Perspectives on the global economic changes

Austin · Post by **Austin** » 16 Oct 2016 10:48

She said too many things there , Can we expect Negitive Interest Rates and Helicopter Money as US goes into recession.

High Pressure Economy is certainly a nice term

Austin · Post by **Austin** » 16 Oct 2016 10:49

Yellen has invented a new term now , High Pressure Economy

Is Yellen's Call for 'High Pressure Economy' an Endorsement of Negative Rates

In a speech, Fed Chair Janet Yellen inadvertently advocated a set of policies that imply lower interest rates and other accommodative measures, possibly hinting at negative rates looming as a recession-aversion strategy.

Kristian Rouz – Federal Reserve Chair Janet Yellen delivered a speech on Friday, having said that creating the policy conditions for a “high pressure economy” would be the only way to avoid a recession.

Certain market participants suggested that the regulator will abstain from a further tightening of monetary conditions. Specifically, JP Morgan said they are still expecting a December hike; the tone of their message seemed to imply that they were urging the Fed to move rates up.

Meanwhile, in her speech, Yellen said additional measures to stimulate the economy might be necessary, such as higher inflation targeting, having hinted at “helicopter money” as a possible solution as well. The Fed Chair’s message also fueled expectations of a possible negative interest rate policy (NIRP), which could be implemented as the economy keeps faltering just above zero growth. Although Yellen put forth very few straightforward suggestions for future policy during her speech, her overall message was very dovish. The Fed Chair repeatedly said that “all (Fed) meetings are live,” and said the word “recession” over 20 times. Market participants and observers, however, focused on her suggestion that “high pressure economy” conditions would be beneficial for growth – with the term itself referring to a greater amount of monetary easing, contradicting the Fed’s current set of policies.

“If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labor market,” Yellen said.

By saying “adverse supply-side effects”, the Fed Chair referred to the current decline in corporate earnings, lackluster levels of investment, a slump in business activity and overall private sector weakness.

Amid Recession Fears, Yellen Confirms Has 'Legal Basis' for Negative Rates “With … interest rates at or close to their effective lower bound in many countries … many central banks have sought additional ways to stimulate their economies, including adopting policies that are directly aimed at influencing expectations of future interest rates and inflation,” Yellen said, reiterating her earlier thoughts voiced during her Jackson Hole speech several weeks ago that first sparked concern that additional monetary policy tools, such as “helicopter money” or negative rates, might be implemented soon.

Addressing the concern of why the currently tight labor market conditions have failed to produce stronger inflation and economic growth sustainable enough to normalize monetary conditions, Yellen admitted that “the influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis.” “The underlying cause is unknown,” Yellen said.

The speech sent several disturbing signals to the market. First, the Fed does not have a clue of what is going on, let alone how to fix it. Second, central bank liquidity injections might be a possibility in the near future – again, but this time not in the form of “quantitative easing” in bond buyouts, but as “helicopter money”, or targeted inflows of Fed money into certain struggling sector of the economy. Third, the Fed can’t raise rates further, and might even roll them back to zero or below. The term “high-pressure economy” is explained in a 2015 paper by the Center on Budget and Policy Priorities as follows.

Damage to the US economy that, in the absence of strong monetary stimulus, is likely to persist indefinitely … can be reversed to a substantial degree by expansionary monetary policy. Expansionary policy can create … a “high-pressure economy,” one with stronger-than-average economic growth and low unemployment.

The Fed should do everything it can to promote a high-pressure economy, not increase interest rates and choke off growth as soon as inflation threatens to rise.”

Therefore, Yellen’s use of such terminology suggests she is willing to do “everything … to promote” inflation, and the only way to do it is relaxing monetary conditions within the current framework of broader economic policy. “Not increasing” rates and “choking off” growth, which is sluggish at around 1pc year-on-year, fall in line with this approach, implying a possible introduction of negative rates (NIRP).

