The blog found it hard to believe, when it started to research for Boom, Gloom and the New Normal, how little information existed on basic facts such as population size and annual births. Some countries such as the UK and Japan have data going back a century. But they are the exceptions:
- US annual data on births only starts in 1909, whilst Italian data doesn’t start until 1921
- UN Population Division data only starts from 1950, and even then much of the early numbers are guesswork
This helps to explain why economists have generally failed to understand that changing demographics have economic impact. Milton Friedman, the famous monetarist and Nobel Prize-winner, is the obvious example. Working in the 1960s, he could have had no idea that the US BabyBoom was underway:
- We know today that there was a 52% increase in births between 1946-64, compared to the previous 18 years
- But he couldn’t possibly have understood what was happening, as the data didn’t exist at that time
- The word ‘BabyBoom’ itself doesn’t appear in the blog’s 1973 edition of the Oxford English Dictionary
- Web research suggests the first use of the word in this context was as late as 1977
This simple bit of history has vast implications for economic policy.
Friedman won his Nobel Prize for his work associating increases in money supply with inflation. But with the benefit of hindsight, it is clear he confused cause and effect.
The US, like the rest of the developed world, experienced a surge in demand in the post-War period. The reason was the unprecedented increase in the number of babies being born – and staying alive. A century ago, large numbers of babies died in their first 5 years of life. But this suddenly stopped once drinking water became safe to drink (due to the use of chlorine), and vaccines became available to protect against dangerous diseases such as tuberculosis.
So as these babies grew up, they needed more and more things. Yet the wartime economy was still in recovery mode. It takes time to turn factories made to produce tanks into plants that can produce washing machines. The situation in Europe was even worse, as much of the industrial landscape was bombed out.
Tpday, it is therefore obvious that the inflation from 1970 onwards was due to a surplus of demand relative to supply. Markets were doing their job, and allocating product by raising prices. What else could they do? Even when governments introduced price controls, they inevitably failed, as President Ford found with his 1976 WIN programme – Whip Inflation Now!
DEFLATION IS NOW INEVITABLE
The 1980s saw this process start to reverse as the chart shows above. As the Boomers reached the 25-54 age range and their Wealth Creation period, so supply began to increase to meet demand. And their savings became available to further increase supply via pension fund investment in the stock market.
Crucially, however, inflation meant it made sense to borrow money, as its real value then declined. And it made sense to borrow to buy the products one needed, as their cost would reduce. Thus an early MasterCard slogan to highlight the benefits of a credit card was ‘Take the Waiting out of Wanting’.
Now, of course, we are living in the reverse of this world. We have relatively few people in the Wealth Creation generation. And for the first time in history, we have large and increasing numbers of people in the New Old 55 plus generation. They of course are a replacement economy, as they already own most of what they need. And their incomes are declining as they enter retirement.
Policymakers thus made an critical mistake in assuming that monetary policy could boost demand and restore inflation. It is obviously unfair to blame Friedman for this, as he couldn’t have known this background. But they could, and should, have known their policies were based on a false premise.
Now we are simply waiting for the catalyst to arrive that will cause deflation to become normal. And that catalyst could well be a fall in the oil price.
This would have a dramatic impact on purchasing decisions down the chain:
- Today, of course, we now have too much supply and too little demand – the reverse of 1973
- The collapse of fertility rates along with increased life expectancy means yesterday’s ‘demographic dividend’ has become a ‘demographic deficit
- The arrival of deflation will make people realise it is instead sensible to postpone purchases as prices will be lower in the future.
- They will also try to repay debt, as it will become more expensive in real terms.
Another critical transition will follow from this:
- Income will become the key metric for consumption again
- ‘Wealth effects’ from increased asset prices will disappear, further reducing demand
Policymakers’ stimulus programmes have wasted $tns by failing to recognise the obvious economic impact of today’s massive changes in demographics. The US, for example, has spent $10tn alone over the past 6 years – $6.27tn in federal deficits and $3.63tn on the Federal Reserve’s money printing programme.
Now the rest of us will have to pick up the bill from their mistake.