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The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival
This original and panoramic book proposes that the underlying forces of demography and globalisation will shortly reverse three multi-decade global trends – it will raise inflation and interest rates, but lead to a pullback in inequality. “Whatever the future holds”, the authors argue, “it will be nothing like the past”. Deflationary headwinds over the last three decades have been primarily due to an enormous surge in the world’s available labour supply, owing to very favourable demographic trends and the entry of China and Eastern Europe into the world’s trading system. This book demonstrates how these demographic trends are on the point of reversing sharply, coinciding with a retreat from globalisation. The result? Ageing can be expected to raise inflation and interest rates, bringing a slew of problems for an over-indebted world economy, but is also anticipated to increase the share of labour, so that inequality falls. Covering many social and political factors, as well as those that are more purely macroeconomic, the authors address topics including ageing, dementia, inequality, populism, retirement and debt finance, among others. This book will be of interest and understandable to anyone with an interest on where the world’s economy may be going.
280 pages, Hardcover
First published January 1, 2020
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Displaying 1 - 30 of 68 reviews
October 3, 2020
Perhaps, maybe.......
An original way of looking at the questions for sure.
The message?
As I explained to the barista at the coffee shoppe where I read the book:
A latte will cost more in the future because (longer living) retired people who stop by to have a late breakfast on their way home from the clinic using their public pension money you and your colleagues have contributed are driving up prices.
A bemused reaction followed.
The book is more technical and well structured than my small talk to the young man serving me another latte would indicate. However, the main points are there: demographic change leading to a lower rate of expansion in the labor force at a time of longer life expectancies will drive demand side imbalances in the face of declining aggregate supply through multiple channels leading to inflationary pressures.
Like I said, old people like me buying lattes.
I rented the book on Kindle for $6....
An original way of looking at the questions for sure.
The message?
As I explained to the barista at the coffee shoppe where I read the book:
A latte will cost more in the future because (longer living) retired people who stop by to have a late breakfast on their way home from the clinic using their public pension money you and your colleagues have contributed are driving up prices.
A bemused reaction followed.
The book is more technical and well structured than my small talk to the young man serving me another latte would indicate. However, the main points are there: demographic change leading to a lower rate of expansion in the labor force at a time of longer life expectancies will drive demand side imbalances in the face of declining aggregate supply through multiple channels leading to inflationary pressures.
Like I said, old people like me buying lattes.
I rented the book on Kindle for $6....
February 2, 2023
It's pretty amazing to see that so many of the outcomes that Goodhart and Pradham predicted, based on current trends in demographics have already started to take place.
A few of the chapters were rough to get through (like an entire chapter on "solutions" that was just several different tax systems.)
They're no Austrian economists, but it was still good stuff.
A few of the chapters were rough to get through (like an entire chapter on "solutions" that was just several different tax systems.)
They're no Austrian economists, but it was still good stuff.
October 22, 2020
Excellent and thought-provoking
An excellent, well researched and thought-provoking book about one of the key challenges facing the world over the coming decades - changing demographics. More importantly, the authors go beyond the usual consequences to draw important social conclusions as well as the economic ones. A must-read.
An excellent, well researched and thought-provoking book about one of the key challenges facing the world over the coming decades - changing demographics. More importantly, the authors go beyond the usual consequences to draw important social conclusions as well as the economic ones. A must-read.
Read
February 28, 2021I know reading this is soooo Financial Times of me, but I do think it's worth thinking in these terms, even if it means rejecting the thesis of this book.
Have truly no way of critiquing this (going to have to wait for a husband to explain it to me), but useful as an exercise. We really do take so many constants for granted, and I suspect we may not be able to in the future.
Have truly no way of critiquing this (going to have to wait for a husband to explain it to me), but useful as an exercise. We really do take so many constants for granted, and I suspect we may not be able to in the future.
December 20, 2021
The current low-interest rates and the scary economy worry me. So it is better to stay safe than sorry and keep ourselves informed. This book highlights the economic phenomenon of the last two decades and the influence of growing economies like China on inflation or deflation. The lower wages and lower cost of manufacturing did contribute to low inflation and interest rates. But this demographic sweet spot will be coming to end, so inflation will return. And this is happening much sooner than we think. Even the Central banks cannot control inflation as the monetary policy isn't what's keeping the prices low.
Read
September 27, 2022I'd been meaning to read this one for awhile but never picked it up, partly because I was immediately put off of trying to read it by comments which seemed obvious -- "but look at japan" -- (which, they do address in the book), but I finally read it and found it make a compelling case -- particularly as I was already partial to many of the other arguments or theses they put forward in their case.
The book is quite dense, but one way to distill it down is to say that the authors believe the disinflationary growth environment post-China debut on international stage with WTO, and pre-covid, was due to huge positive labor market supply shock (China, mostly) which reduced worker bargaining power, which created a more horizontal Philips curve -- one in which inflation rate is less impacted by UR. The authors argue that the demographic changes throughout the advanced economies will essentially involve the opposite process by giving more power to workers -- and again, on a global scale: the long run Philips curve might become more vertical again, and that NRU will shift inward too, such that inflation will be more easily set off. Additionally, a somewhat Keynesian-flavored analysis of MPC enters the equation: old people as consumers are inflationary; whilst young people as producers are deflationary -- which one are we getting more of?
The Japan critique is addressed in a clever way, though I was not fully able to parse the evidence, the logic goes that japan's demography crisis is occurring locally right now, and thus they are still able to tap the rest of the globe for labor supply with offshoring procedures, and thus avoid the inflationary effects of a tight labor market that a global demographic crises would imply. Therefore, the authors say, the local-not-global nature of japan, today, invalidates Japan-as-counter-example.
The book also spends a lot of time painting an ugly picture of what the political and fiscal economy of a grey nation will look like, and it looks difficult -- both politically and structurally. They note for example the attempts at raising retirement age and messing with pension systems and how well that has gone (not well) just as foreshadowing how politically difficult choices will perhaps not be made -- but nonethless some choices will have to be made somewhere in the system...
Overall really insightful, and not overly technical given the nature of the work, though there were certainly sections I struggled with. Note that I am skipping over a lot of what the book covered in this blurb.