Signs of anxiety in the US market were revealed very quickly after Yellen’s speech. Micheal Feroli, JP Morgan's chief US economist, said that “we continue to expect the next hike in December.”First, she (said) a 'high-pressure economy' could help the supply side, such as stimulating greater capex, R&D, and labor force participation. Second, she stressed the role of monetary policy in anchoring inflation expectations. Third, she stated that easy monetary policy in the US is beneficial to growth overseas, arguably a good thing,” Feroli explained, adding that “Some of these themes are contested. Most notably, the argument that monetary policy can foster supply side gains.”

The view reflects the market participants being fed up with the loose monetary conditions that have failed to produce any substantial growth in the current environment. A supply-side reform would require a lot more than tweaks in monetary policies that could only accompany a structural reform, likely going up, not down as hinted by Yellen. However, a cut in interest rates to below zero could win the establishment in Washington some more time before the current stalemate resolves in a new recession and economic crisis.

Austin · Post by **Austin** » 16 Oct 2016 11:17

From Reuters

Fed's Yellen says 'high-pressure' policy may be only way back from crisis

Gyan · Post by **Gyan** » 16 Oct 2016 14:35

I have been pointing out in this forum repeatedly that fiscal deficit is going to be raised. Rest is all fancy jargon. There will not be any collapse just loads of inflation. Crap bets of banks can only be protected by 10 years of low interest and high inflation, that will be coming soon.

Austin · Post by **Austin** » 16 Oct 2016 18:40

Gyan wrote:I have been pointing out in this forum repeatedly that fiscal deficit is going to be raised. Rest is all fancy jargon. There will not be any collapse just loads of inflation. Crap bets of banks can only be protected by 10 years of low interest and high inflation, that will be coming soon.

I think the issue is Fed no longer understand or controls how its policy will work , For eg QE is suppose to stimulate economy and consequently growth but what they got is sub par growth , high debt , bubbles in stock market and economy closing in recession.

Now they would like to try Negitive Interest rate policy and may be Helicopter money , hoping this would work , this was the same hope they started QE but in vain.

Yallen pretty much admits that she is clueless when she says

"Yellen admitted that “the influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis.” “The underlying cause is unknown,” Yellen said.

Austin · Post by **Austin** » 16 Oct 2016 18:42

Putin called the huge US national debt time bomb for the world economy
10.16.2016 15:49:01

Goa (India). 16 October. Interfax - A huge US national debt is a time bomb for the world financial system, said Russian President Vladimir Putin.

"The outstanding issues (the US - IF). For example a lot, a huge public debt It is a time bomb for the economy of the United States itself, and for the global financial system.", - He said at a press conference in Goa.

"No one knows what to do What to devalue in the future or that.?", - The president continued.

http://militarynews.ru/story.asp%3Frid% ... d%3D429482

panduranghari · Post by **panduranghari** » 18 Oct 2016 15:21

Buying equities is fiscal policy. How is that? It supports industry which should collapse based on the available metrics- CAPE, YoY sales, incremental dividend payout.

What are you harping on, gyan ji about fiscal deficit. ECB and BOJ- the 2 amongst the big 3 are already doing that.

panduranghari · Post by **panduranghari** » 18 Oct 2016 15:24

Austin wrote: I think the issue is Fed no longer understand or controls how its policy will work .

As per Simon Hunt - http://www.macrovoices.com/203-simon-hunt-china- The Fed policy is not controlled from Washington anymore but from Beijing. Listen to that interview. Its superb.

Gyan · Post by **Gyan** » 18 Oct 2016 16:09

FIscal deficit is done by Govt not Central Banks. Govt will ask Central Banks to print money and "distribute" it, hopefully to common people. QE can never raise inflation, QE is used to lend money to rich who then inflate asset value, but that drives down purchasing power of middle class, leading to lasting deflation. QE can only prevent panic induced market crash and cannot be primary driver of economic policy. My guess is that 50-75% of loans are non recoverable and it will take 20-30 years to wash Bank Balance Sheets.

panduranghari · Post by **panduranghari** » 18 Oct 2016 19:43

I like your confidence.

