SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis Regulators take control of a second bank and race to roll out emergency measures

The measures, which include guaranteeing all deposits of SVB, were designed to shore up wavering confidence in the banking system. They were jointly announced Sunday night by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

Regulators announced they had taken control of Signature Bank, one of the main banks for cryptocurrency companies, on Sunday. The New York bank’s depositors will be made whole, officials said.

A senior Treasury official said the steps didn’t constitute a bailout because stock and bondholders in SVB and Signature wouldn’t be protected.

The Fed and Treasury separately said they would use emergency-lending authorities to make more funds available to meet demands for bank withdrawals, an additional effort to prevent runs on other banks.

“This should be enough to stop the depositor panic,” said William Dudley, who served as president of the New York Fed from 2009 to 2018. “What it tells you is that risks to the financial system are not just tied to the big money-center banks.”

Officials took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, which gives regulators flexibility to guarantee uninsured deposits. (…)

Federal regulators said any losses to the government’s fund would be recovered in a special assessment on banks and that the U.S. taxpayers wouldn’t bear any losses. (…)

First Republic caters to wealthy clients with big balances in excess of the FDIC insurance cap. Investors worried that the bank could be vulnerable to a run like the one that claimed Silicon Valley Bank. First Republic’s shares had fallen about 30% since Wednesday. (…)

Regulators struggled to find a buyer on Sunday and pivoted to backstopping the deposits, according to a senior Treasury official, as they sought to announce a resolution to depositors by Monday morning. (…)

Officials on Sunday signaled they would likely weigh tougher capital requirements and liquidity rules, reversing at least some of the steps taken during the Trump administration to ease restrictions on smaller banks.

“We learned today that a $200 billion bank was too big to fail—or at least too big to be allowed to fail with losses borne by large depositors, as the bank resolution system assumes,” said Daniel Tarullo, a former Fed governor who was the central bank’s point person on regulation following the financial crisis. “While I understand the government’s concern about economic fallout, today’s actions strike me as having major implications for financial regulation.” (…)

The WSJ Editorial Board:

(…) The FDIC may have resorted to its “systemic risk exception” for SVB and Signature, but this is a stretch considering their size. The joint statement by regulators said it received the required two-thirds vote of both the FDIC and Fed boards, and we’d like to see the creative legal work by the Office of Legal Counsel at the Justice Department.

The Fed is acting as it should as a provider of liquidity to all comers. But it’s going further and offering one-year loans to banks against collateral of Treasurys and other fixed-income assets. The Fed will value these assets at par, which means banks don’t have to sell their assets at a loss. The Fed is essentially guaranteeing bank assets that are taking losses because banks took duration risk that Fed policies encouraged. This too is a bailout. (…)

SVB was the 16th largest bank in the U.S. but still not a large bank with $209B in assets. We all know that SVB’s problems were self inflicted by poor, reckless, stupid management.

Banks are supposed to match the duration of their liabilities (deposits) with that of their assets (securities). SVB was long on assets against demand deposits. And unhedged. When it had to sell its Treasuries to meet sudden withdrawals, it sold them at a loss since interest rates have risen. These losses ($1.8B) erased its equity base … yaddi, yaddi ,yadda.

So why were SVB and Signature Bank designated as a systemic risk to the financial system?

Because, technically, this gives regulators flexibility to guarantee uninsured deposits. Why? Where was the systemic risk? Even Larry Summers said Friday: “I don’t think this is likely to be a broadly systemic problem.”

From my lens, the systemic risk was in the unregulated, free-wheeling crypto world:

• Stablecoin Firm Circle Reveals $3.3 Billion Exposure to Silicon Valley Bank

(…) With a circulation of around $40 billion, Circle’s token is second only to Tether’s USDT. (…)

Trading activity on a large decentralized exchange called Curve showed similar signs that traders were adjusting out of their positions in Circle’s stablecoin. Acheson said Curve’s 3pool protocol, which allows users to swap between Circle’s token, Tether and another stablecoin called DAI is now “severely out of balance” as users try to exit their USDC positions. In theory, the supply of the three stablecoins should be held roughly in line. But data on Curve Finance shows just about 6.4% of the pool was Tether, while USDC and DAI both have more than 40% of the supply.