I'd say I'm a tentative believer in their thesis now -- particularly as I am unconvinced that Africa, for example, will somehow keep its TFR up as it continues develops, contra the global pattern.
The book is quite dense, but one way to distill it down is to say that the authors believe the disinflationary growth environment post-China debut on international stage with WTO, and pre-covid, was due to huge positive labor market supply shock (China, mostly) which reduced worker bargaining power, which created a more horizontal Philips curve -- one in which inflation rate is less impacted by UR. The authors argue that the demographic changes throughout the advanced economies will essentially involve the opposite process by giving more power to workers -- and again, on a global scale: the long run Philips curve might become more vertical again, and that NRU will shift inward too, such that inflation will be more easily set off. Additionally, a somewhat Keynesian-flavored analysis of MPC enters the equation: old people as consumers are inflationary; whilst young people as producers are deflationary -- which one are we getting more of?
The Japan critique is addressed in a clever way, though I was not fully able to parse the evidence, the logic goes that japan's demography crisis is occurring locally right now, and thus they are still able to tap the rest of the globe for labor supply with offshoring procedures, and thus avoid the inflationary effects of a tight labor market that a global demographic crises would imply. Therefore, the authors say, the local-not-global nature of japan, today, invalidates Japan-as-counter-example.
The book also spends a lot of time painting an ugly picture of what the political and fiscal economy of a grey nation will look like, and it looks difficult -- both politically and structurally. They note for example the attempts at raising retirement age and messing with pension systems and how well that has gone (not well) just as foreshadowing how politically difficult choices will perhaps not be made -- but nonethless some choices will have to be made somewhere in the system...
Overall really insightful, and not overly technical given the nature of the work, though there were certainly sections I struggled with. Note that I am skipping over a lot of what the book covered in this blurb.
I'd say I'm a tentative believer in their thesis now -- particularly as I am unconvinced that Africa, for example, will somehow keep its TFR up as it continues develops, contra the global pattern.
August 13, 2022
An astonishingly good book. Prescient too in that the economic effect of the pandemic was predicted. Because the book deals with a longer time frame than economic forecasts and elections, its conclusions cut right across those.
I can't say it better than Martin Wolf did in the FT:
This is a highly significant book, because it goes against the prevailing consensus. The authors, a distinguished academic and an independent researcher, argue that the low inflation, low interest rates and rising inequality of recent decades were overwhelmingly due to demographic shifts fuelled by globalisation — especially the entry of China into the world economy and the weight of the middle aged in high-income countries. Now deglobalisation and ageing will reverse all that, generating higher inflation, higher interest rates, rising wages and falling inequality.
I can't say it better than Martin Wolf did in the FT:
This is a highly significant book, because it goes against the prevailing consensus. The authors, a distinguished academic and an independent researcher, argue that the low inflation, low interest rates and rising inequality of recent decades were overwhelmingly due to demographic shifts fuelled by globalisation — especially the entry of China into the world economy and the weight of the middle aged in high-income countries. Now deglobalisation and ageing will reverse all that, generating higher inflation, higher interest rates, rising wages and falling inequality.
April 13, 2025
Pretty textbooky and you really need to be locked in while reading to understand the concepts. I've never thought about the role of demographics in the financial system so it's incredibly thought provoking and interesting to see these predictions play out in real time. Not a light hearted book, low-key depressing lol.
December 5, 2020
A salient contribution is the skill with which macroeconomic factors, financial indicators and demographic and health trends are interwoven. The dexterous presentation of those linkages provides a uniquely strong basis for arriving at conclusions. In particular, I enjoyed, and very much agree with the discussion on China and Japan, inflation expectations and rising debt. On the demographic outlier Africa, I was left with a question; in the absence of improved governance, what does the expected high population portend? There are so many (and in some cases new) structural imbalances that meaningful prediction is quite difficult This well researched and excellently written book not only makes for a lively read, but also shines some light on what we might reasonably expect.
January 10, 2025
Very textbook-y. Interesting ideas. Read it while going through one of my crazy periods so probably need to come back to it.
Basically invest in commodities and health/elder-care and get ready for life to get kind of crappy. Not catastrophic but just kind of crappy.
Basically invest in commodities and health/elder-care and get ready for life to get kind of crappy. Not catastrophic but just kind of crappy.
March 9, 2022
When the world is running down
You make the best of what's still around
-The Police
This certainly details how it is running down
You make the best of what's still around
-The Police
This certainly details how it is running down
January 23, 2025
Very interesting ideas but very dense book. Does require prereq of some Econ/finance knowledge
March 29, 2021
Technical read needed to read through parts again but great arguments.
April 5, 2024
It's a technical book that gives a prediction that demographic change in the world will drive inflation.
January 30, 2025
The Great Demographic Reversal is a phenomenal book on demographics and the future macroeconomic implications worsening dependency ratios will have on the Advanced Economies (AEs). GDR is perhaps one of my favorite books of the past few years—the authors are intellectually honest, humble, and show all the data backing up their forecasts, while giving alternative arguments serious consideration.
The thesis of the book is as follows:
1. After WWII, there was a surge in birth rates, creating the baby boom generation.
2. Since then, there has been a general decline in birth rates since the 1950s.
3. The boomers aged into the workforce during a period of globalization. The dependency ratio fell as China and Eastern Europe integrated significantly into the global economy, leading to a huge surge in labor supply and a ton of low-cost production.
4. This surge in labor supply fueled global growth, kept inflation low, and kept yields down (as workers, preparing for retirement, saved).
5. The above dynamics are likely to reverse in the near future as the boomers age out of the workforce and younger generations aren’t large enough to compensate them leaving the labor pool (remember the steadily declining birth rates from earlier?).
6. This “Great Demographic Reversal,” occuring at a time of deglobalization is likely to lead to higher inflation, lower growth, and higher yields. Debt burdens are likely to rise as government expenditures balloon to pay for Social Security/pensions and medical care for the elderly, while they have a relatively smaller population who works and pays taxes. This demographic reversal will be the fundamental driver of macroeconomics and geopolitics over the coming decades, just as the great demographic dividend we earned was the fundamental driver of macro and geopolitics over the last 30-40 years.