Austin · Post by **Austin** » 18 Oct 2016 20:36

Janet Yellen's "high-pressure economy" risky for asset markets: James Saft

http://economictimes.indiatimes.com/art ... aign=cppst

Neshant · Post by **Neshant** » 19 Oct 2016 10:14

Gyan wrote:Govt will ask Central Banks to print money and "distribute" it,

Other way around.

Private banks control govt.

How do you think they get govt to give them multi-trillion dollar bailouts and offload their losses onto the public.

Austin · Post by **Austin** » 19 Oct 2016 20:26

panduranghari wrote:
Austin wrote: I think the issue is Fed no longer understand or controls how its policy will work .
As per Simon Hunt - http://www.macrovoices.com/203-simon-hunt-china- The Fed policy is not controlled from Washington anymore but from Beijing. Listen to that interview. Its superb.

Thanks

Hmm , He seems to be very positive about China , He says if China wants it can pay off all its Debt and most of it is owned internally and the growth

He mentions China will still grow twice as fast any western country in the next 15 years so he is bullish about China.

BTW what is IMF/WB projection for China GDP growth for the next 15 years , Should that be average like 5 % over that time ?

US is already touching 1 + only and the average GDP growth during entire Obama tenure is around 1.55 % ! Hence Forth no matter who comes as POTUS , US wont be growing beyond 1 % . EU wont be doing any better , Most importantly their Debt has increased exponentially for these countries.

Gyan · Post by **Gyan** » 19 Oct 2016 20:45

When the growth rate is low, then whether there is any growth at all, is a matter of applying inflation adjustment very accurately. Let's say Nominal Growth is 2%, if inflation is calculated at 1% then there is positive GDP growth of 1% but if inflation is calculated at 3% there is recession due to -1% growth. Hence, GDP growth of western world is debatable as their inflation indexes are fixed.

Gyan · Post by **Gyan** » 19 Oct 2016 20:49

Let's say China has Steel producing capacity of 900 million tons per annum. 30% is excess. Rest of the world steel capacity is around 400 MT And demand is 300MT. What happens???

DavidD · Post by **DavidD** » 20 Oct 2016 05:58

Then a lot of steel mills will be sitting idle with a lot of wasted capacity world wide, which is pretty much what's happening right now.

Austin · Post by **Austin** » 20 Oct 2016 10:30

Gyan wrote:When the growth rate is low, then whether there is any growth at all, is a matter of applying inflation adjustment very accurately. Let's say Nominal Growth is 2%, if inflation is calculated at 1% then there is positive GDP growth of 1% but if inflation is calculated at 3% there is recession due to -1% growth. Hence, GDP growth of western world is debatable as their inflation indexes are fixed.

Western inflation is certainly higher then what they are officially quoting as many reports have indicated.

Also if there is a direct relation between GDP growth and inflation , then we would be growing at very similar rate or even having negitive growth

http://www.inflation.eu/inflation-rates ... india.aspx

panduranghari · Post by **panduranghari** » 20 Oct 2016 14:25

With 1.3 to 1.6 billion people, how can anyone not be bullish about China long term? The number of people buying goods online in China is more than the number of people buying goods in Europe and USA combined. Its staggering. They will hit their peak by 2030 when they start getting old. Morgan Creek Capital's Mark Yusko writes extensively about China and India. And he is bullish on both. More for India than China as we wont hit our demographic peak until 2075. While China will grow old before they become rich, India wont grow old before it turns rich. I think Raoul Pal of Real Vision TV also feels the same. These guys are good macro thinkers. Another one whom I respect a lot is Robert Kiyosaki and he too feels the same. He hates China because he was screwed by Commies. Very positive on India.

