Is ageing demographic trend inflationary?
Mainstream economists have accepted the fact that we are going towards a deflationary future in the long term based on demographic trends. What if its just not true. Ageing demographics maybe argued to be inflationary.
we saw mainly three trends which notably proved to be highly deflationary since last few decades.
1 Integration of China into the global economy caused increased in labour pool by up to twice. This obviously led to decrease in average global worker's wages. Wages in developed world fell and Chinese wages rose to meet into an equilibrium in the between.
2 Developed world was still in this sweet spot of demographics where working population exceeded the population dependent on them. It simply means output surplus which is again deflationary.
3 Women participation in labour force increased again causing downward pressure on wages.
All the factors are now behind us, and are reversing. Chinese population is ageing as well, developed economies already have a shrinking workforce and women participation as no room left to expand.
Why ageing demographics may be may be inflationary?
Labours are deflationary as its certainty that total wages will always be less than total output. This is the only way private sector can remain profitable and solvent. Until now we had more working population than dependent population. Also this time dependent population will be altogether different cohort that is older age groups. While we may consider education of a teenage or college degree as an investment, by no means we can say this for healthcare or leisure spending of and elder person. It will be purely inflationary.
Here's the thing, we have two kinds of dependents and broadly two kinds of spending. In earlier decades we had huge young population which needs to be educated and its single most biggest expenditure. Taking out credit for education (student loans) is inherently an investment dynamics. You get the loan, study, gets a job and pay it off. But, lets take example for an elder person who requires healthcare services. Either its private debt or public debt in form of fiscal support, it can't be argued that its an investment. It will purely be a consumptive loan. And studies are clear, that credit for consumption boosts inflationary pressure.
First trend toward ageing can be argued inflationary. Second is fiscal policy.
If you are not living under a rock, then its pretty clear that developed world is marching towards more socialistic policies with wide social security net, loan cancellations and universal basic income. If this huge government deficit will not get sterilized by equal private sector surplus than its inflationary. And this year, same has happened, private sector didn't offset the government deficit. This essentially means extra financing came from foreign creditors and the fed.
Going forward, there is seemingly trend towards lower asset prices, as retired cohort starts to redeem their assets for consumption. This means savings will go down, and although investments in certain sectors will obviously shrink but due to this new demand according to the needs of elders, investment will rise in certain other areas. But, overall investment may also drop. Low investment and higher demand, coupled with lower overall output than consumption, will further increase national deficit and indebtedness which may cause drag on economy and deflationary pressure which partially quill some inflation. All in all, we may see inflation in future.
Keep in mind we have yet not discussed ESG, rising commodity extraction costs and effect of climate change on agriculture resources will pull inflation further more. On other side we have research & innovation, artificial intelligence & robotics and technology which is highly deflationary.
Its out of my reach to determine so much dynamic topic and come to conclusion whether future hold inflation or deflation for us. Sure, I think, its more feasible to analyze sector-wise where we can have better forecast about inflation/deflation but as a whole its difficult.
CIO, Garg Capital
akhilgargdps@gmail.com
Twitter- gargcapital
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