Immigration, Demographics, and Your Livelihood, Part II

The Daily Reckoning PRESENTS: In the conclusion of this two-part essay, Harry Dent and Rodney Johnson look further into the economic fundamentals that make up the immigration debate. Whether or not you share in their views, this is definitely an essay worth reading…


Immigration to America is strongest in the high-growth areas of the Southwest, though certainly all states have witnessed some shift in their demographics over the past decade. The immigrants are overwhelmingly Spanish speaking, primarily from Mexico, and often live in predominantly Latino neighborhoods.

Still, these immigrants weave into mainstream society by necessity and desire. Those who work in construction, trades, or food service depend on mainstream America for their paychecks, forcing at least minimal interaction. Language tends to be the single biggest impediment to their continued integration, and once this is removed – for example, in the case of immigrant children who quickly absorb the language – these newcomers join the economic ranks of Middle America. No dramatic change is typically necessary because their social mores are comparable to the overwhelming majority of Americans. A Mexican Catholic mass is little different from its Irish or Italian equivalents, and none are radically different from their Protestant counterparts.

What is striking about European immigration is that while the various countries have tried different approaches to assimilating their own immigrants, the results have been the same: balkanization and alienation from the mainstream. Contrast the British with their old rivals, the French. The British are famous for their liberal, laissez-faire approach to social policy. For centuries, London has been a haven for exiles and émigrés that no one else would take. So long as they didn’t make too much trouble, they were welcome to stay and do whatever they pleased. You could be British without having to “act English.”

Across the Channel, the French took a different approach; creating a French national identity based on language and shared political values. Being French meant speaking French, pledging allegiance to the Republic, and maintaining a rigid separation between religion and state. The government has even taken the step in recent years of forbidding the wearing of Muslim headscarves and Jewish skullcaps in public schools. To be French, you must “act French.”

Both approaches have failed. London is derisively called “Londinistan” for its large number of extremist mosques and radical groups, primarily Pakistani in origin. And despite the restrictions in schools, Paris is ringed with Algerian suburbs in which it is rare to find a woman without a veil, as many women are afraid of harassment should they leave the house with their heads uncovered. Across Europe the story is the same.

The seemingly harmless publication of political cartoons in Denmark that satirized Islam set off a riot that left a trail of death and destruction across the globe, and the tolerant Danes have witnessed their national flag being burned in their own streets. These immigrant groups come from different home countries and espouse differing views of Islam, yet the problem is the same across Europe: a rejection of the mainstream. Why?

The answer to the question has two parts, an economic component and a cultural one. We will start with the economic component, as it is the more straightforward of the two. Here at HS Dent, we have made the case again and again that demographics drive the modern consumer economy. Family formation is expensive, and parents spend a small fortune on every child they raise. This family spending, which peaks in the United States as the breadwinner approaches age fifty, keeps wages rising and increases the need for labor. In the United States, this has meant low unemployment and high immigration. Europe has lower birthrates than the U.S., and already demographic forces are starting to sap Europe’s economic vitality.

As in America, immigrant families in Europe tend to have higher birthrates, but the overall demographic mix is not conducive to creating the jobs to employ the children of immigrants once they reach working age. Furthermore, decades of well-intentioned labor laws have had the perverse effect of making it almost cost-prohibitive to hire anyone on the Continent, particularly in Germany and France, and the generous social safety nets in place give the unemployed little incentive to hustle for jobs. It’s not surprising that Germany and France have unemployment rates of 11.6% and 9.9%, respectively. Consider that for a moment. As of this writing, Germany’s unemployment rate is 2 and-a-half times higher than the United States, and France’s unemployment rate is twice that of the United States. When our own unemployment barely reached 6% during the downturn of 2000-2002 market pundits were calling for dire consequences. Imagine what would be on CNBC if our unemployment was at 10%!

Even within the U.S., there is a difference in the assimilation of immigrants between the high-regulation, high-social-benefits states and the low-regulation, low-social-benefits states. Radical Hispanic activist groups such as MEChA and the Aztlan movement have their greatest strength in liberal California, while in conservative Texas, which has a comparable Latino population, these groups have little following.

Considering these factors, when the ethnic minority groups of Western Europe are separated from the mainstream by religion, language, and income level, as well as in some cases collecting a monthly welfare check that makes it possible to never leave the neighborhood, what incentive do they have to assimilate?

Economics cannot fully explain the extent of the rejection of mainstream European culture. Most of the bombers in the July attacks in London were from successful, middle class families. Clearly, some other factor is at work here. What is it about European culture that so many newcomers find so unappealing? Some of it could be a hangover effect from the shared histories of Western European powers and their former colonial subjects.