Austin · Post by **Austin** » 20 Oct 2016 18:39

panduranghari wrote:With 1.3 to 1.6 billion people, how can anyone not be bullish about China long term? The number of people buying goods online in China is more than the number of people buying goods in Europe and USA combined. Its staggering. They will hit their peak by 2030 when they start getting old. Morgan Creek Capital's Mark Yusko writes extensively about China and India. And he is bullish on both. More for India than China as we wont hit our demographic peak until 2075. While China will grow old before they become rich, India wont grow old before it turns rich. I think Raoul Pal of Real Vision TV also feels the same. These guys are good macro thinkers. Another one whom I respect a lot is Robert Kiyosaki and he too feels the same. He hates China because he was screwed by Commies. Very positive on India.

How does Western Country with already low population base for decades then survive and grow , I guess Automation has made the possible because that improves productivity of individual many fold.

All things being equal low population base means higher per capita income and consequently larger purchasing power capability for individuals

Austin · Post by **Austin** » 20 Oct 2016 19:46

2016 Economic Conference, Janet L Yellen – Keynote Address

Gyan · Post by **Gyan** » 20 Oct 2016 19:49

panduranghari wrote:With 1.3 to 1.6 billion people, how can anyone not be bullish about China long term? The number of people buying goods online in China is more than the number of people buying goods in Europe and USA combined. Its staggering. They will hit their peak by 2030 when they start getting old. Morgan Creek Capital's Mark Yusko writes extensively about China and India. And he is bullish on both. More for India than China as we wont hit our demographic peak until 2075. While China will grow old before they become rich, India wont grow old before it turns rich. I think Raoul Pal of Real Vision TV also feels the same. These guys are good macro thinkers. Another one whom I respect a lot is Robert Kiyosaki and he too feels the same. He hates China because he was screwed by Commies. Very positive on India.

I am reposting my above post, wherein I was trying to make a point that China has such a gigantic excess capacity that not only itself, it has pushed the whole world in recession.

Let's say China has Steel producing capacity of 900 million tons per annum. 30% is excess. Rest of the world steel capacity is around 400 MT And demand is 300MT. What happens???

panduranghari · Post by **panduranghari** » 20 Oct 2016 20:31

Austin wrote:
How does Western Country with already low population base for decades then survive and grow , I guess Automation has made the possible because that improves productivity of individual many fold.

All things being equal low population base means higher per capita income and consequently larger purchasing power capability for individuals

Automation could help. Productivity is not really an issue as even in this recession USA is more productive than China.

Low population does not make high per capita income. There are many jobs that need to be done. Someone has to be a doctor, nurse, teacher, sweeper, engineer, BUM, etc. Purchasing power in the west has bought them a higher standard of living. And what gives a currency its strength is its widespread use. Less people using a currency does not make it weaker but it certainly means there is not enough demand for that currency. It constrains the hands of the central bank to undertake easing which permits money to trickle (as per the Keynesians who does not care about supply side economics) down to the masses. Now that trickle down means certain section of population does not do much. There is a need which is covered by the immigration. The immigration happens due to the purchasing power of the currency. Will you move to Zimababwe/ Pakistan OR will you move to US/Europe - that was the choice for a 'third world' 'economic immigrant'.

When does this 'third world economic immigrant' become a 'rich expat'? ONLY When the third world country becomes economically self sufficient!

Is American economy today strong just because its currency is so strong?

panduranghari · Post by **panduranghari** » 20 Oct 2016 20:49

Gyan wrote: I am reposting my above post, wherein I was trying to make a point that China has such a gigantic excess capacity that not only itself, it has pushed the whole world in recession.

Let's say China has Steel producing capacity of 900 million tons per annum. 30% is excess. Rest of the world steel capacity is around 400 MT And demand is 300MT. What happens???

Gyan saar,
This is Keynesian thinking.

Supply-side economics is a macroeconomic theory that argues economic growth can be most effectively created by investing in capital and by lowering barriers on the production of goods and services. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices; furthermore, the investment and expansion of businesses will increase the demand for employees and therefore create jobs.

Muppalla · Post by **Muppalla** » 21 Oct 2016 17:37

Austin wrote:
Gyan wrote:When the growth rate is low, then whether there is any growth at all, is a matter of applying inflation adjustment very accurately. Let's say Nominal Growth is 2%, if inflation is calculated at 1% then there is positive GDP growth of 1% but if inflation is calculated at 3% there is recession due to -1% growth. Hence, GDP growth of western world is debatable as their inflation indexes are fixed.
Western inflation is certainly higher then what they are officially quoting as many reports have indicated.

