FT Newspaper Subscription Services | Login to your account Loads more below! "The Federal Reserve has an awful hunch. It suspects that the world’s shifting demographics, as longer lifespans and reduced birth rates combine to increase the proportion of the aged within western societies, have rendered central banks powerless to raise long-term interest rates."
Dear Aliens running our central banks, welcome to earth, enjoy your stay, look around, kick the tires, hold off on policy promulgations until you understand us . . . I assume these people are idiots. Of course, a massively aging population will render the central banks powerless to effect inflation. No matter how much money they pump, it will only sluice to the sides, cause asset bubbles, and then vanish as these bubbles pop. It's magic they claim! No, it's obvious. But they being central bankers could not see this obvious even as it sits astride them riding them like the jackasses they are. Stop money pumping. Now! "That was the conclusion of a paper published this month by economists from the Fed’s research division, capping a debate that has intensified over the past year. Citing an example based on the changing age structure of the US population, they said: “The model suggests that low investment, low interest rates and low output growth are here to stay, suggesting that the US economy has entered a new normal.'" No. The central banks cannot do anything about this, but the governments can. Immigration of workers is the key, but secondary measures require reformation of the tax code (it should be a consumption tax - sales tax), reformation of the desire of government to regulate everything (dramatically reduced regulations will be necessary), and full on acceptance of the gig economy, by ensuring regulations do not snare it forcing it into our current 19th century employment/business/government model. If we take these actions the US economy will flourish, birth rates will again rise, and we will return to a level of economic activity that looks much more like the mid 20th century. "The ageing issue is very emotional: who’s going to look after grandma?,” asks George Magnus, chief economic adviser at UBS. “As an economic issue it looks dark and impenetrable. But demographics is not destiny. We need political courage to do this, and we need more of it.” Measures such as later retirement, incentives for carers and part-time workers and more immigration can all mitigate the effect of an aging population." I am always surprised to find a hint of rational sanity in these demographics reports. They are commonly compiled by progressive reporters who seem to only be able to talk to progressives, resulting in dense english verbiage with little value or grounding in reality. The last paragraph is contrary, and a breath of fresh air. "The mechanics of how we arrived at this point are straightforward. People save most during their working years. This prompts them to buy bonds either directly or mostly through pension contributions, pushing down yields. Then in retirement they consume more than they save — and in the final few months of life tend to consume more, in expensive healthcare, than at any other time. Greater longevity has accentuated this by ensuring more people live to see an incapacitated and expensive old age. This tends to push yields upwards. The effects of demographical change on the labour market are also pronounced. When there is a bigger proportion of workers in the population, there is more competition for work. This pushes down labour’s negotiating power, and reduces both wages and inflation. Inflation is a critical driver of the bond market: when it is low, investors will accept a lower yield from their bonds. So again, a large population in work tends to push interest rates down, and a growing retired population should push them back up again. The new Fed paper suggests that “demographic factors alone account for a 1.25 percentage point decline in the natural rate of real interest and real gross domestic product growth since 1980”. This is a huge claim, as it implies that demographics — rather than fiscal or monetary policy, technology or other changes in productivity — are responsible for virtually all of the decline in economic growth over the past 35 years." It is straightforward, but that does not stop the Keynesian economists from pettifogging the issue with their preferred nonsense of central bank money pumping, and nonsensical government spending. Both only do damage, they do not help, and it is the government spending which is the worst. For government to spend it generally must take real money from real people. Thus, it takes money from productive people, and gives money to unproductive people, but expects that to result in an economic positive. Definitionally this cannot happen, and, so it does not, and the funds are mostly squandered. The central bankers money pumping results in either inflation if the demographic permit, and if not, it results in asset bubbles, which eventually pop, resulting in economic injury to millions, and the total loss of the money intended to create inflation. "As this period also saw increased savings activity as baby boomers scurried to get ready for retirement, slow economic growth was accompanied by long bull markets in both stocks and bonds in the US. Thus the phenomenon of ageing baby boomers helped to explain rising inequality. Increasing asset prices raises the wealth of those who already have savings, while a lack of bargaining power kept wages down for the rest." Most of the inequality was driven by specific asset bubbles, most importantly the real estate asset bubble. This was driven by both governments incompetence in ever reducing the protections necessary for lending (debt to asset ratios, etc.), and the central banks idiotic machinations to artificially lower interest rates. Easy money, and easy loans for even the deadest of deadbeats, combined with a long term rising