Demography and Investment in rich countries like Japan

Interesting post here in FTAlphaville by Matthew C Kein. I would dispute the point about openness or closedness of rich Countries’ economies, which isn’t really a true issue. But I’d agree that future economic growth policies will run into trouble if they address only demographic issues. What is stricking and important is the question of the ratio of Business saving rates vs Household saving rates: this seems clear explanation for the paltry and inadequate Investment levels in high-income rich countries for the past 20-30 years. There can no be further doubt the growth must come with a change in the investment outlook for all these countries; there must be some kind of trigger for this to happen, but I’m without a clue about where this should come from, and when we look back in History we don’t want that to be in the form of wider conflict on a World scale…

Japan-savings-rate

Here some nice excerpts from the posts:

Like Japan, we too had a big financial crisis caused by excessive private borrowing and bad investment decisions. Like Japan, our non-financial corporate sectors have sharply raised their net savings rates, assuming they hadn’t already done so after the excesses of the late 1990s. And finally, like Japan, the rich world as a whole is a relatively closed economy, which means domestic factors should matter a lot more than international ones when it comes to explaining underlying inflation and wage trends.

Japan-ca-balance1

(…)

By contrast, the share of Americans in work, across all age cohorts except the elderly, remains significantly below the pre-crisis level, much less the heyday of the late 1990s. As Martin Wolf noted recently, America has the dubious distinction of being the only big rich country to experience falling labour participation rates for women in their prime working years.

The expected changes in the rich world’s population structure will clearly have big effects on society, politics, and the distribution of resources from young to old. It’s possible these changes could lead to big upward shifts in discount rates and workers’ share of output, although Japan’s experience suggests the opposite could be even more likely. Either way, any long-term prediction based solely on demographics is likely to run into trouble.

http://ftalphaville.ft.com/2015/12/08/2147125/aging-real-rates-and-labour-bargaining-power-the-case-of-japan/

The brave new World of Money Creation (II)

The following is a recent addition to Izabella Kaminska in her FT’s Alphaville series: Free Money! Series. More interesting bits again and another vindication of Private Money creation in a World of monopoly control of the money supply. Specially:

”A more prudent path might just be encouraging both the central bank and the market to get better at identifying over or under issuance where and when it happens, something which could be made easier if private money’s price signal was detached from the state peg.

We generally lean to the view that in the long term it probably doesn’t matter what you do. If one form of money is repressed, it’s more than likely another form will spring up in its place. If one form is over-issued, meanwhile, more than likely a superior form will enter the market to take its place.

Unfortunately, in our current framework, that counterbalancing effect has been broken. So, unless we get extremely radical private issuance outside of the banking system as it stands (which the altcoin movement might be signalling), chances are QE in its current asset-swapping form — as opposed to actual expansionary helicopter drops — is more than useless. ”

Izabella also adds the entry of Noah Smith at Noahpinion about the significance of interest rates (nominal and real) to this story:

” What I call the “Neo-Fisherite” assumption is that in the long term, r (the real interest rate) goes back to some equilibrium value, regardless of what the Fed does. So if the Fed holds R (the nominal interest rate) low for long enough, eventually inflation has to fall. This is exactly the opposite of the “monetarist” conclusion that if the Fed holds R very low for long enough, inflation will trend upward. ”

Which means, as Izabella notes that the current private issuance of state peg money (in the current economic situation and further compounded by Quantitative Easing) doesn’t amount to any real effect on economic activity. It just is too late, too few (I had earlier suspicions of QE being money thrown down the drain….). Or with further Noah Smith help:

” The thought experiment is this: Suppose there was no government debt, and the Fed raised nominal interest rates to 20% and held them there forever. What would happen to real rates? Well, they wouldn’t rise to 20% forever, because there’s just no way that our society can physically, technologically deliver a 20% riskless rate of return to bondholders. Eventually, one of two things would have to happen: either 1) the Fed’s control over the nominal interest rate would break down, or 2) inflation would rise (the Neo-Fisherite result). If the Fed can’t control the nominal interest rate, then our standard models of monetary policy all break down, and we have to think about the microeconomics of money demand, which is hard to do. But the only alternative would be the Neo-Fisherite result. ”

I would like end this post with a statement. I am completely neutral in this discussion. There isn’t for me any conflict of interests and these posts merely reflect my interest in this discussion and to further enhance views and promote debate.