The Great Demographic Reversal: Ageing societies, inflation & investment trends

[00:00:00] All right, I'm very excited and pleased to have us joined by the author of The Great Demographic Reversal. It's a terrific book published by economists that I believe previously worked at Morning Family. We're not going to hold that against them. Charles Goodhart is a Professor Emeritus at the London School of Economics, and Manoj is the founder of Talking Heads Macro, so they've written a non consensus book, very provocative, That goes against the grain of traditionally held conventional wisdom ideas.

And, we believe demographics are destiny and there's a lot of demographic changes happening in the world, right? China's population is set to shrink by hundreds of millions by the end of the century, the United States is below replacement rate and we're faring better than Japan and Europe and other countries around the world.

So what does that mean? How should one position? What's [00:01:00] the role of AI robotics in any of this? There's a lot of really interesting ideas to get into. I thought a good place to start might be to, first off, just summarize the argument. And then we can move forward to how do we, where do we go from here?

Do you want me to start, perhaps? Go for it. The 30 years from about 1990 to about 2020 were really extraordinary. They were totally unusual in the longer term history. During these years the baby boomers, with the rise in the birth rate between about 1945 and about 1965, entered into the workforce.

And meanwhile, the fertility rate, the number of births per woman, went down really quite sharply. The latter had the effect of bringing a vast number of women into the workforce, who were previously [00:02:00] working at home, looking after their children. Doing cleaning and cooking, which also got made easier by white goods, dishwashers and refrigerators and so on.

And then above all, you had the geopolitical developments, whereby China and Eastern Europe entered into the world's trading system. It was the biggest ever single Surge in the available labor supply that the world has ever seen. The result of that was that wages everywhere got held down because China became the workshop of the world and produced masses and masses of goods.

And the prices of goods declined year after year. So that even with service. Prices going up. You still had a degree of small price inflation. Now that's changing. You mentioned in your introduction that Chinese [00:03:00] population was going down. I think you said at the end of the century, it's already gone down.

It went down last year by quite a lot. It's actually been overtaken by India as the largest single country in the world in terms of population, and it's going to go on going down. The increase of China's GDP, which was running at about 10 percent per annum, has more than halved. There's a phrase about China growing old before it grows rich.

It's growing old very rapidly, and the number of workers is declining very sharply. The influence of China on the world is going to diminish rather in the same way as the influence of Japan on the world was huge until really about 1990 and then began to decline. So the effect on Asia in particular of the population changes is just enormous.

And note that in the last [00:04:00] year, the birth rate in China was as low as 0. 6. Actually much the same as in Korea, 0. 6, where the sustainable rate is 2. 1. And China is going to have a totally lopsided population with very little increase, in fact decreases in their working population year after year. And if your working population is decreasing, It takes a hell of a lot of productivity increases to get an increase in per capita income.

So the China is going to move into the same sort of situation or even more so than Japan. It's going to move from being the fastest growing economy in the world pretty much to flatlining. Wow. We're also seeing some of the effects immediately with the property market crisis in China. I don't know.

Things are not that bad, but I the longer term future is going to be very [00:05:00] different. It's much the same, only much less mark I in the advanced countries of the West. And, but even here, the the natural. Workforce in countries like your own in the USA and the UK are going down, but the working population is being held up by inwards migration, which we might talk about at some stage.

Because the question of what is going to happen to migration is a key question, both politically and economically. And can be very much affected by the public response to the fact that over the last few years, immigration has really increased fairly sharply. Two levels such as the share of the immigrant population in the US is back to about its all time high, much the same in the UK.

And [00:06:00] indeed the birth rate in western countries is being partially held up by the fact that immigrant families tend to have more children than locally born women have children. And, the question then is, and it's a quite difficult question to answer, exactly what are the implications of this massive reversal.

In demography I think I'll pass over to Manoj now, if I may, to take one through some of the, one of the great questions on this is what is likely to happen to inflation and particularly to interest rates. Again, I'm not speaking. And I don't think we particularly want to speak about the immediate future the next few months or the next few quarters.

Because that's influenced by a whole series of probably passing changes, where we want to speak about what's likely to happen over the next sort of 10 [00:07:00] years or so. Manoj, can I pass to you? Yeah, I'll just make three very short comments. The three questions that I think we need to ask ourselves is number one is when you hear Charles talking, particularly about the past, I think most people would agree that demography, the introduction of China had a particularly strong role to play in disinflation, in globalization and If you do agree with the past that those kind of features did play an important role in the past that we've had, which has been extremely constructive for a large part of the last 30 years and disinflationary for almost all of it, why should we be convinced that the reversal of demography will not lead to a reversal of at least some of those features?