housing market values turned home ownership into the lottery. Until it collapsed, taking millions down the rathole with it. Most injured were the blacks, and other minorities which were targeted by anyone with a subprime loan to offer. This was because these lenders were incentivized by government to make these loans to minorities. Tragically, they did so even if the black/minority qualified for a standard loan. Incentives matter, and these were big incentives. The result was that these blacks/minorities were much more seriously injured in the collapse. Boohyah, government, boohyah! "But as the chart (top left) shows, the US, western Europe and Japan have all reached the “tipping point” when the numbers of people in work compared with old and young dependants has peaked and started to fall. In all three examples, that moment came just as the country suffered a major market crash. But the growing weight of the elderly in society has not, yet, started to push up interest rates, which remain at historically low and sometimes negative levels. The Fed research paper suggests the effects could be permanent. It is common to blame either loose monetary policy or the overhang of debt from a crisis. But the Fed economists warned of a “risk that permanent effects of demographic factors could be misinterpreted as persistent but ultimately transitory downward pressure on the natural rate of interest and net savings stemming from the global financial crisis”. In short, low yields may be unavoidable and much of the current policy debate may be misguided." Ummm, there is, and will continue to be an excess of old people selling bonds, stocks, and assets, and a dearth of young buyers. Interest rates will definitely stay low, as will prices in this environment. We need more buyers. Where, oh where, could we find some buyers? Mexico, perchance? Central America, perchance? Immigration, perchance? Don't worry, all the oldsters kvetching about low interest rates, and low bond prices, and how their second, third, and fourth homes just don't fetch enough will all scream "NO MORE IMMIGRATION!" Thus, all but ensuring their weakening asset situation as they head deeper into retirement. They hit themselves on the head with wooden spoons because it feels so good when they stop?! "What happens next is a matter of some controversy. Last year, a team of economists at Morgan Stanley headed by Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee, argued that the rising number of retirees would “reverse three multi-decade trends” by reducing inequality, pushing up yields and raising equilibrium growth rates. “Both the young and the old are inflationary for the economy,” they said. “It is only the working age population that is deflationary.” With the working age population shrinking, inflation could return. Longer lives, and greater expense at the end of life, would only increase consumption, they argued. Housing was also an issue. “As nations get richer, the old stay in their existing homes, rather than go to live with their children,” the team pointed out. “They are already on the housing ladder. So they stay put.” In this way, aging will mean increasing investment in housing, and will not lead to any release of equity." The points out nothing so much as these wankers stubborn refusal to accept that deflation is a normal part of the economic cycle. Most of America's history has been one of cycles of inflation and deflation, and this, in part, is what made the nation wealthy, and stable. Since the creation of the Federal Reserve Bank, however, the goal has been inflation, with the abject failure of policy during the Great Depression when the Fed created and prolonged a disastrous deflationary period. Inflation assists profligate government, banks, and the wealthy, but not much the common man. Deflation commonly checks these excesses, but since the Fed, has been rendered unresponsive. The result was a long term inflationary period with much wealth inequality being create within the housing market, and then locked in through zoning, urban growth boundaries, urban service boundaries, and other growth restrictions. These have forced the young people to pay dear for real property, property which the Boomers, and Silent Generation bought cheap before pulling up the ladders with growth regulations. Thus, the wealthy old protect themselves, until their greed destroys their asset prices, then we see Detroit, and collapse, with tatters of wealth fleeing. This will come to the San Francisco Bay area if conditions there do not improve, and land become significantly less restricted. "Morgan Stanley faced withering criticism but the critical point at issue is the deal that society is prepared to offer the elderly. If they hold on to their current package, then rates could rise fast. But many believe that package is no longer viable and must be reduced. “Our political-economy assumption is that the contract that administrations have implicitly made with the elderly will continue . . . to provide support through pensions and healthcare,” said Mr Goodhart." Oh, sure the Millennials will simply let the Boomers keep screwing them because they are so nice. More likely: "Others disagree. Joachim Fels, an economist at Pimco, responded with his own paper earlier this year entitled “70 is the new 65: demographics still support ‘lower interest rates for longer’”. Mr Fels said: “If you look at the data in more detail, people retire later and later in life and it’s those people who do the bulk of the savings who retire the latest. It’s the Warren Buffetts of the world, to take an extreme example. But there are many more people like that.” The wealthiest find it easier to stay in work, and have a much lower propensity to spend what they earn. So, Mr Fels argues, this mutes the effects that ageing would have on markets. Dividing the US labour force by income, he showed that the participation in work by the top 20 per cent after the age of 65 had increased dramatically in the past two decades, and was likely to continue. He now suggests his paper should have been called “Is 75 the new 65?”