents-to-child ratio is 4-2-1. This ratio – believed to be the highest national ratio of older-generation to younger-generation in world history – will put unsustainable productivity pressure on the one child generation.
  • Economists call this the “inverse relationship between per capita gross domestic product and fertility”. (In rural South Carolina we call it “Granny’s gotta get a job”.)

Two weeks ago, headlines proclaimed that the Chinese government is ending the one child program. Parents will now allowed to have two children. This gives a whole new meaning to Quantitative Easing.

Only time will tell us what this new policy’s unintended consequences may be, but the intended consequences are pretty clear: household spending in China may rise in nine months.

Comment: According to reports, stocks in diaper makers, baby-bottle manufacturers and skin-care product makers went up on news of the new policy.

Speaking of family planning “unintended consequences”…

An old Chinese proverb says, “Fu bu guo san dai” which translates (we hope) “wealth never survives three generations” (translation courtesy of The Economist).

Last week Barron’s confirmed the old proverb, publishing data that says 70% of family wealth is destroyed by the second generation. By the third generation, the average loss of family fortune exceeds 90%.

In their book, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, authors Roy Williams and Vic Preisser tell us wealth loss most often occurs because of a lack of communication and trust in the family. Financial education of future heirs is key.

The Vanderbilt family is a famous cautionary tale. The family fortune should be worth $300 billion today. Two family generations wiped-out William Henry Vanderbilt’s fortune, and by 1973 not a single Vanderbilt heir was even a millionaire. William Henry’s son, William Kissam Vanderbilt said, “Inherited wealth is a real handicap to happiness. It is as certain a death to ambition as cocaine is to morality.”

Comment: Most of us would be willing to take our chances.