“Unforseen SVB collapse and potential exposure of USDC to SVB created panic around it, so people started fleeing to USDT,” Michael Egorov, founder of Curve Finance, said in an email. He explained the activity in the DAI token by noting that traders treat it as almost a proxy for USDC. “DAI is not a safe haven in this regard because a lot of it is collateralized by USDC directly,” he said. (…)

The crypto sector had already been rattled by the Silvergate meltdown earlier in the week. The California-based bank had been one of a handful of US-based lenders providing financial services to crypto firms, including FTX. The shrinking pool of crypto-friendly banks may make trading in and out of cryptocurrencies from US dollars increasingly difficult for crypto exchanges and market makers. (…)

As time goes by and the overly easy monetary tide is receding, we keep learning how the crypto world is managed by people who don’t seem to understand risk and don’t really know what they are doing.

Who in his right mind would even think of leaving $3.3B in a small, regional and concentrated bank like SVB?

Circle not having access to this $3.3B would have created a run on USDC and a major domino effect throughout the crypto world as seven of the 10 largest so-called liquidity pools running on the Ethereum blockchain use USDC for transactions, eventually reaching traditional banking one way or the other.

So-called stablecoins serve as the money-market funds of the crypto world, seen as safe havens for traders and investors. Like money-market funds, stablecoins are not supposed to “break the buck”.

Back to SVB: why was it not stress-tested? Adam Tooze:

Because in 2018 the regulations were changed and SVB was leading the charge pushing for the onerous regulations to be lifted.

Josh Marshall @joshtpm

nytimes.com/2023/03/10/bus…

The bank executive lobbying in this instance, is the same Greg Becker who “sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. The sale of 12,451 shares on Feb. 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on Jan. 26.” As reported by Business Standard. (…)

The same Becker who last week “was on stage at a Morgan Stanley conference answering questions about the startup scene, market valuations, M&A, IPOs, remote work, crypto, ChatGPT—everything except how the bank was doing. Becker was even asked about how he relaxed!” (The Information)

Now we know: he had a plan…

BTW: Monday last week, SVB made the Forbes list of America’s Best Banks for the fifth consecutive year.

Back to business as usual?

(…) More Americans ages 25 to 54 jumped into the labor force—giving companies more workers to choose from and taking some pressure off wage growth, which was little changed in February from January. (…)

Large parts of the labor market—including restaurants, hospitals and nursing homes—are driving the growth. Those service providers were hit hardest by social-distancing measures at the onset of the pandemic. Now, nearly three years later, they are hiring at a rapid clip as they find it easier to recruit and fill openings, helping fuel an extended stretch of outsize hiring gains. (…)

Employers that hired aggressively earlier in the pandemic in industries—such as transportation and warehousing, finance and the tech-heavy information sector—cut employees last month. Workers’ average weekly hours have been trending downward for about two years and ticked down in February, a sign of some cooling in the labor market. (…)

Average hourly earnings for private-sector workers rose 4.6% over the 12 months through February, below a recent peak last March of 5.9%. (…)

There was much more important and significant stuff in this NFP report:

• The labour force grew 419k in February, +1.72M (+1.0%) in the last 3 months while new jobs totalled 1.05M. YoY, the labor force is up +1.5% in February and is now 0.9% above its pre-pandemic level, and only about 1% below its pre-pandemic trendline. We could be there in May or June!!

• If so, the labor supply would have grown by 3.5M workers in 6 months since December against labor demand of 2.02M per the rather strong last 6 months.
• The last 3 months each saw more people entering the labor force than jobs created (first time since May-July 2019). The cumulative surplus is 670k or 223k per month.
• This in spite of favorable weather conditions, and on the eve of a looming large decline in demand for construction workers as mild weather likely helped reduce the current building backlog.

• The diffusion index, which tallies the difference between the number of industries that are adding workers and those that are cutting, fell to 56% in February, the lowest since February 2019 (ex-covid).

• Looking at labor income, the January numbers seemed to break a trend but February re-established the downward path of the last 15 months.

• Not only is employment growth slowing, total average weekly hours are back to pre-pandemic levels, even in service-producing sectors.

• Average hourly earnings increased by 0.24% MoM in February, +4.6% YoY, while the 3-month annualized rate fell 0.8pp to +3.6%.
• But wages for production and non-supervisory workers (80% of the total) increased 0.46% mom, or 5.3% from a year ago.

This ING chart also augurs badly for the labor market, particularly since banks are likely to tighten standards even more:

Source: Macrobond, ING

Canada: The labour market remains vigorous in February

Job creation came back down to earth in February. Nonetheless, the 22K gain in February confirms that last month’s strong gains were not a blip and that the momentum in the Canadian labour market remains vigorous.