The book was similar to Peter Zeihan’s “The End of the World is Just the Beginning,” in its discussions of demographics and the general direction of its predictions. However, GDR is significantly better. GDR is far more humble with its forecasts, it is more data-heavy and honest with its level of convictions, and it overall gives a much more compelling case to the forces molding the coming decades.
The section on their inflation forecasts was, in my opinion, the best and most convincing. They argued inflation is likely to rise for the following reasons:
1. Dependents are inherently inflationary because they consume and don’t produce, whereas workers are deflationary because they produce more than they consume. The switch in population dynamics towards dependents and away from workers will be inflationary.
2. The lower relative labor supply will be inflationary and push real wages up as workers gain more bargaining power.
3. Globalization is likely to take a step back, leading to higher costs across the board.
Their sections on switching from debt to equity finance and the potential new laws and regulations to encourage this switch was, I felt, the weakest part of the book. They argue for unenforceable (and kind of incoherent) policies including: 1) creating an equity tax shield (like the debt tax shield) and 2) removing the limited liability of some equity owners. However, I don’t think these policy recommendations (or these small sections) detracted too much from the overall message of the book.
And, their thesis is pretty convincing (and scary)! They argue somewhat well that even with the much of Africa and India yet to reap their demographic dividend, the advanced economies will likely still suffer from lower growth, lower labor supply, higher inflation, and higher yields due to a wider trend of deglobalization (and pushback to mass immigration) and a general unlikelihood of getting Africa + India to produce as much as necessary to keep up global growth.
Overall, I really enjoyed GDR and highly recommend it. I find their thesis convincing and while I see a few ways of softening the demographic reversal (high productivity growth, automation, etc.), I think they are generally right. The book is also a rather entertaining read—the authors are clear writers and do a good job of explicitly stating their assumptions, evidence, conclusions, and conviction levels.
Some favorite quotes:
1. On Labor v. Capital: “The main thesis of this book is that the evolution of the real trends in the economy (continued real output growth coexisting with deflationary headwinds) has been caused by a combination of demography and globalisation, leading to the largest ever upwards supply shock to the availability of labour (assisted by labour saving technology). Almost inevitably in this context, the real return to labour, except for high-skilled workers complementary with capital, has gone down, while the return to capital, profitability, has gone up.” 314.
2. On Central Bank Independence: “Rather naturally, Central Bank independence (CBI) is likely to fall into jeopardy, but not necessarily in an uniform manner. CBI is likely to be far better protected in countries (or zones) with left-leaning governments. Not only are such governments less concerned with the welfare of those who benefit from ever-rising asset prices, but also they want to protect their backs against financial panics, rising credit risk premia, being shut out of the ability to borrow on the bond market, etc. For such leftist governments, an independent Central Bank provides a much-needed surety of financial rectitude in an environment of rising inflation. Right-wing, particularly populist, governments feel no such need for that protection since the rich and powerful are, in general, already in their constituency. It is therefore under the ascendency of these regimes that CBI is likely to suffer the most.” 306.
3. On Demographics and Globalization: “Here the first big story is that the previously highly favourable demographic developments in the fastest growing areas in the world, e.g. East Asia and Europe, are currently and sharply reversing. As a result of the demographic changes of the past, the myriad of left-behind workers with dampened expectations are turning to nativist, populist politicians on the right. The policies they espouse to limit immigration and protect local industries chime with the views of the disillusioned workers (Chapter 7). They may have lost bargaining power, but they have retained political power. This is the Great Reversal of our title.” 315.
4. On the Future of Growth: “The danger facing the global economy is precisely that the economies that have dominated global growth are facing the biggest demographic challenges. And that means even if the world as a whole still faces substantial population growth going forward, the economies that shaped global growth for the last 35 years are the ones which bear the brunt of the demographic headwinds . Put differently, if demography is to leave only a scar on the global economy, then the economies that have done very little for global growth in the past few decades are the ones that must do much, much more in the future.” 88.
5. On Changing Ageing/Saving Dynamics: “In the old days, people were mostly free of dependency cares from around 40 until retirement, when their earnings were highest and the prospect of retirement coming into sight. That encouraged saving. Nowadays people will be most free of dependency caring in their 20s, when earnings are lower and the prospect of living until 90 + almost unimaginable. Not a good time for saving. Then from 30 onwards, in some cases continuously, until your own retirement, looking after your own children would be followed in short order by the need to help look after your parents.” (115).
The thesis of the book is as follows:
1. After WWII, there was a surge in birth rates, creating the baby boom generation.
2. Since then, there has been a general decline in birth rates since the 1950s.
3. The boomers aged into the workforce during a period of globalization. The dependency ratio fell as China and Eastern Europe integrated significantly into the global economy, leading to a huge surge in labor supply and a ton of low-cost production.
4. This surge in labor supply fueled global growth, kept inflation low, and kept yields down (as workers, preparing for retirement, saved).
5. The above dynamics are likely to reverse in the near future as the boomers age out of the workforce and younger generations aren’t large enough to compensate them leaving the labor pool (remember the steadily declining birth rates from earlier?).
6. This “Great Demographic Reversal,” occuring at a time of deglobalization is likely to lead to higher inflation, lower growth, and higher yields. Debt burdens are likely to rise as government expenditures balloon to pay for Social Security/pensions and medical care for the elderly, while they have a relatively smaller population who works and pays taxes. This demographic reversal will be the fundamental driver of macroeconomics and geopolitics over the coming decades, just as the great demographic dividend we earned was the fundamental driver of macro and geopolitics over the last 30-40 years.
The book was similar to Peter Zeihan’s “The End of the World is Just the Beginning,” in its discussions of demographics and the general direction of its predictions. However, GDR is significantly better. GDR is far more humble with its forecasts, it is more data-heavy and honest with its level of convictions, and it overall gives a much more compelling case to the forces molding the coming decades.
The section on their inflation forecasts was, in my opinion, the best and most convincing. They argued inflation is likely to rise for the following reasons:
1. Dependents are inherently inflationary because they consume and don’t produce, whereas workers are deflationary because they produce more than they consume. The switch in population dynamics towards dependents and away from workers will be inflationary.
