Aging Nations Prefer Low Prices to High Income

Maybe the Boomers really are to blame.

For the tepid economic recovery, that is. Whichever demographic segment dominates sets the tone for policy. In the developed west, the aging population is clearly in control. And what they want is low inflation accompanied by a high return on their investments, to the extent they have any. The reason is that that makes their diminished earning power go further.

This, in case you hadn't noticed, is not good news for job creation, innovation and anything else that smacks of risk, uncertainty and the normal give-and-take usually essential to economic growth. Corporation leadership and elected governments can be as sclerotic as the shareholders and voters to whom they ostensibly report. Cutting R&D or stimulus programs or school services, anything that isnt 'essential' especially to those in power, is a response to that sort of demand. Even when such short-sightedness will make it much harder to generate profits and tax income a few years hence, the time when it will really be needed as the population becomes older, poorer and even less able to care for itself.

Historically the conflict between the two competing sets of needs was mediated by politicians and corporate executives who had the wherewithal to make some choices and attempted to give each group at least some of what they wanted. But years of budget cuts and the increasing ferocity of the fight over diminished resources has eliminated many of those options.

The Boomers can whine all they want about the younger generation moving back home - if they ever left - but as that old mantra from the Sixties had it, if you're not part of the solution, you're part of the problem. JL

Simon Kennedy and Shamin Adam report in Bloomberg:

Because the young initially don’t have many assets, wages are their main source of income. The young are therefore comfortable with relatively high wages and the resulting inflation.
By contrast, because older generations work less and prefer higher rates of returns on their savings, they are averse to inflation eating away at their assets.
The older a country’s population, the lower its inflation rate, posing a challenge for central banks in the world’s industrial nations, according to a UBS AG (UBSN) report.

Special Report: Seeking Gold in a Graying Population

Singapore-based economist Andrew Cates of the Swiss bank’s global macro team plotted average inflation levels over the last five years against changes in the dependency ratio, which compares the very old and very young to the working-age population.

The resulting chart showed nations that have aged in recent years typically faced very low inflation and, in the case of Japan, deflation. By contrast, those that have been getting younger, such as India, Turkey and Brazil, have relatively strong price pressures.
“Since aging demographics will now start to feature more prominently in the outlook for many major developed and developing countries this is clearly of some significance for how inflation might evolve,” said Cates in a May 30 report.
The finding clashes with the view of economics textbooks, according to Cates, which tend to say a slowdown in population growth should put upward pressure on wages -- and therefore inflation -- as labor supply shrinks. Still, this ignores how demographics influence demand for durable goods and property, Cates said.
“Whichever group predominates in any economy will therefore have more ability to control policy and more ability to control economic outcomes,” said Cates.