The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival Hardcover – 9 August 2020
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“I appreciate the global scope of this book and its emphasis on the complexity and interconnectedness of the global economy. This is the kind of long-term thinking that economists, policymakers, and others may find beneficial.” (insurancenewsnet.com, June 25, 2021)
“I think this is a very good forecast. … The book interestingly comments on an implied cycle in the standing of macroeconomics and macroeconomists. … their argument is well worth pondering and entering into our considerations of the biggest economic risks ahead.” (Alex J. Pollock, Law & Liberty, lawliberty.org, May 18, 2021)
“The Great Demographic Reversal is packed with informative charts and tables. It presents a powerful, well-argued challenge to the ‘mainstream’ view that low growth, inflation and nominal interest rates are here to stay. Above all, its message that everyday economics needs to take demography seriously is surely correct.” (Diane Coyle, Financial Times, December 2, 2020)
“This thought-provoking book is a great read, and there is no need to be an economist to enjoy it.” (Philip Turner, Central Banking, centralbanking.com, November 16, 2020)
“It is a pleasure to read a book this well argued. There is a good deal of careful analysis and there are lots of tables and graphs.” (Charles Taylor, Financial World, November 2020-January 2021)
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This book will be of interest and understandable to anyone with an interest on where the world's economy is going.
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Unfortunately, the main point of the book, that the demographic reversal - more dependent elderly and fewer working people - will inevitably lead to inflation, is overly simplistic. Yes, it will, if the participation rate will not change, if there is yet full employment, if the consumption habits will not change, if the monetary system will stay unchanged, if there will no major conflicts or disasters, if international trade flows will not change.... Way too many conditions to be a simple cause-effect relationship. And stating that you can treat the world as one big economy, is a distorted view of reality. Globalisation only affects a minor part of most economies. In the so-called "open" economy of Japan, imports and exports only account for one fifth of GDP... So there will always be economies with deflation and others with inflation, both having the same demographic trends.
Most other analyses are more balanced, with different factors being analyzed and pros and contras well taken into account.
Another flaw, but which is present in the majority of economics works is the pretended relationship between savings, investment and growth. Since the nineteenth century, economists hold that more savings mean more investment and more growth. However, this relationship broke down with the introduction of fiat money. By definition, debt-financed investment is equal to savings in one period. But what this increased savings will mean to consumption, investment and growth in the next period is dependent on many different factors, not at least expectations. It can go in any direction !
A last flaw is the neoclassical idea that interest rates are the equilibrium price between savings and investment. Keynes showed a long time ago that interest rates must be understood as the price for liquidity. But fortunately it does not affect most of the analysis on the effect of changing interest rates in the book.
This book is a must read for everybody interested in looking critically at the economic future. Long time trends are mostly absent from economic analysis, because the DSGE models and equilibrium analyses have a horizon of at most a few years. The authors rightly expose that several factors that are considered to be constant ("ceteris paribus") in mainstream economics are changing over the long term. This seems to me to be the most important lesson from the book, not the (unlikely) influence of the reversal of demography on inflation.
A basic knowledge of macroeconomics is needed to understand most of the more technical issues. In the Kindle edition, tables and charts are a little bit small, but this only a minor problem. And apart from some overly simplistic ideas, it is a very interesting book about many policy proposals that are currently been made.
The authors start with the source of the labor supply shock that they see as having catalyzed the deflationary labor impulse in the market, China. The introduction of the Chinese labor force into the global economy through the expansion of the manufacturing labor force in the tradeable goods sector had no precedent and created a deflationary impulse that has lingering effects. The distribution of profits between labor and capital became distorted and remain in favor of capital. The authors then describe how these dynamics ultimately depend on the demographic trends we expect as well and the shrinking of the labor force in the developed world over the next 20 years coupled with increasing life expectancy as well as rates of dementia will reverse the trends of the last 20 years and create significant inflationary pressures on the workforce. The authors discuss that the demographic dynamics do not lead to a constant neutral interest rate. Given the attempt to raise inflation despite the natural rate being negative has led to policies encouraging asset inflation that ultimately will lead to challenges in raising interest rates later when inflation resurfaces because of excessive debt burdens. The authors discuss objections with the most dividing point being on technology and its ability to create deflationary prices. The authors ultimately highlight that they don't know what will happen given the potentials for productivity growth but note it is usually over-estimated and highlight that in healthcare it is more challenging to automate and that is the area where cost inflation will be most prevalent and most impactful in aging societies. The authors also argue against Japan as an example where aging has been deflationary noting that deflation has been due to the exogenous shock from China not the endogenous dynamics of Japan itself; this is coherent but remains their opinion. The authors also discuss how India and Africa's positive demographic dividends wont alter the dynamics due to frictions to immigration and challenges to fully catch up on growth and thus on counterbalancing the shrinking labor pools in the developed world.
The book is out of consensus in its argument, though their ideas are implicitly discussed in economic textbooks. Their description of the coming inflation dynamics are an important reminder that there is a potential short-sightedness to focus on current inflation when the world has significantly changing dependency ratios. Time will tell if the authors analysis proves accurate but no matter what they provide a coherent basis to think about why inflation dynamics have been so puzzling so as to remind the literate audience that perhaps our current monetary and fiscal policy mix is heavily misguided.
The idea that wages will go up because someone has to take care of all the aging boomers is not well-supported enough for me to put much weight on.