Also if there is a direct relation between GDP growth and inflation , then we would be growing at very similar rate or even having negitive growth

http://www.inflation.eu/inflation-rates ... india.aspx

I don't know how US calculates its inflation. Food inflation is very high from a layman's perspective. I guess US does not use food in its calculation.

Prem · Post by **Prem** » 22 Oct 2016 01:55

Austin wrote:
panduranghari wrote:With 1.3 to 1.6 billion people, how can anyone not be bullish about China long term? The number of people buying goods online in China is more than the number of people buying goods in Europe and USA combined. Its staggering. They will hit their peak by 2030 when they start getting old. Morgan Creek Capital's Mark Yusko writes extensively about China and India. And he is bullish on both. More for India than China as we wont hit our demographic peak until 2075. While China will grow old before they become rich, India wont grow old before it turns rich. I t.
How does Western Country with already low population base for decades then survive and grow , I guess Automation has made the possible because that improves productivity of individual many fold.All things being equal low population base means higher per capita income and consequently larger purchasing power capability for individuals

Check the long report on China by AEI, It's in managing China' Threat Dhaga.

hanumadu · Post by **hanumadu** » 22 Oct 2016 02:09

Muppalla wrote:
Austin wrote:
Western inflation is certainly higher then what they are officially quoting as many reports have indicated.

Also if there is a direct relation between GDP growth and inflation , then we would be growing at very similar rate or even having negitive growth

http://www.inflation.eu/inflation-rates ... india.aspx
I don't know how US calculates its inflation. Food inflation is very high from a layman's perspective. I guess US does not use food in its calculation.

The official inflation numbers have to be low to continue the zero interest rate and QE.

panduranghari · Post by **panduranghari** » 22 Oct 2016 13:57

Satya wrote:So even ECB is not sure of Clinton Win nothing else explain their wait till december presser .

From understanding USA III thread.

Draghi said for the EU, the persistent trade surplus is not acceptable. So what should ECB do when the trade surplus is high? The expectation is for the currency to appreciate. And Draghi repeatedly talked down Euro. He knows if he permits it, the Euro has to automatically appreciate. He has already said by MArch 2017 the QE will have stopped.

If Euro rises, many things change. Biggest affected nation states will be China and USA. The biggest winner will be Gold. In a way, Draghi has warned us all. At the turn of the year, something major is coming.

Gyan · Post by **Gyan** » 22 Oct 2016 19:55

http://www.businessinsider.com/china-co ... 16-10?IR=T

China yet again produced more crude steel than the rest of the world (ROW) combined in September, according to new data from the World Steel Association released on Thursday.

Chinese output has now outpaced that in all other nations in six of the past seven months.

Approximately 132.9 million tonnes of crude steel was produced during the month, with China accounting for 68.2 million tonnes of that total.

World Steel reports that Chinese output was up 3.9% on the levels of a year earlier, helping to offset declines in other nations.

In the first nine months of the year, a total of 1.197 billion tonnes of crude steel has been produced worldwide, down 0.5% on the same period in 2015.

Over the same period, Chinese output stood at 603.8 million tonnes, an increase of 0.4%.

GShankar · Post by **GShankar** » 23 Oct 2016 21:46

Question to gurus - when you see consolidation in any industry, does that mean the market is not growing (or rather shrinking)? - getting more expensive for smaller players and bigger players need to buy out others to get economies of scale, etc.?

Neshant · Post by **Neshant** » 24 Oct 2016 11:07

This is surely a hare brained scheme coming from idiot bankers looking to rip people off by inflating away the value of the money.
They can only do this with ease under a digital currency system - which bankers hope to control.

The scam of inflating needs to end.

People who have rightfully earned their money have a right to keep what they have without fancy terminology and schemes designed to separate them from their wealth and enrich banking goons.