The details of the February report were also robust, with 31K full‑time jobs created and the private sector adding 39K employees to its workforce. Moreover, at the regional level, the only employment declines were in Quebec and Nova Scotia, two provinces that had posted outsized gains in the previous month.

These employment gains must be placed in the current Canadian demographic context. In February, the country’s population grew by 60K, matching January’s gain. As a result, the ranks of the labour force swelled by 42K in the month, with that gain evenly split between employment and unemployment. This development prevented the unemployment rate from falling in the month despite the job creation.

Hourly earnings also surprised to the upside in February, but we do not believe that there is reason to be overly alarmed as signs of moderation persist. While the unemployment rate is comparable to last summer, the labour market is not as red-hot as it was then. In fact, consumers have historically been clairvoyant to sense reversals in the labour market, and the latest Conference Board survey shows that optimism is waning. The employment outlook indicator returned to its 2019 level after hitting all-time highs in 2021.

Other indicators also point to a slowdown ahead. Sluggish business formation, as well as declines in corporate profits and business investment in Q3 and Q4 all point to a soft patch in the labor market through 2023. Thus, it remains important to let the ultra-tight monetary policy work its way in the economy before concluding that the central bank has not done enough, especially as Canada could import further tightening of financial conditions from the United States.

Here’s the U.S. chart of the same data:

Falling Survey-Response Rates Undermine Economic Data The declines skew government measures of inflation and the job market.

(…) This is a problem for two reasons. First, surveying only works if the people it samples are representative of the overall population. When response rates drop, the people who don’t answer might have something in common, biasing the results. (…)

Second, even absent systemic bias, falling response rates mean the data isn’t capturing the true state of the economy. 

In a December presentation, an official with the Labor Department’s Bureau of Labor Statistics showed that response rates across 16 major government surveys, including nine of households and seven of businesses, had declined, especially for households. 

“If you go from 80% to 79% it’s not the end of the world,” Douglas Williams, a senior research survey methodologist for the BLS, said in the presentation, referring to response rates. “What’s problematic is when this happens every year for a ten-year period—that accumulates to a very substantial amount.”

(…) a decade ago the report’s headline estimate of job creation in the prior month was based on about 80% of establishments in the survey responding. That figure slowly declined to the mid-70s before the pandemic. Then the pandemic hit and the response rate spiraled down even more, into the low 60s in some months.

(…) “the kind of follow-up that BLS used to do to sustain participation is much harder when people are working from home,” making it harder to contact the individuals at a business who must fill out the surveys. (…)

In the years before the pandemic, the jobs report was typically revised up or down by about 40,000 jobs between the first and third report. But in 2020 the average size of revisions jumped to nearly 140,000, before falling to about 90,000 in 2021 and 60,000 in 2022—still about 50% more than before the pandemic. (…)

The consumer-price index report on inflation depends in part on surveys where response rates are also plunging. The response rate for an interview survey on consumer expenditures, which establishes the representative basket from which subsequent price changes are calculated, has fallen from 70% to 38%. Response to the inflation report’s housing survey has dropped from 72% to 58%.

For the BLS’s monthly report on job openings and labor turnover, which reports on vacancies, quitting and hiring, the response rate has dropped from 69% a decade ago to 31% late last year, according to data compiled by Mr. Slok. Some economists have noted the BLS measure has diverged from private measures in recent months. The BLS measure shows robust openings, while private measures—such as one calculated by the job-posting website Indeed.com—have declined. (…)

Data dependent, huh?

Banks Lose Billions in Value After Tech Lender Stumbles Investors dumped shares of SVB Financial Group and a wide swath of U.S. banks after the lender said it lost nearly $2 billion selling assets following a larger-than-expected decline in deposits. The four biggest U.S. banks lost $52 billion in market value.

Shares of SVB, the parent of Silicon Valley Bank, fell more than 60% after it disclosed the loss and sought to raise $2.25 billion in fresh capital by selling new shares.

Banks big and small posted steep declines. PacWest Bancorp fell 25%, and First Republic Bank lost 17%. Charles Schwab Corp. fell 13%, while U.S. Bancorp lost 7%. America’s biggest bank, JPMorgan Chase & Co., fell 5.4%.