2. The lower relative labor supply will be inflationary and push real wages up as workers gain more bargaining power.
3. Globalization is likely to take a step back, leading to higher costs across the board.
Their sections on switching from debt to equity finance and the potential new laws and regulations to encourage this switch was, I felt, the weakest part of the book. They argue for unenforceable (and kind of incoherent) policies including: 1) creating an equity tax shield (like the debt tax shield) and 2) removing the limited liability of some equity owners. However, I don’t think these policy recommendations (or these small sections) detracted too much from the overall message of the book.
And, their thesis is pretty convincing (and scary)! They argue somewhat well that even with the much of Africa and India yet to reap their demographic dividend, the advanced economies will likely still suffer from lower growth, lower labor supply, higher inflation, and higher yields due to a wider trend of deglobalization (and pushback to mass immigration) and a general unlikelihood of getting Africa + India to produce as much as necessary to keep up global growth.
Overall, I really enjoyed GDR and highly recommend it. I find their thesis convincing and while I see a few ways of softening the demographic reversal (high productivity growth, automation, etc.), I think they are generally right. The book is also a rather entertaining read—the authors are clear writers and do a good job of explicitly stating their assumptions, evidence, conclusions, and conviction levels.
Some favorite quotes:
1. On Labor v. Capital: “The main thesis of this book is that the evolution of the real trends in the economy (continued real output growth coexisting with deflationary headwinds) has been caused by a combination of demography and globalisation, leading to the largest ever upwards supply shock to the availability of labour (assisted by labour saving technology). Almost inevitably in this context, the real return to labour, except for high-skilled workers complementary with capital, has gone down, while the return to capital, profitability, has gone up.” 314.
2. On Central Bank Independence: “Rather naturally, Central Bank independence (CBI) is likely to fall into jeopardy, but not necessarily in an uniform manner. CBI is likely to be far better protected in countries (or zones) with left-leaning governments. Not only are such governments less concerned with the welfare of those who benefit from ever-rising asset prices, but also they want to protect their backs against financial panics, rising credit risk premia, being shut out of the ability to borrow on the bond market, etc. For such leftist governments, an independent Central Bank provides a much-needed surety of financial rectitude in an environment of rising inflation. Right-wing, particularly populist, governments feel no such need for that protection since the rich and powerful are, in general, already in their constituency. It is therefore under the ascendency of these regimes that CBI is likely to suffer the most.” 306.
3. On Demographics and Globalization: “Here the first big story is that the previously highly favourable demographic developments in the fastest growing areas in the world, e.g. East Asia and Europe, are currently and sharply reversing. As a result of the demographic changes of the past, the myriad of left-behind workers with dampened expectations are turning to nativist, populist politicians on the right. The policies they espouse to limit immigration and protect local industries chime with the views of the disillusioned workers (Chapter 7). They may have lost bargaining power, but they have retained political power. This is the Great Reversal of our title.” 315.
4. On the Future of Growth: “The danger facing the global economy is precisely that the economies that have dominated global growth are facing the biggest demographic challenges. And that means even if the world as a whole still faces substantial population growth going forward, the economies that shaped global growth for the last 35 years are the ones which bear the brunt of the demographic headwinds . Put differently, if demography is to leave only a scar on the global economy, then the economies that have done very little for global growth in the past few decades are the ones that must do much, much more in the future.” 88.
5. On Changing Ageing/Saving Dynamics: “In the old days, people were mostly free of dependency cares from around 40 until retirement, when their earnings were highest and the prospect of retirement coming into sight. That encouraged saving. Nowadays people will be most free of dependency caring in their 20s, when earnings are lower and the prospect of living until 90 + almost unimaginable. Not a good time for saving. Then from 30 onwards, in some cases continuously, until your own retirement, looking after your own children would be followed in short order by the need to help look after your parents.” (115).
January 24, 2022
I am simply flabbergasted as to the utterly atrocious economics in this book. It reflects a preposterous "macroeconomics" that, maybe 40 or 50 years ago, held sway amongst academics and government bureaucrats (and apparently still does in some quarters). The authors persist in a profoundly wrong, and honestly stupid, conception of "inflation".
January 12, 2021
The main premise of this book is that the assumptions used by macroeconomic writers on why we have been able to simultaneously expand deficits and keep interest rates low did not come from the brilliant policy of the central bankers and politicians but from a unique confluence of demographics (more low priced workers surging into the system from places like China and Eastern Europe) and benefits of technological changes that helped moderate inflation.
They also argue that in coming decades with rising levels of elderly in most of the developed countries (and the concurrent increase in needs for support and care) that the trend is about to turn. And it will become nasty.
IF you are not interested the issue - you should be. With the debt to GDP ratio in the US at more than 125% the future looks perilous - even if their assumptions about what caused the moderation in rates are mistaken.
They argue that there might be some ways to solve this dilemma but none of their suggestions seem especially compelling.
I am decidedly not a macroeconomist - so some of the arguments in this book may have been lost on me. And from what I do remember about the field I think the authors are a lot more confident in the tradeoffs of the Phillips Curve (employment v inflation) than the last three decades of experience would tell them to be. This book is not light reading but the assumptions made about whether brilliant policy or confluence of deflationary trends caused the moderation are worth thinking about.
They also argue that in coming decades with rising levels of elderly in most of the developed countries (and the concurrent increase in needs for support and care) that the trend is about to turn. And it will become nasty.
IF you are not interested the issue - you should be. With the debt to GDP ratio in the US at more than 125% the future looks perilous - even if their assumptions about what caused the moderation in rates are mistaken.
They argue that there might be some ways to solve this dilemma but none of their suggestions seem especially compelling.
I am decidedly not a macroeconomist - so some of the arguments in this book may have been lost on me. And from what I do remember about the field I think the authors are a lot more confident in the tradeoffs of the Phillips Curve (employment v inflation) than the last three decades of experience would tell them to be. This book is not light reading but the assumptions made about whether brilliant policy or confluence of deflationary trends caused the moderation are worth thinking about.
March 7, 2023
In The Great Demographic Reversal, famed economist Charles Goodhart challenges the commonly held belief that aging societies lead to disinflationary economies. Instead, he argues that aging societies actually put upwards pressure on inflation and nominal interest rates.