We're not asking about inflation going back to the 1970s and the 1980s. But is it that difficult to believe that a reversal of some of these demographic trends will then unravel some of the past changes that we had seen where inflation came down, wage growth was significantly lower. These labor markets are going to tighten.

China's not going [00:08:00] to play a disinflationary role. Why can't we think of three to 4 percent inflation? Is that too much to think about? Number one. Number two. If we do also agree that China and demography had a role to play in bringing inflation down, how much should we allow central banks to do? to be responsible for the decline in inflation.

Central banks at the moment are, cream of the crop. They believe, I think to, for a large part, and investors are certainly believe okay to believe that they control inflation almost perfectly over the medium term and over the longer term. But things are changing. If you're going to see an increase in debt, does the central bank have the willingness, it has the ability, does it have the willingness to attack growth?

In order to bring inflation down so aggressively that we get question marks asked about debt sustainability. And if those question marks are asked and the financial stability and the mandate gets attacked, how does the central bank balance the two? At least going ahead, we should be open to the possibility that central banks don't have as much [00:09:00] control on medium term inflation as long as debt to GDP is not convincingly sustainable.

There is a trade off that's very different from the past where they had no inflation to deal with. Debt was very easily financed with low interest rates. And that was a very easy kind of phase of our economic development. And finally, what do governments do? So in the past, what we've seen is you've had spikes in debt to GDP in World War I, World War II, and in difficult events where the government has had to step in.

And once that event has passed, debt to GDP has gone down. And some of the commentary that we see in the newspapers almost treats pandemic related debt as the same thing. And in a gross sense, it is. Once the pandemic is gone, there is no need for 10 percent fiscal deficits anymore, and the funding related to the pandemic should come down, but if you look at any debt projection, Before the pandemic, after the pandemic, it shows you that the path of debt to GDP in the advanced economies is only going one way, and that's significantly higher.

[00:10:00] Under those circumstances, how do we prevent interest rates from rising if it's not through some kind of central bank intervention? And if central banks intervene to fight inflation that comes from higher debt, which would make it sustainable, do we then get a higher volatility regime? Or do central banks allow a little bit of inflation?

And if that happens, how can we then stop interest rates from rising? So our basic contention is not only that we will see higher inflation, we're not talking about a return to the seventies, but we will see higher inflation on average, and certainly higher inflation towards the end of a cycle, which we're not used to seeing.

Let me play back what I heard. So we've left a multi decade regime of China joining the global workforce and technology has enabled women to join the workforce over the last several decades as well. And many of these trends are changing now. China's demographics are in decline. Women already are in the workforce.

So the marginal [00:11:00] bump from that is behind us. And these are structural changes and. In addition to that, you have these re shoring, near shoring trends and now this creates an issue for inflation and interest rates, there's a trade off between those two. So if you're a central bank, and you're going to be facing in the medium term, more pressure on inflation, what do you do?

You can be more aggressive on interest rates and that would create more volatility or a higher cost of capital. On the economy. That's one approach. The other approach is to tolerate a higher level of inflation. Although we were experiencing a higher level of inflation in the last, few years.

So is that a fair summary and a description of the trade off that policy makers have in front of them? Yes, in a sense, the situation is even worse because the debt problem is so high. And the difficulty that we have In all our countries is that the [00:12:00] on present projections, the expenditure for looking after the old pensions, Medicare, and so on mean that the deficit is going to go on rising and with a reduced workforce.

The rate of overall growth is going to go down and the tax take is going to remain fairly stagnant. Now the difficulty is that you can deal with this either by cutting public sector expenditures. Now what are you going to cut? We've got climate change coming up. We've got defense problems with Ukraine and Russia and China and Taiwan.

We've got more and more old, like me, who need more and more medicines, and many of us are incapacitated, so we need very expensive care. Now you put that together, and the actual long term outlook, if you look at the Congressional Budget Office, Projections for [00:13:00] debt and deficit, it's just going exponentially upwards.

Effectively, it's unsustainable. Now you can deal with this either by cutting public expenditures really quite sharply. And I think Trump might go in that direction or you can raise taxation, but neither of these are politically popular and so the general way that all our politicians are working and, it's almost irrespective of party, irrespective of country, is that what you do is you hope for a growth miracle and leave it for the next elected party government to try and deal with the situation.

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