In the west, The Federal Reserve, Goldman Sachs and the rest of the 40 thieves are also trying to push digital currencies so they can best rip off the people and their savings. It also makes their bad bets in the stock market whole by destroying the value of cash and inflating stock prices. In short, they profit at the expense of savers, wage earners, pensioners and taxpayers with digital currency manipulation which they control.

More reason to own gold and crypto-currencies.

----

Narendra Modi calls for making India a cashless society in 'Mann Ki Baat'

http://economictimes.indiatimes.com/new ... 386384.cms

NEW DELHI: Prime Minister Narendra Modi in his 'Mann Ki Baat' address on Sunday said India should move towards becoming a 'cashless society' using the JAM mechanism and electronic payments as this was crucial to curb black money in the country. "I urge my fellow citizens to begin using the electronic modes of cashless transaction and illegal businesses will close down...transparency will come and black money will disappear.

Austin · Post by **Austin** » 24 Oct 2016 11:23

Neshant wrote:Narendra Modi calls for making India a cashless society in 'Mann Ki Baat'

http://economictimes.indiatimes.com/new ... 386384.cms

NEW DELHI: Prime Minister Narendra Modi in his 'Mann Ki Baat' address on Sunday said India should move towards becoming a 'cashless society' using the JAM mechanism and electronic payments as this was crucial to curb black money in the country. "I urge my fellow citizens to begin using the electronic modes of cashless transaction and illegal businesses will close down...transparency will come and black money will disappear.

Looks like NaMO is stating Bankers Ki Mann Ki Baat

Lilo · Post by **Lilo** » 24 Oct 2016 12:30

^
How so?
He is targeting the blackmoney/hawala based monetary system - dominated by agents with transnational loyalities.
Atleast the Indian state has only ceded a minor stake to the transnational banking system - and that compact has remained in place more or less for the past 25 years.

Reaquiring the control over blackmoney(black or white - money is money) from the dalals in the blackmoney markets will only strengthen the overall economic soverignity of India - vis-a-vis the transnational interests.

Austin · Post by **Austin** » 24 Oct 2016 13:38

The dallals will find out some way to continue their black money after all they would just work in co-ordination with banking system to do their black work , These are not small time thugs but well connected people.

The common man will be more impacted by this and eventually the bank in co-ordination with GOI will run their diktat which will impact the tax payer more than blackmoney/hawala types.

I agree we Indian need to invest in physical gold to hedge against banking scam

panduranghari · Post by **panduranghari** » 24 Oct 2016 15:06

Grant Williams interviewing Kyle Bass

Listen to this podcast before its pulled off air. Its really good. Bass talks a lot about problems with and in China.

panduranghari · Post by **panduranghari** » 24 Oct 2016 15:24

GShankar wrote:Question to gurus - when you see consolidation in any industry, does that mean the market is not growing (or rather shrinking)? - getting more expensive for smaller players and bigger players need to buy out others to get economies of scale, etc.?

Looking at one easy example - oil.

The large high EROI fields have already been found. All big companies like Shell, BP etc. are unable to increase their balance sheets and thus their dividends without new discoveries. Ergo they buy small producers. (Similar trend in the gold market - look at GDX and GDXJ. GDX are the big miners. GDXJ are the junior miners hence they do not have a lot of capital which many projects need). Market for oil is forever growing until we find a cheap enough alternative. Solar is a real deal. At the moment, if the solar technology improves 6 fold, it will make oil market vestigeal.

Read or listen to what Art Berman says. He is very knowledgeable about this field. http://www.artberman.com/

“Shale is not a revolution–it’s a retirement party. Shale plays were not some great new idea. They became important only as more attractive plays were exhausted.”

panduranghari · Post by **panduranghari** » 24 Oct 2016 18:01

Its the demography, stupid

Central bankers, like investors, have usually tended to ignore or underplay the influence of demographic factors over the short and medium term. The size and age distribution of the population changes very gradually, and in a fairly predictable manner, so sizable shocks to asset prices from demographic changes do not happen very often.

