Posts about Business, Economics, and Finance
Hey all,
I read a very interesting book recently that provided what I thought an undervalued perspective on both the past 40 years in the global economy and some important points to consider for the next 30 years in the global economy. It seems quite relevant to Australia as many of the troubles (and boons) facing countries due to these dynamics have been visible in Australia so its interesting to consider them as part of a global system when typically the view is local.
The Great Demographic Reversal: Ageing Societies, Waning inequality, and an Inflation Revival by Charles Goodhart & Manoj Pradhan
The Past 40 years (1980-2021)
Why did Central banks have such an easy time achieving their inflation targets (within the band of 2-3%) between 1990-2021 while interest rates were steadily declining and reached record lows post-GFC? And why did central banks have such difficulty reviving inflation between 2008-2021?
Why did the labour share of economic output shrink in developed economies between 1980-2020?
What do the next 20-30 years hold for inequality, inflation, and interest rates?
The answer given by Goodhart & Pradhan to these question is that over the last 40 years (1980-2020) the global economy has been operating under conditions of an unprecedented boost to the labour supply that has acted as a huge disinflationary force globally. The labour supply boost has come from 4 main factors:
The integration of China into the global economic system.
Post-1991 the integration of Eastern Europe into the global economic system.
An improving dependency ratio due to a large baby boomer generation with a declining TFR (so fewer child dependents and not many old people meant a large working population)
The addition of women into the workforce
To give an idea of the numbers of people involved the author's provide figures that the growth in the working age population (WAP) of USA/Western Europe between 1990-2020 was 60 million total, while China added 240 million WAP in this timeframe and the addition of Eastern Europe added a further 200 million WAP to the global economy. (As an aside, this book was released 2 days after the Cardi B hit of the same acronym so they got scooped on this acronym in a pretty funny way).
This enormous boost in the labour supply (in combination with a liberal economic outlook led by globalisation) has had the effect of being a massive disinflationary force on the global economy so that inflation could be comfortably kept within the 2-3% bound even as interest rates steadily dropped. It also significantly weakened the bargaining position of labour which lead to a declining amount of national output going to labour in developed economies which led to a surge of inequality within countries while inequality between countries dropped due to offshoring, the decline of private sector unions due to weakened bargaining power etc.
The ability to maintain inflation in the sweet spot of 2-3% while interest rates dropped was mistakenly attributed to effective central bank actions when the lion's share of the credit was the favourable demographic structure. This has allowed central banks to enjoy a significant amount of independence without political controversy as the decline in interest rates meant that greater debt ratios could be easily sustained without debt interest payments increasing (making it easy for politicians to promise lots of stuff to lots of people without worrying about raising taxes to pay for it).
The authors posit that the conditions of the last 30-40 years are now over due to global aging alongside a relative collapse in globalisation and so we are going to be moving from a disinflationary environment to an inflationary environment. They think this will have a number of different impacts which I will cover in 3 headers of inflation, interest rates, & inequality.
The Next 30 years
Inflation
The authors predict that inflation will be a much more persistent problem in the coming decades because the older populace that was previously working/saving/spending will now stop working/stop saving but will still be spending. This is happening globally and combined with much longer lifespans means that the ratio of producers relative to consumers will be less and less favourable over time. This will be a major inflationary force in the global economy compared to the major disinflationary force demographics have been for the past 30-40 years.
Interest Rates
The author's believe that interest rates will be higher than the average of the last 30 years and remain high as businesses/government will invest large amounts of capital investment in an attempt to improve productivity as well as meet other goals (such as "greening" the economy). However because of the large amounts of debt built up during the low interest rate period the author's believe there will be considerable pressure to keep interest rates low in the short/medium term and that the independence of central banks will be threatened over this. However, as the market determines the interest rate in the long term they expect that over the long term interest rates will be considerably higher than the average of the last 30-40 years.
Inequality
The author's predict that changing demographics will give increased bargaining power to labour who will pursue both increased (after-tax) wages as well as a revival of private sector unions as the balance shifts into their favour. The author's believe that the widening inequality within the countries of the developed world will shrink a decent amount over the next few decades.
Potential counterfactuals
There are two major factors that the author's believe could lead to a different outcome from what they predict above. These are:
The integration of India/Africa into the global workforce to create a repeat of the conditions that held when China/Eastern Europe were integrated into the global workforce.
A massive productivity boost from automation/AI/something else.
They consider both of these to occur partially but to not be significant enough to change their overall predictions of a world returned to an inflationary environment with higher interest rates and relatively tight labour markets and a subsequent increase in the bargaining power of labour.
