The Great Demographic Reversal by Charles Goodhart and Manoj Pradhan

Goodhart and Pradhan believe that the post-war demographic tailwinds will turn enough to force a Minsky Moment for economies heavily financed by debt. The basic problem is that our public finances are geared towards a population profile that is disappearing, and we are not ready to handle much higher numbers of senescence and dementia.

We do not, indeed we could not, try to encompass all the other myriad issues that will affect our longer-term economic future, such as climate change and technological developments, largely because many others, much more expert than ourselves, have taken up such subjects. And there are the ‘unknown unknowns’, which will probably become the dominant influence on all our future lives.

Obstfeld (2019) displays a diagram similar to our Diagram 1.3 in his ‘Global Dimensions of US Monetary Policy’

There was no political backlash before the GFC in 2008 because rising inequality within countries was offset by the general economic well-being of these years, often described as the ‘Great Moderation’. Indeed, in many ways, these were the best 15(plus) years for general economic success in the history of the world. Growth was steady, unemployment was low, inflation was stable and more people taken out of poverty than in any prior equivalent period. As Mervyn King stated (2003), these were the NICE years (Non-Inflationary with Continuous Expansion).

For a discussion of the participation of seniors in the US workforce, see Button (2019).

Finally, the mainstream view sees debt and demography singing from the same hymn sheet in driving growth, inflation and interest rates lower for the foreseeable future. We see the two in conflict, with debt a gigantic block that the irresistible forces of demography will eventually move out of its way. In turn, that will put monetary and fiscal policymakers in conflict with each other.

relative consumption should be declining, slowly, as age increases. This does not happen in advanced economies; instead consumption tends to rise in the final decade of life. This is primarily because of medical expenses which are concentrated at the end of life. Such medical, and caring, expenses are going to become much more of a burden, absent a medical miracle, not yet on any horizon, since dependency, especially dementia, is an exponentially rising function of age, and care for dementia is currently scandalously underfunded. We not only take this into account, but also the steady upwards rise in the age of having a first child (we know of no other paper that discusses the economic effects of this latter).

Moreover, the ageing of our societies implies simultaneously that calls on public expenditures will be rising fast, at a time when the growth of real incomes to provide taxable capacity to meet it is falling. All this has been largely obscured in recent decades by an offsetting decline in nominal interest rates, leaving debt service ratios constant.

As demography starts to pressure inflation and interest rates higher, economies and/or sectors with unsustainable debt will one by one be bullied into submission. The shock to debt will undoubtedly create periods of weaker growth and even recessions or crises—the experience of Turkey and Argentina in 2018 shows as much. These periods will also generate lower inflation and interest rates cyclically.