Thursday’s rout is another consequence of the Federal Reserve’s aggressive campaign to control inflation. Rising interest rates have caused the value of existing bonds with lower payouts to fall in value. Banks own a lot of those bonds, including Treasurys, and are now sitting on giant unrealized losses.

Large declines in value aren’t necessarily a problem for banks unless they are forced to sell the assets to cover deposit withdrawals. Most banks aren’t doing so, even though their customers are starting to move their deposits into higher-yielding alternatives. Yet a few banks have run into trouble this week, sparking fears that other banks could be forced to take losses to raise cash. (…)

Some venture-capital investors have advised startups to pull their money out of SVB, citing liquidity concerns, according to people familiar with the matter.

Garry Tan, president of the startup incubator Y Combinator, posted this internal message to founders in the program: “We have no specific knowledge of what’s happening at SVB. But anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously and prioritize the interests of your startup by not exposing yourself to more than $250K of exposure there. As always, your startup dies when you run out of money for whatever reason.” (…)

The Federal Deposit Insurance Corp. in February reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed’s rate push began.

In part, U.S. banks are suffering the aftereffects of a Covid-era deposit boom that left them awash in cash that they needed to put to work. Domestic deposits at federally insured banks rose 38% from the end of 2019 to the end of 2021, FDIC data show. Over the same period, total loans rose 7%, leaving many institutions with large amounts of cash to deploy in securities as interest rates were near record lows. (…)

Bank of America and its megabank peers can afford to part with a lot of deposits before they are forced to crystallize those losses.

Most of SVB’s liabilities—89% at the end of 2022—are deposits. Bank of America draws its funding from a much wider set of sources that includes more long-term borrowing; 69% of its liabilities are deposits. (…)

SVB, based in Santa Clara, Calif., caters to tech, venture-capital and private-equity firms and grew rapidly along with those industries. Total deposits rose 86% in 2021 to $189 billion and peaked at $198 billion a quarter later.

They fell 13% during the final three quarters of 2022 and continued dropping in January and February “in part because of its concentration in investor-funded technology company deposits and the slowdown in public and private investments over the past year,” Standard & Poor’s credit analysts wrote in a note downgrading SVB to one notch above junk. They said they expect SVB’s deposits might decline further. (…)

In a news release Wednesday, SVB said it had sold substantially all of its available-for-sale securities. The company said it decided to sell the holdings and raise fresh capital “because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.”

SVB’s year-end balance sheet also showed $91.3 billion of securities that it classified as “held to maturity.” That label allows SVB to exclude paper losses on those holdings from both its earnings and equity.

In a footnote to its latest financial statements, SVB said the fair-market value of those held-to-maturity securities was $76.2 billion, or $15.1 billion below their balance-sheet value. The fair-value gap at year-end was almost as large as SVB’s $16.3 billion of total equity. (…)

• Silvergate’s Story Is About Fundamentals, Not Just Crypto The lender’s problems stemmed partly from age-old banking risks such as concentration and matching assets and liabilities
• US Banking System Can Weather SVB Contagion Risk, El-Erian Says

Another example of how analysts and investors, even institutional investors!!, often fail to see risk, even try to avoid seeing it…

While reports of its problems had surfaced in recent weeks, things were calm enough that just two days ago, [SVB CEO] Becker was on stage at a Morgan Stanley conference answering questions about the startup scene, market valuations, M&A, IPOs, remote work, crypto, ChatGPT—everything except how the bank was doing. Becker was even asked about how he relaxed! (The Information)

Dunno what he said about relaxing, he surely knew what was going on, unless his CFO saved him the anxiety… BTW, Daniel Beck, the CFO, should not be relaxing about his job.

US Jobless Claims Jump to 211,000, Led by New York, California

Applications for US unemployment benefits last week rose to the highest since December, driven by spikes in California and New York and suggesting some softening in what’s still a tight labor market.

Initial unemployment claims increased by 21,000 to 211,000 in the week ended March 4, Labor Department data showed Thursday. Continuing claims, which include people who have received unemployment benefits for a week or more, rose by the most since November 2021. (…)

The four-week moving average in initial claims, which smooths out some of the volatility, edged up to 197,000, the highest since January. (…)

California and New York accounted for three quarters of the increase. Severe weather across the Midwest and California may have been a factor.