That does not mean that demography is unimportant. The cumulative effects can be very large over long periods of time. Apart from technology, there is a case for arguing that demography is the only thing that matters in the very long run. But demographic changes usually emerge very slowly, so they do not trigger sudden fluctuations in the determinants of asset prices, notably the economic cycle and monetary policy.

However, there are exceptions to this rule, and we may be living through an important exception at the present time. It seems that the Federal Reserve is starting to recognise that the decline in the equilibrium interest rate in the US (r*) has been driven not by temporary economic “headwinds” that will reverse quickly over the next few years, but instead has been caused by longer term factors, including demographic change.

Because these demographic forces are unlikely to reverse direction very rapidly, the conclusion is that equilibrium and actual interest rates will stay lower for longer than the Fed has previously recognised. Of course, the market has already reached this conclusion, but it is important that the Fed is no longer fighting the market to anything like the same extent as it did in 2014-15. This considerably reduces the risk of a sudden hawkish shift in Fed policy settings in coming years.

Furthermore, greater recognition of the permanent effects of demography on the equilibrium real interest rate has important implications for inflation targets, the fiscal stance and supply side economic policy. These considerations are now entering the centre of the debate about macro-economic policy.

The relationship between demography, growth and interest rates has been studied by economists ever since the days of Malthus, but it has played relatively little role in mainstream macro-economic discussion in the last few decades. Recently, however, several important studies (summarised below) have emerged from central bank economists, emphasising the link between demography, GDP growth and r*.

These links are obviously related to the work of Lawrence Summers on “secular stagnation”, and more particularly to the work of Alvin Hansen on population growth in the 1930s. The different forms of secular stagnation have become increasingly influential among policy makers. Last week, Fed Vice Chairman Stanley Fischer accorded an important role to demography in an important speech on the causes of the decline in r*. Since Fischer was among the most hawkish members of the Fed’s Board when he wanted to “normalise” interest rates last year, this could mark a significant change in the thinking of the FOMC.

Why is there a link between r* and demography? Remember that the equilibrium real rate of interest is that which ensures that savings and investment in the economy are equal in the long run. If ex ante savings exceed investment, r* declines, and vice versa. Since the savings behaviour of households is clearly affected by the age distribution of the population, and the investment behaviour of the corporate sector is affected by the labour supply, it is obvious that demography matters a lot for the determination of r*.

In recent work, three aspects of the population statistics have emerged as important in explaining the decline in r* in the developed economies. These are:

The growth rate in the labour supply. Most models (though not all) produce a relationship between real GDP growth and r*, and also allow GDP growth to be impacted by a change in the supply of labour. The labour force is now slowing down rapidly in most advanced economies. Since the capital stock is fairly fixed for lengthy periods, this will increase the capital/labour ratio in the economy, and the “abundance” of capital will both reduce the rate of return on capital, and the attractiveness of new investment projects. This reduces real interest rates.
The dependency ratio within the population. When the number of dependents (young and old people) relative to those of working age is low, the savings rate in the economy tends to rise, because workers save more than retirees. When the bulk of the baby boomers were in the labour force before 2000, this caused a large rise in savings in the advanced economies, which triggered a drop in r*. This will shortly start to reverse as the baby boomers retire.
The life expectancy of the population. If lifespans are expected to lengthen, while the retirement age remains unchanged, then people will choose to save more while they are in employment (or delay expenditure when retired, which is more difficult) in order to remain comfortably off until they die. This increases the savings ratio and reduces r*.

