The last two decades have cast doubt on Milton Friedman’s famous statement that «inflation is always and everywhere a monetary phenomenon». The case is building that not so much monetary policy as demographic developments determine the level of inflation and outcomes in financial markets as Thomas Signer writes in an essay for finews.first.
This article is published on finews.first, a forum for authors specializing in economic and financial topics.
Clearly, an individual’s age is valuable information. When we first meet a child, one of our initial questions is ‹how old are you?› No other piece of information gives us as many clues to the child’s likely desires, interests, knowledge, and activities. For similar reasons, we are equally keen to learn an adult’s age. Usually, we act more subtly in obtaining it.
Age not only reveals a lot about a person’s consumption but also their savings habits. Intuitively, the aggregate development of consumption and savings trends should impact the price level in a FIAT monetary system, i.e. determining whether inflationary or deflationary forces have the upper hand. After all, the price level is the result of demand meeting supply. Babies and youngsters only consume, as do most folks in their retirement ages. And this latter cohort is experiencing turbo-charged growth.
«China will see its median age go from 20.3 years in 1975 to over 50 by 2050»
The ongoing aging of societies is unprecedented in human history. It is primarily the result of two developments, falling birth rates and increasing longevity. While the latter has suffered a setback due to Covid, few see the trend towards higher longevity broken for good. This combination has led to steady increases in median ages throughout most of the world, most spectacularly in China.
China will see its median age go from 20.3 years in 1975 to over 50 by 2050. This will match the median age in Europe and a number of other Asian countries. Median ages in North and South America and Russia will only be a few years lower by 2050.
«Japan may give the best clues»
So will the world’s population eventually just fade? A recent study published in the Lancet forecasted the peak of the world’s population at 9.73 billion in 2064, lower and earlier than other studies. China, as per the forecast in the Lancet, would likely see its population shrink from around 1.4 billion currently to around half that by 2100. However, worries about an «Empty Planet» are misplaced. Sub-Saharan Africa alone sees to that. Its population is forecasted to increase from around 1 billion now to 3 billion by 2100.
What does this all mean for future asset prices? Japan may give the best clues. The study of Japan provides the strongest argument for a demographically driven view of financial markets. Since humans are not «economic utility-maximizing agents» but rather «bias driven animals» – a view now broadly undisputed - theorizing about human behavior yields little insight. Observing behavior, however, does. So, to study the impact of aging in an empirical fashion is best done by looking at Japan.
«Now, Japan finds itself at a crossroads»
The Japanese form the ideal «control group» for developed countries. The island nation has autonomously undergone distinct boom and bust cycles, preceding other developed countries not only in their economic and financial but also demographic cycles. The baby bust hit Japan in the early 1950s vs the US and Europe in the 1960s. Japan experienced disinflation a decade earlier. It also witnessed a giant equity and real estate bubble in the 1980s vs the US and Europe in the 1990s.
Since the bust of the bubbles in both stocks and real estate in the early 1990s, Japan has experienced increasingly strong deflationary pressures. The Japanese central bank (BOJ) fought with ever more extreme monetary policies, particularly with the arrival of Governor Haruhiko Kuroda in 2012.
Now, Japan finds itself at a crossroads. Its budget deficit remains deeply in the red, leading Japan to accumulate a public debt of roughly 2.5 times GDP. Also worrisome, its current account has shrunk further due to skyrocketing prices of energy imports. Will the BOJ be able to keep interest rates low, and so allow easy funding of the country’s giant public debt?
«Its implosive demographics alone signal trouble ahead»
Is it all the while preventing further depreciation of the Yen? Or is the country headed for the toxic combination of high inflation and currency collapse? Even if Japan succeeds in avoiding the moment of reckoning for now, it unlikely can forever. Its implosive demographics alone signal trouble ahead. The country recorded only 843 thousand births in 2021 for a population of 126 million. Japan’s path may foreshadow the trajectory of other developed countries. It deserves the utmost attention!
One conclusion is clear: demography must be a key parameter in forecasting financial market outcomes. A leading Swiss Think Tank is taking up this challenge. Besides focusing on the demographic hotspots «longevity» and «Africa», the World Demographic and Ageing Forum in St. Gallen, Switzerland, has now started a «Financial Demography» track, bringing together thought leaders in the field. The Forum is keen to engage with the community of financial practitioners.
Thomas Signer teaches finance subjects to the Next Gen and lectures in the MBA program of SBS Swiss Business School in Zurich-Kloten.
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