Most economists and financial pundits look at Japan as the canary in the coal mine when it comes to the impact of demographic shifts on economies. They point to the country’s stubbornly low inflation over the past few decades as clear evidence of the disinflationary pressure that aging societies will place on economies as populations age and save more while consuming less. Also, the increase in life expectancy has redefined retirement and created fluidity for the 65+ demographic as they continued to work and in some cases re-entered the workforce after retirement.
This logic has always troubled me.
How can this demographic force be disinflationary, ceteris paribus, when in those economies a greater proportion of people are increasingly dependent on a smaller productive workforce? And how can a large portion of the population drawing down on its savings be putting downward pressure on rates?
Goodhart addresses these questions by opposing the often dogmatic arguments of many economists. He notes that Japan did not exist in autarky, and that other forces, beyond just shifting demographics, played a significant role in Japan’s persistently low rates. Goodhart argues with confidence that this demographic shift is actually inflationary and puts upward pressure on nominal rates, challenging widely held views to the contrary
He believes these inflationary forces will be dominant in most advanced economies, and that the change in China’s role in the global economy coupled with its own demographic shift will reverse a decades-long deflationary force it had on the world’s advanced economies. He warns that this transition will happen in many interconnected markets at once, and that there will be nowhere to turn to avoid this inflationary force for decades to come. To offset these forces, he suggests, would require extremely significant and unlikely advances in productivity, perhaps from technologies such as AI and robotics.
While increased lifespans and good health of the elderly have been held as examples of why demographic shifts have been disinflationary, Goodhart believes that this is also a trend that will work in reverse. He argues that while advancements in treating cancer and heart conditions have prolonged lives, there have been few advancements in preventing dementia which invariably drives the elderly to become highly dependent. As a result, Goodhart predicts an increased number of elderly requiring full-time care, which will contribute to inflationary pressures.
Throughout the book, Goodhart and Pradhan reframe many economic trends in the light of previously favorable demographics in advanced economies and the emergence of China in the global market. They argued that advanced economies previously benefited from entering a temporary ‘demographic sweet spot’, which also contributed to weak nominal wages from decreasing bargaining power of labor, increased inequality within many countries as well as derivative social and political upheaval.
Goodhart and Pradhan also commented on the likely impact of COVID-19. Having published the book in August 2020, well before any concerns about inflation, they anticipated that the response to the pandemic would accelerate the inflection point, particularly given the highly expansionary monetary and fiscal policies that emerged.
They foresaw that the pandemic response would lead to elevated nominal rates, but likely a period of negative real rates as accumulated leverage would lead to financial fragility. Goodhart believed central banks would be left with difficult choices to make, and his view was that central banks would choose to limit tightening and allow inflation to remain elevated in the face of the alternative risks of rapid tightening.
While many of their views are troubling and inconvenient, they do point to some silver linings such as increased incentives for investment and bargaining power for labor, which will help address some of the concerns that have emerged in recent decades around rising inequality within economies. He strongly refutes the central thesis of Thomas Piketty, who suggested that intervention was necessary to address otherwise inelectuable trends. Instead, Goodhart believes that as these forces reverse, there will be a great equilibration between capital and labor.
I found Goodhart’s arguments to be very convincing and believe that the study of demographics and the role it plays on economies is under-appreciated by many investors — most likely due to the fact that such trends span accross decades and are difficult to observe on short horizons. Having also experienced first hand the impact of dementia on my late father, who was otherwise kept healthy by advancements in medicine, I am also concerned about how we will cope with such a large portion of society experiencing this tragic outcome.
I look forward to discussing this with Charles Goodhart at the upcoming AIM Summit conference (www.aimsummit.com), for which Dalma Capital is the lead sponsor.
(This article is published by Zachary Cefaratti. The views expressed are his own and do not constitute investment advice.)
Most economists and financial pundits look at Japan as the canary in the coal mine when it comes to the impact of demographic shifts on economies. They point to the country’s stubbornly low inflation over the past few decades as clear evidence of the disinflationary pressure that aging societies will place on economies as populations age and save more while consuming less. Also, the increase in life expectancy has redefined retirement and created fluidity for the 65+ demographic as they continued to work and in some cases re-entered the workforce after retirement.
This logic has always troubled me.
How can this demographic force be disinflationary, ceteris paribus, when in those economies a greater proportion of people are increasingly dependent on a smaller productive workforce? And how can a large portion of the population drawing down on its savings be putting downward pressure on rates?
Goodhart addresses these questions by opposing the often dogmatic arguments of many economists. He notes that Japan did not exist in autarky, and that other forces, beyond just shifting demographics, played a significant role in Japan’s persistently low rates. Goodhart argues with confidence that this demographic shift is actually inflationary and puts upward pressure on nominal rates, challenging widely held views to the contrary
He believes these inflationary forces will be dominant in most advanced economies, and that the change in China’s role in the global economy coupled with its own demographic shift will reverse a decades-long deflationary force it had on the world’s advanced economies. He warns that this transition will happen in many interconnected markets at once, and that there will be nowhere to turn to avoid this inflationary force for decades to come. To offset these forces, he suggests, would require extremely significant and unlikely advances in productivity, perhaps from technologies such as AI and robotics.
While increased lifespans and good health of the elderly have been held as examples of why demographic shifts have been disinflationary, Goodhart believes that this is also a trend that will work in reverse. He argues that while advancements in treating cancer and heart conditions have prolonged lives, there have been few advancements in preventing dementia which invariably drives the elderly to become highly dependent. As a result, Goodhart predicts an increased number of elderly requiring full-time care, which will contribute to inflationary pressures.
Throughout the book, Goodhart and Pradhan reframe many economic trends in the light of previously favorable demographics in advanced economies and the emergence of China in the global market. They argued that advanced economies previously benefited from entering a temporary ‘demographic sweet spot’, which also contributed to weak nominal wages from decreasing bargaining power of labor, increased inequality within many countries as well as derivative social and political upheaval.
Goodhart and Pradhan also commented on the likely impact of COVID-19. Having published the book in August 2020, well before any concerns about inflation, they anticipated that the response to the pandemic would accelerate the inflection point, particularly given the highly expansionary monetary and fiscal policies that emerged.
They foresaw that the pandemic response would lead to elevated nominal rates, but likely a period of negative real rates as accumulated leverage would lead to financial fragility. Goodhart believed central banks would be left with difficult choices to make, and his view was that central banks would choose to limit tightening and allow inflation to remain elevated in the face of the alternative risks of rapid tightening.