It was only sixty years ago that most of the globe was under colonial control of the major European powers. While the Europeans, and particularly the British, contributed greatly to the societies that they colonized by introducing Western legal concepts and economic institutions, the uglier aspects of colonialism and the assorted wars that led to its end left some mutual bad blood. Immigration to Britain and France is dominated by nationals of these former colonies. Lands are conquered for economic reasons, not cultural. Accordingly, the cultures of the colonizer and the colonized often have little in common.

In earlier days, commonality was created by brute force, as in the case of the Spanish conquest of Latin America. Spain has little trouble today assimilating immigrants from its former American colonies; they already share the same religion, language, and social mores. The British and French, however, did most of their colonizing in a later era, and their control was never as totalitarian. As a result, Indians and Pakistanis are considerably less English and Algerians considerably less French than Mexicans and Argentines are Spanish.

Sadly, cultural and historical differences contribute to a vicious cycle of economic disappointment and cultural alienation that not even the healthy British economy, which has the lowest unemployment and highest growth in Western Europe, can break. French immigration likewise reflects the days of empire and its aftermath. In recent decades, immigrants to France have been overwhelmingly North African in origin and primarily from Algeria, Tunisia, and Morocco. And while many of these nationals have had great success in France, large numbers remain socially and economically isolated. High rates of poverty, unemployment, and crime are the sad reality. The resulting social unrest had led to a rise in the popularity of anti-immigration groups like Jean-Marie Le Pen’s National Front, which embarrassingly came in second in the last French presidential election. In the popular imagination, secular France is being Islamicized, and the backlash has led to dramatic moves, such as the banning of Muslim headscarves in public schools. With political Islam becoming a vocal force in France, the reaction is not altogether surprising. The weeklong rioting that France witnessed in 2005 from its young, unassimilated Muslim population is likely to be only the beginning.

Immigration to the United States is, of course, dominated by Latin America. Among the Latin American immigrants, the majority is from Mexico. Many of the first generation do not immediately assimilate into mainstream American society, instead they work primarily among their countrymen and speak Spanish at home. While this is true, it is also true that there is not a foreign-funded grassroots movement to “Mexicanize” American law or replace the U.S. Constitution with Catholic Canon Law in the way that many Islamic groups in Europe advocate Koranic Sharia to replace Western European constitutions. Given time and the right economic incentives, these newcomers to the United States will blend into the American cultural landscape like the Italians and Irish before them. In the meantime, they provide affordable labor that keeps our economy humming. So far, many of the Western European immigrants are showing little interest in blending in, which could lead to even greater unrest both culturally and economically.

There are several crucial points to understand concerning immigration that tie in to this forecast. First, though the U.S. has had some ethnic tensions due to the high immigration rates of recent decades, our problems are minor compared to those of our contemporaries in Europe. The problems we do have in assimilating immigrants are due primarily to language and education levels, which are largely remedied within a generation. Europe, in contrast, faces an outright rejection of it culture by its immigrant communities, and the problem has gotten worse with second and third generations.

Secondly, though there are “social costs” such as education and healthcare for immigrants and their children that must be paid for by taxpayers, these expenses are not sunk costs. They can be thought of as investments in future taxpaying consumers, and they are much more affordable than the costs of raising kids and educating them here. When we start to suffer the long-term economic slowdown after 2010 due to demographics, we will wish we had more such taxpaying consumers.

Finally, high immigration levels have had the effect of amplifying the already existing boom in housing and consumption. When immigration levels fall – as we predict they will after 2010 – the cities and regions that have benefited from immigration, such as California, south Florida, and parts of Texas, will suffer steeper declines in housing prices, consumer activity and municipal tax revenues.


Harry Dent and Rodney Johnson
for the Daily Reckoning
June 20, 2006

Editor’s Note: Harry S. Dent, Jr. is a noted author who has written several books, including two best sellers. Mr. Dent has appeared on “Good Morning America”, PBS, CNBC CNN/Fn, and has been featured in numerous publications including Barron’s, Investor’s Business Daily, Entrepreneur, Fortune, Success, US News & World Report, and The Wall Street Journal. Mr. Dent received his MBA from Harvard Business School where he was a Baker Scholar.

For more information on Mr. Dent’s research, please visit the new H.S. Dent Foundation Web site:

“Trees do not grow to the sky,” say the old-timers. They don’t. They grow about as high as they are supposed to grow. Then, they rot and fall down.

Just as trees, markets have to do what they are “supposed” to do. When things are out of whack, they have to get back into whack one way or another. When they are far beyond the mean, they must revert back to the mean. If not, there would be no mean to revert to. There would be no “normal,” no usual, no ordinary, no common, no standard, no regular. That is to say, there would be no familiar patterns to life. Everyday would be a surprise.