The figures may also have been boosted by New York City school workers like bus drivers and cleaning staff who have negotiated into their contracts the ability to file for unemployment benefits when there’s a school break, according to Stephen Stanley, chief US economist at Santander US Capital Markets LLC. (…)

Additionally, technology, media and financial companies have announced tens of thousands of job cuts in recent months. Layoffs that were announced in January may not materialize until now, when the worker is actually coming off the payroll, according to Bloomberg Economics.

Separate data Thursday from Challenger, Gray & Christmas Inc. showed 77,770 job-cut announcements in February, more than five times the number in the same month last year. It also marked the highest level for any February since 2009, according to the group.

In case you slipped past my sarcastic emoji (there is no “you gotta be kidding” emoji), Stephen Stanley, chief US economist at Santander US Capital Markets explains:

This week’s tally was inflated by the New York City school holiday. This may strike some as outlandish, but NYC school workers have negotiated into their contracts the ability to file for unemployment benefits every time there is a school break. The number of new filers in NY state more than doubled, adding 16,000 to the national total.

The seasonal factors have a tough time dealing with it, because the timing of the breaks vary from year to year. Absent this special factor, the count would likely have been below 200K yet again. Broadly, initial jobless claims have remained remarkably low despite the flurry of layoff announcements in recent months, underscoring that the labor market retains considerable momentum. (via John Authers)

BTW, Job cuts… no longer “only tech”… (@MikaelSarwe)

Inflation Persistence: Dissecting the News in January PCE Data

This post presents updated estimates of inflation persistence, following the release of personal consumption expenditure (PCE) price data for January 2023. (…) The MCT (Multivariate Core Trend) is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares.

The current release of the MCT implies a significant upward revision in estimated inflation persistence. The MCT stands at 4.9 percent for the month of January following an increase in December, as shown in the solid blue line in the chart below. Importantly, the MCT curve has moved up relative to the estimates reported in our February 7 post. What happened?

The Bureau of Economic Analysis (BEA) release of PCE data for January 2023 included substantial revisions to the price data for the last three months of 2022 (due primarily to revised seasonal adjustment of the Consumer Price Index (CPI) components that underlie much of the PCE price index). Overall, the revisions amounted to an average increase of 0.74 percentage point (ppt) in the monthly annualized core PCE inflation for these three months and were broad-based across sectors.

These data revisions and new data for January have led to a reassessment of the estimated inflation persistence as measured by the MCT. While the dynamics of the trend remain roughly the same as estimated prior to the current release—the trend peaks in May/June of 2022 and then declines throughout the third quarter—the MCT level is now higher.

What is more, the decline from the mid-year peak is not as pronounced, and rather than plateauing at roughly 3¾ percent, as we reported in February, the trend picked up again in the last two months. What explains this overall increase?

(…) In addition to the upward revision of fourth-quarter data, PCE prices accelerated in January, with both headline and core measures up 0.6 percent in the month, moving up further our model’s assessment of inflation persistence. From the chart, the blue line of current MCT lies above the gold line since mid-2022, indicating that January’s inflation reading led to firmer estimated inflation persistence beyond what can be attributed to fourth-quarter data revisions alone. (…)

Moreover, the recent increase in inflation persistence is driven primarily by the common trend component, with the sector-specific trend even down a bit in January (…).

To sum up, the PCE price data released for January have shown a broad-based resilience in inflation persistence.

Russia oil production grows, returns to near pre-war levels

The EIA reports that Russian oil production rose to 11.13 mbpd in February, the highest since April 2022 and a whopping 1.1 mbpd higher than the EIA’s forecast from two months ago.

In fact, as visible on the graph above, the EIA has been ‘forecast surfing’ since last July.  That is, the EIA anticipated that embargoes and price caps would precipitate production declines, particularly related to the more difficult market in refined products.  Month after month, the EIA forecast that, although production declines had not yet kicked in, they would soon begin. 

Thus, the EIA has published a series of forecasts showing a cascade of anticipated production declines, with the Russians thwarting expectations month after month.  The visual impression, as one can see on the graph above, is of a kind of ‘forecast surfing’, as though the actual data were surfing on an ocean wave.

Why has the EIA proven so wrong to date?  And why has our forecast from last July — the Black Market line on the graph — proven so much more accurate? (…)

The EIA’s models are built on market forecasts, emphasizing elements like customer requirements and tanker availability.  There is nothing wrong with this, as oil is normally traded under market conditions (with some exceptions regarding OPEC). 