While many of their views are troubling and inconvenient, they do point to some silver linings such as increased incentives for investment and bargaining power for labor, which will help address some of the concerns that have emerged in recent decades around rising inequality within economies. He strongly refutes the central thesis of Thomas Piketty, who suggested that intervention was necessary to address otherwise inelectuable trends. Instead, Goodhart believes that as these forces reverse, there will be a great equilibration between capital and labor.
I found Goodhart’s arguments to be very convincing and believe that the study of demographics and the role it plays on economies is under-appreciated by many investors — most likely due to the fact that such trends span accross decades and are difficult to observe on short horizons. Having also experienced first hand the impact of dementia on my late father, who was otherwise kept healthy by advancements in medicine, I am also concerned about how we will cope with such a large portion of society experiencing this tragic outcome.
I look forward to discussing this with Charles Goodhart at the upcoming AIM Summit conference (www.aimsummit.com), for which Dalma Capital is the lead sponsor.
(This article is published by Zachary Cefaratti. The views expressed are his own and do not constitute investment advice.)
This entire review has been hidden because of spoilers.
April 28, 2024
Long perspective, population expansion and rapidly aging, caring, altzheimer, revival of inflationary and higher interest rate, housing demand, caring burden, pension and retirement age adjustment, unprecedented, not conventional economic view but appealing, disillusion of low price, low interest rate and growth episode between 1980 and 2008
August 20, 2023
I became aware of this book after listening to Rebecca Patterson who mentioned this book in an interview.
I bought the book shorterly afterwards. However it took me a while to start it. This is definitely not a book for bed time and one needs to systematically go through the chapters. It is work. Having said this, it is very well written and very accessible to the average intellectual reader. From a sales point of view I wonder who would actually buy this book. It is not a book to be read like a novel, nor does it make a standard text book. I think the readership would be quite niche. You would only read this book because you are intellectually curious about where we are heading in terms of the macro picture, and most likely to be working in the finance industry. At the same time it is not a book where you can monetise on. That is to say it is not a book that you expect to give you investment advice for short term gain.
The summary of the book is that in the last 30 years the rise of China and the supply of cheap labour has provided a perfect environment for fast growth, lower wages, lower interest rates and lower inflation in the back drop of globalisation. This trend will now reverse. The book says in 2012 the contribution from the chinese demographics had peaked.
The overall dependency ratio will increase going forward. House hold savings will decrease. As people live longer and start families later in life the savings will be used to fund longer retirement and care for the younger generation. Higher rate of consumption and lower levels of production efficiency due to higher wage growth will be inflationary. As savings drop real interest rate will have to rise. We will likely see bear steepening of the yield curve as a result.
The book provided some plausible explanations why the future will not look like Japan, arguing that Japanese employment does not adjust and as a result the Philips curve will remain flat. The authors argue that the structural change in the Japanese labour market will not be applicable to the world as a whole. However the book is rather rigid in it's assumptions of the future. For sure one may see a world where there would be a downward pressure in wages and rise in temporary works and a reduction in the hours worked in order to seek continuous employment.
The authors paint a rather negative picture in how Africa and India are not sufficient to counteract the decline in the chinese demographics, and how technology and AI as well as increasing retirement age are all not sufficient enough to bring around the changes needed. There are too many variables and it is unrealistic to expect the authors or anyone to make any definitive guesses about the state of the world 10-20 years from now. However after reading through the book one does feel the authors are rather rigid/pessimistic in their predictions and one can not but think there will be pockets of efficiency and optimism that no one will foresee. Whether that is enough to drive down inflation and interest rates no one would know.
Finally the authors ended the book on the debt trap. This is related to Ray Dalio's long term debt cycle. The book does not go as far as to say we are reaching the end of the long term debt cycle, only to say that we do have a debt problem as rates rise. The ratio of debt payments of interests in the past decades have remained constant as the falling interest rates counteract the increasing debt burden. This is set to change as inflation and interest rate rise in response to the demographic changes we are experiencing.
The final few chapters offers some possibilities in solving the various issues the book discussed. However they are not serious, no can anyone expect any realistic solutions. These chapters have only been included for completeness and can be omitted without any loss to the reader.
Overall the book is well written, easily accessible and thought provoking. It will not bring the reader any quick monetary returns and should only be read by the intellectually and academically curious.
I bought the book shorterly afterwards. However it took me a while to start it. This is definitely not a book for bed time and one needs to systematically go through the chapters. It is work. Having said this, it is very well written and very accessible to the average intellectual reader. From a sales point of view I wonder who would actually buy this book. It is not a book to be read like a novel, nor does it make a standard text book. I think the readership would be quite niche. You would only read this book because you are intellectually curious about where we are heading in terms of the macro picture, and most likely to be working in the finance industry. At the same time it is not a book where you can monetise on. That is to say it is not a book that you expect to give you investment advice for short term gain.
The summary of the book is that in the last 30 years the rise of China and the supply of cheap labour has provided a perfect environment for fast growth, lower wages, lower interest rates and lower inflation in the back drop of globalisation. This trend will now reverse. The book says in 2012 the contribution from the chinese demographics had peaked.
The overall dependency ratio will increase going forward. House hold savings will decrease. As people live longer and start families later in life the savings will be used to fund longer retirement and care for the younger generation. Higher rate of consumption and lower levels of production efficiency due to higher wage growth will be inflationary. As savings drop real interest rate will have to rise. We will likely see bear steepening of the yield curve as a result.
The book provided some plausible explanations why the future will not look like Japan, arguing that Japanese employment does not adjust and as a result the Philips curve will remain flat. The authors argue that the structural change in the Japanese labour market will not be applicable to the world as a whole. However the book is rather rigid in it's assumptions of the future. For sure one may see a world where there would be a downward pressure in wages and rise in temporary works and a reduction in the hours worked in order to seek continuous employment.
The authors paint a rather negative picture in how Africa and India are not sufficient to counteract the decline in the chinese demographics, and how technology and AI as well as increasing retirement age are all not sufficient enough to bring around the changes needed. There are too many variables and it is unrealistic to expect the authors or anyone to make any definitive guesses about the state of the world 10-20 years from now. However after reading through the book one does feel the authors are rather rigid/pessimistic in their predictions and one can not but think there will be pockets of efficiency and optimism that no one will foresee. Whether that is enough to drive down inflation and interest rates no one would know.