But there are patterns.

When markets reach an extraordinary peak, somehow they have to fall down to an extraordinary valley. That’s just what they do. But they don’t have to do it in a way that suits us. Or even a way we can anticipate. If we could anticipate it, we could take advantage of it. And if we could take advantage of it, we could stop it in its tracks.

Let’s suppose, for example, that after the market had reached an epic high at the end of the 20th century, we could reasonably expect the next chapter of the story to tell us how it reached an epic low. So, skipping ahead, speed-reading investors might figure that they should sell their shares. And then, reading between the lines in their concise Book of Market History, they would realize that everyone else would also be selling in anticipation of the next big move and that they should try to sell first!

But then, the book would be open to everyone, so everyone would be trying to sell earlier and earlier than the next person, to avoid the rush…until they had all sold before the big bull market even began. In fact, there would be no bull market. If everyone knew what the future would bring, no one would bother living through it. History would stop.

Fortunately, we live in a world of perpetual darkness, at least insofar as tomorrow is concerned. All we know is that the fundamental patterns of the past will probably repeat themselves; we just don’t know how or when.

Many gold bulls, for instance, expect an exact replay of the late ’70s, wherein rising inflation rates led to a soaring price of gold. In this, as in so many things, we are less than sure.

We are a gold bull, too, of course, but we have a feeling this bull market in gold may not take the anticipated course. The real danger to the U.S. economy remains deflation, not inflation. Not too much money chasing too few goods and services, but too little money to keep up with the load of debt.

“Fear Grips Phoenix Housing Market,” is an actual headline from the weekend press. What people are worried about in Phoenix is what they are beginning to worry about everywhere: how are they going to pay their debts? Nearly $1 trillion in ARMs (adjustable rate mortgages) is scheduled to be reset in the next 12 months. How will people make the higher payments? Meanwhile, the biggest debtor of all time, the U.S. government, has its own ARM. If we read the schedule correctly, a third of the entire U.S. debt burden – almost $3 trillion – needs to be refinanced in the next 12 months.

Where is the money going to come from?

It’s not the size of the U.S. debt load that really matters; it’s the ability of the debtors to pay it. As debt payments increase, interest rates are rising everywhere. And as they rise, so does the need for cash to make payments. That’s why the dollar is not likely to be worthless. Not soon. That is for the next stage…when Bernanke’s back is to the wall. For the present, what we are seeing is the need for more cash, and a demand for dollars to keep the system going.

Yes, the dollar is inherently worthless. And yes, it too will eventually do what it is “supposed” to do. It will go away, but nothing happens as simply as you expect.

If you still aren’t awake, try some news from The Rude Awakening…


Eric Fry, reporting from New York:

“The little guy doesn’t have to worry about monthly performance analysis, or about mirroring a specific a benchmark. He simply tries to buy ’em when they’re cheap and sell ’em when they’re not.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.


And more views from Scotland…

*** “I read Empire of debt last year…” starts one DR reader’s e-mail to us,

“The U.S. government ‘cooks the books’! Take the unemployment numbers…

“1. 1.5 % of the working age population is incarcerated!

“2. Those fortunate enough to receive unemployment benefits are conveniently removed as job seekers after six months…In Europe it is five years in some cases!

“3. Another 1% of available workers are in military uniform doing a service which is in not in demand by consumers…

“4. Germany used to count (up to 03/2005) workers as unemployed who worked 15 hours/week or less. Most other nations went by ILO standard of one hour/week.

“Seems to me the U.S. unemployment rate is as high and in some cases higher than some European nations!

“I believe it was once stated that the economy is 90 % a state of mind…The mainstream media does nothing to dispel any myths! This whole charade goes on until the duped Chinese and Japanese realize they made some unwise investment choices…If they want to bail out, what do we do…say our military is bigger than yours?! Come and get it!”

[Ed. Note: “People come to believe whatever they must believe when they must believe it,” we wrote in our latest missive, Empire of Debt. And in many cases, that means swallowing whatever the media reports without thinking twice. Every empire is built on delusions – and the United States is no different. If you haven’t already purchased your copy, now is the time. You’ll be the smartest person on the beach this summer:

Empire of Debt

*** Gold is looking for its bottom. Maybe it has already found it. What will happen to gold in a deflationary, dollar-craving world? It will go up. But it may not go into the rafters right away. In the future, it will go to $1,000 and beyond. But between today and the future there will be plenty of tomorrows.