Although recent economic studies do not completely agree about the relative importance of these three factors [1], there is a consensus that, together, they have accounted for a significant part of the decline in r* since 1980. For the world as a whole (including emerging markets), Bank of England authors calculate that demographic composition and labour supply growth has reduced r* by about 1 per cent in the past 30 years. Carvalho, Ferrero and Nechio estimate that the demographic transition has reduced r* by 1.5 percentage points in developed economies since 1990. And Federal Reserve authors, in a significant recent paper, conclude that their demographic model accounts for 1.25 percentage points decline in r* and trend GDP growth since 1980. They say this is “essentially all” of the decline in these variable in the US over this period. Stanley Fischer quoted this estimate with approval in his speech last week. Although the retirement of the baby boomers may soon start to cause a drop in the US savings ratio, other demographic factors are expected to keep r* abnormally low for a long time to come. The Federal Reserve authors calculate that the current level of the underlying equilibrium real interest rate, based on the state of demography alone, is only 0.5 per cent. This compares with the latest FOMC estimate of 0.9 per cent for r*. That official estimate includes several economic forces other than demography that are also keeping interest rates down, so r* may well be reduced further in coming FOMC meetings. In any event, as investors and policy makers absorb the latest macro-economic research, demography may assume an increasingly important role in their thinking about fiscal and monetary policy.

panduranghari · Post by **panduranghari** » 24 Oct 2016 18:02

Austin,
You asked earlier about automation. I think this essay will help you understand the issue in more detail. Automation cannot solve the problem of demographic cliff.

GShankar · Post by **GShankar** » 24 Oct 2016 20:50

panduranghari wrote:
GShankar wrote:Question to gurus - when you see consolidation in any industry, does that mean the market is not growing (or rather shrinking)? - getting more expensive for smaller players and bigger players need to buy out others to get economies of scale, etc.?
Looking at one easy example - oil.

The large high EROI fields have already been found. All big companies like Shell, BP etc. are unable to increase their balance sheets and thus their dividends without new discoveries. Ergo they buy small producers. (Similar trend in the gold market - look at GDX and GDXJ. GDX are the big miners. GDXJ are the junior miners hence they do not have a lot of capital which many projects need). Market for oil is forever growing until we find a cheap enough alternative. Solar is a real deal. At the moment, if the solar technology improves 6 fold, it will make oil market vestigeal.

Read or listen to what Art Berman says. He is very knowledgeable about this field. http://www.artberman.com/
“Shale is not a revolution–it’s a retirement party. Shale plays were not some great new idea. They became important only as more attractive plays were exhausted.”

You did not exactly answer in so many (or few) words but seems like your example agrees with my interpretation. That consolidation is necessary when a big company does not want to organically grow (meaning too expensive/time consuming to do that) compared to an acquisition. And this means the market is either already saturated or very close to it.

Please correct me if I am wrong.

Neshant · Post by **Neshant** » 25 Oct 2016 08:11

Austin wrote:The dallals will find out some way to continue their black money after all they would just work in co-ordination with banking system to do their black work , These are not small time thugs but well connected people.

The common man will be more impacted by this and eventually the bank in co-ordination with GOI will run their diktat which will impact the tax payer more than blackmoney/hawala types.

I agree we Indian need to invest in physical gold to hedge against banking scam

Right on.

Digital currencies per say are not bad - assuming it is private digital currencies (e.g. bitcoin) we are talking about that is adopted voluntarily by society.

The key words being private & voluntary.

Anything that is forced upon the people by making transactions, settlements of debts or taxes payable only in a currency that private banks create & own is a prelude to a robbery.

Digital currencies under the monopoly of central bankers (i.e. private banks) are a means of stealing from people. The people are forced to hold the said digital currency by making taxes payable only in that said currency under penalty of imprisonment. Meanwhile bankers devalue (i.e. steal) that digital currency all the way through to profit their trades. Its no co-incidence that the Income Tax dept came into existence at the same time as the Federal Reserve.

The victims of this scheme are those who have done honest work to earn the wealth. The benefactors of this scheme are those with the ill-begotten monopolistic power to steal that wealth through inflation/devaluation.

The hare brained idiots recommending this to the Prime Minister should be shot - more so for being clueless and repeating the same nonsense they hear from thieving western bankers dreaming up new diabolical schemes to defraud the productive people of their nations.

Neshant · Post by **Neshant** » 25 Oct 2016 11:07

This guy knows what he's talking about.