Finally the authors ended the book on the debt trap. This is related to Ray Dalio's long term debt cycle. The book does not go as far as to say we are reaching the end of the long term debt cycle, only to say that we do have a debt problem as rates rise. The ratio of debt payments of interests in the past decades have remained constant as the falling interest rates counteract the increasing debt burden. This is set to change as inflation and interest rate rise in response to the demographic changes we are experiencing.
The final few chapters offers some possibilities in solving the various issues the book discussed. However they are not serious, no can anyone expect any realistic solutions. These chapters have only been included for completeness and can be omitted without any loss to the reader.
Overall the book is well written, easily accessible and thought provoking. It will not bring the reader any quick monetary returns and should only be read by the intellectually and academically curious.
March 13, 2023
At first sight, this book mostly challenges the financial market consensus about the outlook for inflation and real interest rates in the longer term. But digging deeper, the book is also about the complex challenges of living in a world with rapidly aging societies and populist politicians.
On the inflation and interest rates topic, the consensus view predicts that the future will be pretty much like the past 30 years. In particular, today’s (2023) inflation and real interest rates will smoothly revert to the pre-pandemic lows observed since the early 1990s.
A case in point highlighting this consensus is the latest U.S. CBO (Central Budget Office) projection of federal fiscal trends over the next 10 years. The CBO assumes that present U.S. inflation will quickly drop back to 2% (from 6½%), and the Fed’s fund rate eases back down to 2¼% (from 5%). As a result, the short-term risk-free real interest rate will settle in the long term again around zero.
Attacking this consensus view, the book predicts a future of significantly higher inflation and real interest rates. With rapidly aging populations in much of the world reversing past favorable demographic trends, and globalization being reversed by hostile political forces, the book predicts that the forces that kept inflation and real interest rates low for a generation will gradually fade away.
Not everything predicted in this book is gloom and doom, however. The book also predicts a reversal in rising inequality, as labor gains more bargaining power and the superrich will no longer see their asset positions getting inflated by an environment of excessive liquidity and super-low real interest rates. This in turn may well act as a brake on the rise of political populism.
Who might be interested in this book? Foremost, it seems to be an appeal to public policy makers to get their act together. But I think the book may well be of most value for readers who want to make informed decisions about their savings and how to invest their savings. In fact, much of the prevailing wisdom on these decisions looks suspect in the light of the book’s conclusions. In their role as voters, these readers may also be interested in what the book suggests to be some of the big policy issues of the future, from the implications of rising dementia rates in an aging population to how to reverse excessive financial leverage in corporations through the tax system.
Finally, as regards readability, there is precious little economic jargon in the book, although many academic studies are referenced. The book is also upfront about recognizing and dealing with potential counter arguments. Finally, while, as already noted, the consensus view remains solidly entrenched, the book seems to have already converted at least some opinion makers (including on Bloomberg radio podcasts) that the financial future will be unlike the past.
On the inflation and interest rates topic, the consensus view predicts that the future will be pretty much like the past 30 years. In particular, today’s (2023) inflation and real interest rates will smoothly revert to the pre-pandemic lows observed since the early 1990s.
A case in point highlighting this consensus is the latest U.S. CBO (Central Budget Office) projection of federal fiscal trends over the next 10 years. The CBO assumes that present U.S. inflation will quickly drop back to 2% (from 6½%), and the Fed’s fund rate eases back down to 2¼% (from 5%). As a result, the short-term risk-free real interest rate will settle in the long term again around zero.
Attacking this consensus view, the book predicts a future of significantly higher inflation and real interest rates. With rapidly aging populations in much of the world reversing past favorable demographic trends, and globalization being reversed by hostile political forces, the book predicts that the forces that kept inflation and real interest rates low for a generation will gradually fade away.
Not everything predicted in this book is gloom and doom, however. The book also predicts a reversal in rising inequality, as labor gains more bargaining power and the superrich will no longer see their asset positions getting inflated by an environment of excessive liquidity and super-low real interest rates. This in turn may well act as a brake on the rise of political populism.
Who might be interested in this book? Foremost, it seems to be an appeal to public policy makers to get their act together. But I think the book may well be of most value for readers who want to make informed decisions about their savings and how to invest their savings. In fact, much of the prevailing wisdom on these decisions looks suspect in the light of the book’s conclusions. In their role as voters, these readers may also be interested in what the book suggests to be some of the big policy issues of the future, from the implications of rising dementia rates in an aging population to how to reverse excessive financial leverage in corporations through the tax system.
Finally, as regards readability, there is precious little economic jargon in the book, although many academic studies are referenced. The book is also upfront about recognizing and dealing with potential counter arguments. Finally, while, as already noted, the consensus view remains solidly entrenched, the book seems to have already converted at least some opinion makers (including on Bloomberg radio podcasts) that the financial future will be unlike the past.
December 27, 2022
Really good book! I learned so much, and it made me realize how much I have yet to learn in the field of macroeconomics. This whole topic of an aging (and eventually shrinking) population is so important and doesn't get enough serious attention. I'm glad these two are thinking about it so carefully.
Before I started the book, I was sure that demographic trends would be deflationary. They come to the opposite conclusion in some ways so this book seriously challenged my thinking. Their primary point is that there will be wage inflation. I would have said that we would have deflation but that wages would take share from goods, so we may not be as far apart as I initially thought.
Their examination of the changing impact of China (on global labor supply/wage deflation) was excellent. The re-examination of the Japan example was also fresh and insightful, though I'm not sure I agree with all their conclusions. But, wow, it made me think!
There were two points I disagreed with most. First, they contend that corporate capital spending will accelerate as labor shortage incentivizes investments to increase labor productivity. But that won't be the only variable. If population growth is slowing (shrinking) then that impulse will be overwhelmed by the growing expectation of declining demand (why expand capacity if demand will be flat or declining?). Without that assumption of increased capital spending, I struggle to see how interest rates rise. Second, they contend that the elderly will stay in their homes and we will have a housing shortage. I agree over the near term, but longer term, I'm expecting a housing glut. If I'm right, then lower housing prices could be a safety valve to a lot of the pressures they worry about.
