“Central banks have to be mindful that too long a period of very low interest rates can have undesirable consequences in the context of ageing societies. For pensioners, and those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward. They may on the contrary be an inducement to save more, to compensate for a slower rate of accumulation of pension assets.” Mario Draghi, President, European Central Bank
It is now exactly 4 years since we published Chapter 1 of Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again. When writing it, John Richardson and I thought our basic premise – that demographics drive demand – was simply a statement of the obvious. We didn’t write the book to make this argument. We wrote it with the aim of helping companies and investors to develop the new business models needed to profit from these new demand patterns.
How wrong we were! Very few policymakers took us seriously, with the exception of Governor Shirakawa of the Bank of Japan. He had already made the same argument when taking office in December 2008.
Instead, they maintained that the stimulus provided by Quantitative Easing (QE) was already returning the global economy to “normal” levels of economic growth. And when, as was inevitable, this first round of QE failed, the US Federal Reserve simply did QE2 and then QE3, whilst China and the UK followed. Even worse, new premier Abe replaced Shirakawa in 2012 as a prelude to QE in Japan, and Mario Draghi followed at the ECB this year.
But of course, there has been no sustained recovery. And finally, on Friday, Draghi half-conceded that there just might be some downside to the policy in a world of ageing societies. His statement above thus stands as the first faint recognition by a Western policymaker of the fact that stimulus has been exactly the wrong policy since 2008.
Unfortunately, however, this recognition on its own is “too little, too late”. The Great Unwinding of these stimulus policies began 9 months ago, and we are already seeing rising volatility in the 4 key markets of oil, the US$, interest rates and stock markets. These are the warning tremors of the debt-fueled Ring of Fire created by the central banks.
China, the world’s 2nd largest economy, has been moving away from QE since the new leadership took office in 2013, due to the dangers that it creates. As premier Li warned last month:
“It is quite easy for one to introduce QE policy, as it is little more than printing money. When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.”
The chart highlights the problem, based on Bloomberg data. It shows that the G7 group of the world’s major economies can now be best described as the Ageing and High Debt group. Their gross government debt per person ranges from a minimum of $36k/person in Germany to $100k/person in Japan. It is hard to believe all this debt will be repaid. As I noted in February, after the Greek election:
“We all learnt one crucial lesson from Syriza’s victory in the Greek election last week – voters can halt the European Central Bank (ECB). Or in other words, protest coalitions can trump elite consensus. In places like Spain and France, this effect may not work through immediately, but it is being absorbed.”
Draghi has realised very late that the economic rules change in an ageing society. Older people already own most of what they need, and their incomes decline as they near retirement. They also have to save more. None of them ever expected that average life expectancy at age 65 would double during their lifetime, from 10 to 20 years.
There are only 3 ways that the debt burden can be resolved – by major rises in taxation, cuts in services, or default. Greece has shown that electorates will not support the first two options forever. The recent tremors in government bond markets are thus a first sign that investors are realising the 3rd option may eventually prove inevitable.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 45%. “Prices have moved lower this week with excess product in Asia and the US said to be the key causes”
Brent crude oil, down 37%
Naphtha Europe, down 34%. “The naphtha arbitrage window from Europe to Asia is only marginally open but is described by traders as the best money-making option this week”
PTA China, down 27%. “Domestic prices were largely on a downtrend, attributed mainly by weaker downstream polyester conditions.”
HDPE US export, down 18%. “Domestic export prices remained stable during the week, though there were reports of increased trading”
¥:$, down 18%
S&P 500 stock market index, up 9%