. If retirement continues to be delayed, and people put more money aside when they are in work, then the tipping point for demographics when savings start to fall can be delayed by a decade or more." My guess is that Millennials will end up revolting, and returning the US to a more even and rational keel with older retirement dates, means tested old age welfare benefits which are richer for the poor, but cheaper for the nation, and more personal responsibility wedded to the reformations I discussed in the first part of this missive, and expansion of tax, and creditor favored saving vehicles for retirement, health costs, and the general vicissitudes of life. This will ensure low interest rates. They will also allow much more immigration, and of the right people, mostly our neighbors to the south, and skill inclusive, meaning low skilled, medium skilled, and high skilled workers. I fully expect both permanent, and some sort of more temporary work arrangements to become much more common as the Boomers die out in the next decade. "Inadequate pension provision in many countries adds to the problem. In China, there is little or no social safety net. In the US where the “401(k)” pension plans offered to baby boomers have had disappointing returns, many reach 65 without sufficient savings and have no choice but to keep working. With countries steadily moving away from offering guaranteed pensions, and requiring employees to bear the risk of any shortfall, the incentive to save increases." This is ultimately nonsense on every level. First, the problem with 401(k) was not disappointing returns, but failure to invest sufficient assets, combined with the unwillingness of the investor to take sufficient risk during the life of the investment. Putting a few nickels away in a 401(k) in a government bond investment pool will never amount to anything. But investing a minimum of 15-20% of income in a broad stock market portfolio between ages 18-55, then slowly shifting to a less aggressive portfolio, and retiring mid 70s will make the investor wealthy. Even if one only invests $2,000 per year, for 50 years at 7% interest the return is $928,000. Secondly, while government pensions appear safe, they are not. The US has a very serious pension problem running through both our public and private pensions. There is little doubt that these pensions will never pay the amounts promised, there is simply insufficient money to do so. Further, it is incomprehensible that the people living in these cities, counties, and states will pay taxes sufficient to make these pensions whole. As such, the pensioners will take a haircut. Expect many to take haircuts in the 50% range. "In the US, where it appears that many corporate and municipal pension plans will be unable to pay what they promised, courts have blocked pension funds from reducing payouts. All concede that broader cuts in what the state promises to pensioners are very difficult. As Mr Fels puts it: “Raising pension ages pushes down yields. The same argument applies to cutting payouts. Some call this ‘pension reforms’. Others call it ‘default’." The courts have turned reality into farce. But reality will win, no war on math ever wins the day, although the courts can postpone, and thus increase the damage done. "Mr Magnus suggests a middle ground in the debate. He says various “coping mechanisms” have helped to mitigate the issue, such as reforms in Japan, to encourage carers and provide incentives for women to work. But migration, another way to offset the problem, is now going in the opposite direction, threatening to create a skills shortage. “Capitalism rewards scarcity, and labour will become comparatively scarce,” he warns, adding that low rates will not be a long-term phenomenon. “That will raise the return on labour relative to capital. That will turn into a redistributive mechanism within society. That won’t happen in the next 12 months, but it is a logical consequence, and does mean higher rates eventually.” ‘Periods of low growth and interest rates will last for a long time and form the material basis for the “new normal”’ ‘Our political-economy assumption is that the contract administrations have implicitly made with the elderly will continue'" This is an important passage. What he is saying is if we stick to progressivisms plan, we will have low growth, demographic decline, lower wealth accumulation, a weaker economy, and less prosperity. This is exactly correct. We are at the end of the progressive movement. It can no longer provide what is necessary to fundamentally function the economy, the people, or society. If we continue to follow this model we will be poorer for it. Or we can shift the model, to the new, the more dynamic, the functional. This will take serious reformation of the ideology of a large part of the population more than anything else. I suggest we start yesterday. The world is slowly collapsing into a progressivist/socialist steaming pile of Shite. We can stop this collapse, but only if we are the dynamic economic engine the world needs, and expects. We can drag them forward, to prosperity, and they will hate us for it. Here at the end of history it takes limited republican government, reformed religions, extensive individual liberty and its concomitant personal responsibility, and free markets. We can achieve those goals, as I said earlier, through reformation of the tax code (it should be a consumption tax - sales tax), reformation of the desire of government to regulate everything (dramatically reduced regulations will be necessary), and full on acceptance of the gig economy, by ensuring regulations do not snare it forcing it into our current 19th century employment/business/government model. There that wasn't so difficult was it?
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