While India and Africa both possess large and growing WAP's these are not as productive/educated as those in China/Eastern Europe were for a number of reasons. They are countries that have less infrastructure, are less well-governed, and are more corrupt than China/Eastern Europe were at the time of these production shifts. The production shifts would also be occurring in an overall global environment that is far less optimistic about globalisation in general with significant efforts being made to reshore much manufacturing. There is also the potential for mass migration from these countries to advanced economies (so instead of shifting production to cheap workers, shift cheap workers to production) but the numbers required would be so destabilising in populations already wary of more immigration this would be politically and socially non-viable. So while India and Africa will be areas of growing importance over the next 30 years and some shifting of production to these countries will occur, they will not be enough to offset the global aging and demographic shifts in the opinions of the authors.
For automation, the authors are more circumspect and think while there is room for automation the amount required would be both enormous and difficult as previous automation has already picked many low-hanging fruits in this area. But there is always the chance of black swan AI events or other breakthroughs changing things but this is inherently impossible to predict.
Reviewer Comments:
http://eprints.lse.ac.uk/107545/1/The_Great_Demographic_Reversal_Introduction_to_New_Book.pdf
The above link is to the opening chapter of the book (18 pages) which lays out the core arguments with lots of charts/graphs if you want a further read directly from the horses mouth.
Personally I found the author's perspective to be fairly persuasive and it does answer a lot of questions in particular about why central banks have had such a hard time restarting inflation post-GFC. It also helps explain why inflation took off globally all at once. Covid jumpstarted a process that was going to occur naturally due to changing demographics.
I am perhaps a little more optimistic about the trajectory of India/Africa/Globalisation than the author's but can also see how they reached the conclusions they did.
I also really liked the long-term perspective taken by the authors of looking at important conditions over decades that impact the economy as so often economic discussion is focused on the next 2-5 years at the very most. Whereas this perspective of a decades long explosion in the supply of labour being a core foundation to many of the smaller changes we observe is quite appealing to me as someone with a background in historical study.
Anyway I hope you enjoyed this and I would be interested in any counterpoints to the author's ideas or just general thoughts on the topic in general. Or if you read the linked PDF and think I misunderstood or misrepresented the author's arguments, please post corrections.
By Peruvian_🐂 with regarded adaptationz by 👉🐒👈 there is no TL;dr or ELIA.
For the last few decades, houselessness has been on the rise in virtually every major American city. Drug addiction and mental health issues are of course the driving factors. Below is a graph of the amount of houseless using shelters in New York. We can see spikes in the late 1980s due to the crack scourge, but the rate stabilized until the aftermath of the 2008 financial crisis. Due to deflationary forces rippling through our economy, mass layoffs and home evictions, millions of people across the States lost their housing and became desperate.
The Fed (🐒 Federal Reserve) responded to the housing bust with a massive influx of cash into mortgage backed securities. Cumulatively, since 2008, the Fed owns more than $2.6T of MBS (🐒 Mortgage Backed Securities). This caused massive asset price inflation in the housing market and led to enormous wealth gains for those who owned real estate- but those who did not, or lost their homes in the bust, now saw skyrocketing home values but did not have any equivalent jump in income to compensate. This caused what is called "economic despair", similar to the opioid crisis tormenting midwestern "rust-belt" cities.
The median age of a new homebuyer has risen steadily since 2008- due to the higher prices of homes, many were priced out of the market. Only middle age folks had the wealth to pay for these expensive homes- boosting houselessness across the spectrum but especially in young people.
With a collapsing economy and slowly rising rent and home prices, dozens of thousands of people were pushed onto the streets each week- and did not have a way back into housing. They turned to drugs, crime, and more to deal with the pain and anxiety.
Economic self-reliance- especially for men, is closely linked to rates of depression and sewacyde. When the jobs in the city leave, the houses get too expensive to own, and the school tuition skyrockets; many feel an overwhelming hopelessness and turn to self destructive habits to cope with the pain.
Typically in a recession the Treasury will increase spending to cushion the blow to workers- and in 2009 they did extend a few unemployment benefits. But, by and large, Congress authorized few benefit programs for workers, and the average time on the benefit decreased after a slight bump in 2009. At the same time, the Fed was pumping massive amounts of cash into the banking system, boosting equity and bond prices to cope with the fallout of '08.
This caused the beginning of a massive bull market- 70% of the gains for the last 30 years have occurred since the Fed began their massive QE (🐒 Quantitative Easing) program. This would benefit the real economy, they claimed- creating what is called a "wealth effect", the behavioral economic theory suggesting that people spend more as the value of their assets rise.
