To me it seems increasingly likely that we will have a short to medium length period of inflation –– possibly very high or even hyper (most likely shorter duration the higher it is) –– followed by a long, very long period of deflation.
The historically unprecedented period of sustained high inflation during 70's was the rates' equivalent to a bubble –– the historically unprecedented downturn in them we've seen since is the bear market that follows. (And like after any major bubble, the "price" of bubble "assets" (rates, in this case) falls to a level so low that it seems like a bargain.)
I think them unlikely to repeat –– they were a consequence of the demographic transition that, by mathematical necessity, must be historically singular (as long as we don't colonize space and thus expand our habitat).
Two things are possible "catalysts" that come to mind for inflation:
1) The generation that is presently slowly joining the work force –– my generation –– is large. Once it is fully incorporated into the work force (if it ever will be), it will supply an inflationary pressure.
2) Large parts of world still haven't completed dem. transition and are still growing rapidly. Most notably, Africa (~2.5% 2020); parts of Asia, Oceania and the Americas too (around or slightly above 1 %).
(Europe's almost non-existent growth, on a continental scale, should explain much of it's lagging GDP's and stock markets. Those countries currently struggling with immigration and integration, may see their struggles rewarded in the long run, in a similar way as the US did after the initial impact of the great immigration waves during 19th century (and maybe will again, in the 21st?))
I think population (pyramids) and demographic growth (or lack thereof) are such crucial parts of the explanations of why economies (and stock markets, bond markets, currencies, etc. etc.) behave the way they do. Still economists pay little attention to it, and if they do, frequently misunderstand it or draw incorrect conclusions (e.g. the 'strong demographics' were supposed to justify perpetually rising house prices during subprime bubble).
I will dedicate more time to the study of demographics going forward as I believe it crucial to understanding the future, especially since understanding the future has never seemed more important than now. (Probably always seems that way though...)
One thing appears strikingly clear –– returns must go down, in the long term. The growth rates we saw last century, is impossible to sustain over time. Basic arithmetic doesn't allow it. It was a natural consequence of a unique, massive historical event, which cannot possibly repeat itself. A reversion back to pre-WWI days, where heritage once again rules the world, and elusive, shrinking returns on capital become everything, seem unavoidable.
Question is, how long will it take? Seems world population will keep growing for a while longer, and even after pop. growth has stopped, equities should continue to provide worthwhile returns. But deflation should by all logic occur in much of Europe –– indeed, already would've, if not for ECB etc. I wonder, will sustained negative rates become a reality? Can't see the logical reasons as to why not. I mean, I see the absurdity of it, but compared to QE, it may actually be more commonsensical IMO. CB's could well try it.
When it comes to deflation, CB's are just ephemeral human institutions. In the very long run, they have absolutely nothing to put up against the unrelenting forces of demographics. Deflation will come, and rates will be near 0 or possibly substantially below in 20-50 years. I can see no other way. I remember being wrong about stuff in the past though so I guess it's possible...
(Well, one objection, and an important one at that, is that graph of interest rates since 1300, which I assume almost everyone has seen by now: visualcapitalist.com (basically only goes down). Sure, if you extrapolate that, it goes < 0, but what says that in a 0-growth world we shouldn't instead go back to the historical rates of pre-growth from a hundred years back? Something unpredictable may well happen (which seems to be about the only thing that we can predict with high certainty: it will happen) like we start to wage war on each other again (WWIII, cold war II, etc.) or something else that fundamentally disturbs the image of a highly peaceful and seemingly "safe" world that most of us have today, and tend to project into the future.
Granted, the longer into the future you venture, after a certain point, the more difficult predictions become.) |