By contrast, our forecast from last July is a black market forecast, that is, it operates under a different set of assumptions.  Chief among these is that prohibitions — whether on quantities like the EU embargo or on prices like the oil price cap — tend to lead to evasion accompanied by vast corruption and unbounded hypocrisy.  Thus, we assumed that the Russians would find a way around the sanctions, and the numbers to date suggest this in fact has happened.

The shape of our forecast comes from historical data on black markets, most notably from the US Prohibition era, when alcohol consumption was illegal in the United States.  (…)

This is no surprise, given that the various oil sanctions do not apply to much of the globe, including India, China and the Middle East.   Overall, however, we see the same pattern: initial success of the sanctions followed by a supply recovery to a level modestly lower than the pre-prohibition state.   We made our Russian oil forecast using this approach, and to date it has held up better than the EIA’s numbers.  This, again, is not due to superior forecasting technique, but rather the use of an entirely different forecasting paradigm. 

Forecasting is, of course, a precarious endeavor.  The Russians have announced oil production cuts equalling 650,000 bpd, and these should begin to manifest in the March data.  If the EIA is not entirely right, it may not be entirely wrong either.  Still, the Russians are likely to find ways around embargoes and price caps.  The more time passes, the more successful they will be.  That is what a black market model suggests. (…)

A Revolution Is Coming for China’s Families By 2050 living parents and in-laws will outnumber children for middle-aged Chinese men and women.

China’s working-age manpower is in steep decline. The country is rapidly graying, and the largely dependent 65-plus population is soaring. In January Beijing announced that the country’s total population shrank in 2022—a decade earlier than Western demographers had been forecasting as recently as 2019. (…)

The Chinese family is about to undergo a radical and historically unprecedented transition. Extended kinship networks will atrophy nationwide, and the widespread experience of close blood relatives will disappear altogether for many. This is a delayed but inescapable consequence of China’s birth trends from the era of the notorious one-child policy (1980-2015). The withering of the Chinese family will make for new and unfamiliar problems, both for China’s people and its state. Policy makers in China and abroad have scarcely begun to think about the ramifications. (…)

But China is now on the cusp of a severe and unavoidable “kin crash,” driven by prolonged subreplacement fertility. The implosion of consanguineous family networks, by our reckoning, means that China’s rising generations will likely have fewer living relatives than ever before in Chinese history.

A “kin famine” will thus unfold unforgivingly over the next 30 years—starting now. As it intensifies, the Chinese family—the most important institution protecting Chinese people against adversity in bad times and helping them seize opportunity in good times—will increasingly falter in both these crucial functions.

By a grim twist of fate, China’s withering of the family is set to collide with a tsunami of new social need from the country’s huge elderly population, whose ranks will more than double between 2020 and 2050. Our simulations depict a fateful inversion within the nuclear family. By 2050 living parents and in-laws will outnumber children for middle-aged Chinese men and women. Thus exigency may overturn basic familial arrangements that have long been taken for granted. The focus of the family in China will necessarily turn from the rearing of the young to the care of the old. (…)

Owing to the surfeit of baby boys under the one-child policy and declining cohort sizes, growing numbers of men in decades ahead will enter old age without spouses or children—the traditional sources of support for the elderly. By our projections, by 2050, 18% of China’s men in their 60s will have no living descendants, twice the fraction today. Absent a massive expansion of Chinese social-welfare provisions over the next few decades, who will look after these unfortunates? (…

China’s coming family revolution could easily conduce to a rise in personal risk aversion. Risk aversion may in turn dampen mobility, including migration. Migration is a risky act that requires knowledge of opportunities and trusted people who can help obtain them. (…) Less migration means less urbanization, which means less growth—and possibly still more pessimism and risk aversion. (…)

If the waning of the family requires China to build a huge social welfare state over the coming generation, as we surmise it will, Beijing would have that much less wherewithal for influencing events abroad through economic diplomacy and defense policy.

Further, our simulations suggest that by 2050 at least half of China’s overall pool of male military-age manpower will be made up of only children. Any encounter by China’s security forces involving significant loss of life will presage lineage extinction for many Chinese families.

Autocracies are typically tolerant of casualties—but maybe not in the only-child China of today and the decades ahead.

Failure to contemplate the implications of the coming changes in Chinese family structure could prove a costly blind spot for the Communist Party. Blind spots expose governments to the risk of strategic surprise. The consequences of social, economic and political risks tend to be greatest when states aren’t prepared for them.

The full report here.