The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. They are made to feel richer, even if their income and fixed costs are the same as before.
However- who does this really benefit? Studies show that the majority of the equities are owned by the top 10% in terms of wealth- in fact, these wealthy individuals own 89% of all listed US stocks!
The median American worker saw his bosses become enormously wealthy, without additional work or effort put in, while his/her wages were stagnant for basically the entire decade. This further contributed to economic despair and gave people a sense of a "rigged system" and that the American dream, touted by the Baby Boomers and those before them, was now dead.
Upward mobility became increasingly difficult as home and asset prices rose without a corresponding increase in median wages.
Something had changed since 2008. Although the NBER ( 🐒 National Bureau of Economic Research) claimed that we had only experienced a recession, if we use their original terminology we actually had been through a depression.
Depressions were originally defined as prolonged periods of economic underperformance, which by all indications we were experiencing. GDP (🐒 Gross Domestic Product) nominally was rising, but much of that could be attributed to increased government spending (component of GDP) and base effects of recovering from a weakened economy. NBER estimates we underperformed GDP potential by around $8.2 Trillion in real growth since ’08, which would have mostly gone to middle and working class workers in the form of wages.
Although unemployment spiked post 2008 and then began falling, a large part of the reason for this is how unemployment is actually calculated. They include people who do not have jobs and are actively looking for work- but what about those who have given up and no longer are looking? they are not included in these stats- which is why we see a falling Labor Force Participation rate (above) even when the unemployment figures are reportedly falling.
Millions of Americans have left the workforce- and many of these people have ended up houseless, dependent to drugs, and worse. According to the National Institute on Drug Abuse, almost 100k people lost their lives in 2020 due to an overdose- 5x the rate of the early 2000s:
The Fed has also worked to suppress interest rates to the zero bound- stimulating credit growth and pushing money out on the risk curve. This brought enormous sums of cash into the tech space, where companies received insane multiples on incredibly low earnings.
Tech linked indices, like the NASDAQ, saw enormous price gains in excess of the other "blue chip" stocks of the real economy. Facebook, Apple and Google became trillion dollar companies and VCs (🐒 Venture Capitalists) were willing to pour in unlimited funding for whatever the tech giants wanted.
This virtually unlimited cash gave the tech firms the resources to supercharge their apps to become mass psychology manipulation tools- to addict young people, causing anxiety and depression. Worst of all, it pushed sewacyde rates up, especially among young girls, who were fed unending comparisons and social judgement from their peers in the digital milieu. These apps have gotten more ubiquitous and more entrenched over time- if any young person wants to be relevant and have friends, they are pushed to buy into these harmful apps.
Of course, some may say this was inevitable, as the tech giants would eventually be pushing for profit and exploiting these children anyways- but the Fed certainly sped up this process significantly by lowering interest rates and allowing unprofitable tech firms to borrow freely, pushing up valuations and allowing them to raise mind boggling amounts of cash.
Money is power, and power can buy many things, even the ability to influence minds.
Young people nowadays are in most ways actually worse off than their parents. They can't buy a home. They can't afford school. They can't get a good job. And this issue is causing societal-wide consequences, like a falling marriage and birth rate.
Couples typically only marry when they can afford their house- although it is commonplace in Latin American and Asian cultures for a married child and spouse to live with parents, this is taboo in the states, where owning a property is considered a rite of passage.
General rates of depression are rising- humans are made for community, for intimacy.
Turns out we need each other. 🐒🦧🦍
And by pricing couples out of the housing market, destroying jobs, and hiking asset prices, the Fed has seriously damaged the ability of young people to seriously date and have children. Thus the birth rate is collapsing in the US as well, which portends some disastrous consequences in the next 40 years. Small generations beget small generations- and we may begin a death spiral, similar to Japan where overwhelming amounts of old people are retiring, with no one to replace them. This decreasing population means less workers, less products, and a less industrious economy- creating economic stagnation and decline in the long run. Furthermore, it puts severe strain on the retirement system, such as social security.
The Social Security trust fund most Americans rely on for their retirement will run out of money in 12 years, one year sooner than expected, according to an annual government report. The outlook, aggravated by the 😷🌐, also threatens to shrink retirement payments and increase health-care costs for older Americans. When the program was created, there were over 6 young workers paying in for every 1 retiree receiving benefits. That figure is now less than 3:1, and is soon falling to 2:1
Through the magic of QE (🐒 Quantitative Easing), the Fed has exacerbated the worst houseless, mental health, and population crisis the United States has ever faced. These issues are incredibly complex and hard to remedy- and it may take decades to undo the damage.
Source of this God-tier DD by the 🐂
🐒🤙