*** “Can we just go to a hotel?”

The boys were unhappy about our living quarters. Elizabeth, favoring architecture over comfort, had rented an odd garden house on the Dunmore estate near Stirling. For the first time in our lives we were lodged in a pineapple. But it wasn’t so much sleeping in a tropical fruit that annoyed the boys; it was the fact that there was no television.

“What are we going to do?” they wanted to know. Not that they typically spend a lot of time watching TV. Just the contrary; they rarely get to watch it. Which is why they look forward to staying in hotel rooms; hotels usually have TV, and cable TV at that. This place had nothing. Not even soap.

But what it lacked in comfort it made up for in particularity. Its builder, Lord Dunmore, was the Governor of Virginia just before the American Revolution. He seems to have discovered the pineapple, which was used in the colonies as a symbol of hospitality, and taken to it. Chased out of Virginia by the sons of liberty, he returned to his home in Scotland and built a house in the shape of the fruit. After his death, the estate fell to rack and ruin, but the pineapple, built of carved stone, survived. It was purchased by the Landmark Trust, which converted it to a cottage and rents it out to tourists.

What one learns while touring Scotland is the same thing one always seems to learn: things are more complicated close up than they appear from a distance. We had imagined Scotland as the land of the fierce and freedom-loving Scots, valiantly resisting the encroachments of the English until the bitter end. Our own ancestor Seamus McCeney (the name barely resembles the original Gaelic form), fought against the English at the Battle of Culloden, was captured, and then sold into indentured servitude on Kent Island, in the colony of Maryland.

But when we visited Culloden, we discovered that Scots and English were not the only ones on the battlefield; there were French and Irish, too. And not all the Scots were on the same side!

Elizabeth got out the guidebook and we found that the Scots themselves were not exactly what we thought they were. The Scottii tribe was not from Scotland at all, but from Ireland. According to the book, they invaded the west of Scotland and created the Kingdom of Dalriada. The Pictish tribes to the North and West – who were probably the people we think of as the original Scottish Highlanders – were actually squeezed between these invaders from Ireland and Viking raiders from Norway. Eventually, they were squeezed so hard they disappeared. Meanwhile, the Anglo-Saxons had invaded from Europe, replacing the Romans, who left after the collapse of Rome. And then came more invaders, from Normandy, in 1066. The Normans defeated the Anglo-Saxons at Hastings, and then marched north to Scotland. The Lowlands of Scotland thus became a “melting pot” of culture and language. Robert the Bruce, who later beat the English soundly at Bannockburn, was descended from a Norman family. So was much of Scotland’s lowland nobility. And some of the best-known clans, such as MacDonald and MacDougal, were Viking in origin.

Nor were all the Scots wearing kilts, sharpening their dirks, and eating haggis. In the 18th and 19th centuries, one of the most dynamic and prosperous parts of Briton was here in the lowlands between Glasgow and Edinburgh. James Watt, who invented the steam engine, was from this area. So were the great economists Adam Smith and Adam Ferguson. They were among the leading figures of what came to be called the Scottish Enlightenment. And it was here in Dumfermline that Andrew Carnegie was born.

“Oh yes,” said our guide in Dumfermline, “not only was this the home of five Scottish kings, Robert the Bruce was buried here in the church and Andrew Carnegie was born right over there in a humble weaver’s cottage. And see that big park over there? It’s beautiful, isn’t it? Well, when Carnegie was a boy, it was a private park. He couldn’t go in. Only rich people could use it, so Carnegie would stand at the bars of the gate and look through. And he vowed to make his fortune in America so that he could buy that park. And he did. He bought it and gave it to the town. Now, anybody can use it.”

Technology and trade transformed the world, and left its mark on the green and lovely valley along the Firth of Forth. Where once there had been nothing but rolling pasture, dark satanic mills sprang up. Where once people lived with the rhythms of the seasons, they soon learned the rhythms of industrial life. Factories whistles told them when to rise and when to fall out at night. Generations of lowland Scots went down into the region’s coal mines, until the last one closed after a flood in 2002.

“They still burn coal in the power plants,” our guide explained. “But now they get the coal from Chile.”

Factories, power lines, highways – the area reminded us vaguely of Northern New Jersey. But what did most damage to the natural beauty was not industry, but architecture. Every hill and dale seemed to have contracted a kind of pox – council estates. Not all the houses in these state-sponsored developments are ugly, but a vast majority of them are hideously. Their shapes are dominated by the relentless geometry of the ’70s – plain windows and doors, stark angles rather than curves, with little dress or adornment. And the materials, too, lack richness. The outside walls are usually done in concrete…cement…or a pebble-stucco finish.

But at least they are easy to escape. Drive over the hills, away from Glasgow and Edinburgh, and the scenery is delightful once again.

The Daily Reckoning