The only section that completely missed the mark was 12.3 on reforming the incentive structure of corporate managers. As someone who analyzes public equities and works in a corporation myself, I can't imagine their suggestions working at all.
On the flip side, the discussion about finding ways to incentivize more equity financing was brilliant. I need to give this topic more thought and I hope my elected representative do as well.
I'm conclusion, I loved this book. It's been a while since a book made me think so hard. And the epilogue really boosted their credibility!
Before I started the book, I was sure that demographic trends would be deflationary. They come to the opposite conclusion in some ways so this book seriously challenged my thinking. Their primary point is that there will be wage inflation. I would have said that we would have deflation but that wages would take share from goods, so we may not be as far apart as I initially thought.
Their examination of the changing impact of China (on global labor supply/wage deflation) was excellent. The re-examination of the Japan example was also fresh and insightful, though I'm not sure I agree with all their conclusions. But, wow, it made me think!
There were two points I disagreed with most. First, they contend that corporate capital spending will accelerate as labor shortage incentivizes investments to increase labor productivity. But that won't be the only variable. If population growth is slowing (shrinking) then that impulse will be overwhelmed by the growing expectation of declining demand (why expand capacity if demand will be flat or declining?). Without that assumption of increased capital spending, I struggle to see how interest rates rise. Second, they contend that the elderly will stay in their homes and we will have a housing shortage. I agree over the near term, but longer term, I'm expecting a housing glut. If I'm right, then lower housing prices could be a safety valve to a lot of the pressures they worry about.
The only section that completely missed the mark was 12.3 on reforming the incentive structure of corporate managers. As someone who analyzes public equities and works in a corporation myself, I can't imagine their suggestions working at all.
On the flip side, the discussion about finding ways to incentivize more equity financing was brilliant. I need to give this topic more thought and I hope my elected representative do as well.
I'm conclusion, I loved this book. It's been a while since a book made me think so hard. And the epilogue really boosted their credibility!
December 3, 2024
The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival is a thought-provoking and well-researched book by Charles Goodhart and Manoj Pradhan.
The book covers in detail economic trends (prior to the pandemic) of rising inequality, stagnant wages, and disinflationary pressures, and explains the two key drivers behind these trends. The two trends are 1) Globalization, that picked up pace with the integration of China (after joining the WTO) and other mainly SE Asian emerging markets with the global economy, and 2) Demographics that led to a significant growth in labor supply. These two trends over the past three decades (1990-2020) were disinflationary and resulted in falling inflation and lower interest rates. However, these are reversing as global population growth is declining, average age is rising, and deglobalization is taking hold. The surge in global labor supply is behind us due to lower fertility rates, higher retirement rates, and attitudes towards immigration. This will cause upward pressure on inflation and interest rates.
The authors have also pointed out the “debt trap” faced by many countries since the Global Financial Crisis and it has worsened since the pandemic. They argued that governments around the world used historically-low interest rates as an excuse to borrow. The authors warned that as soon as interest rates begin to rise, public debt service payments will explode, as we have seen over the last two years in the US and the UK. Central banks independence would be put to test as tight monetary policy would be required to control inflation but that will push interest expense higher on public debt.
Goodhart and Pradhan also highlighted in the last chapter (written in 2020) that the very expansionary monetary and fiscal policies put in place to combat COVID-19 will lead to inflation sooner than they had predicted and this turned out to be true with global inflation accelerating in 2021. They ended the book with these lines – “In summary, an imperfect, inflationary future is coming to our doors faster than we had expected, thanks to the pandemic. Slowing globalization amidst a global trend of ageing will ensure that the future is nothing like the past.”
A must read for those interested in the impact of demographics and deglobalization on economic and political policymaking.
The book covers in detail economic trends (prior to the pandemic) of rising inequality, stagnant wages, and disinflationary pressures, and explains the two key drivers behind these trends. The two trends are 1) Globalization, that picked up pace with the integration of China (after joining the WTO) and other mainly SE Asian emerging markets with the global economy, and 2) Demographics that led to a significant growth in labor supply. These two trends over the past three decades (1990-2020) were disinflationary and resulted in falling inflation and lower interest rates. However, these are reversing as global population growth is declining, average age is rising, and deglobalization is taking hold. The surge in global labor supply is behind us due to lower fertility rates, higher retirement rates, and attitudes towards immigration. This will cause upward pressure on inflation and interest rates.
The authors have also pointed out the “debt trap” faced by many countries since the Global Financial Crisis and it has worsened since the pandemic. They argued that governments around the world used historically-low interest rates as an excuse to borrow. The authors warned that as soon as interest rates begin to rise, public debt service payments will explode, as we have seen over the last two years in the US and the UK. Central banks independence would be put to test as tight monetary policy would be required to control inflation but that will push interest expense higher on public debt.
Goodhart and Pradhan also highlighted in the last chapter (written in 2020) that the very expansionary monetary and fiscal policies put in place to combat COVID-19 will lead to inflation sooner than they had predicted and this turned out to be true with global inflation accelerating in 2021. They ended the book with these lines – “In summary, an imperfect, inflationary future is coming to our doors faster than we had expected, thanks to the pandemic. Slowing globalization amidst a global trend of ageing will ensure that the future is nothing like the past.”
A must read for those interested in the impact of demographics and deglobalization on economic and political policymaking.
April 25, 2021
I really like this style of writing. Each chapter develops core points or responds to potential criticisms. and they periodically just say "we took this Figure from Author X" or "go read Author Y for the full story" and this keeps the argumentation ticking over.
I'll try and summarise, would love comments on what i get wrong. The argument centres on demographics. Aging populations in West Europe + China mean a collapse in savings at the same time as dependency rate soars. This means less capital investments while the primary care/health sector gobbles up more labour share. Aggregate supply will fall (at least in relative terms) and so we'll have less goods/workers being chased by the same amount of savings, hence expect inflation.
Mainstream econ discounts this possibility because Japan faced the same demographics earlier and maintained low interest rates/inflation. But Japan went through this process as a mid sized economy who could take advantage of global deflationary pressures + there are idiosyncracies of Japanese labour market in which employees accept lower wages. In contrast, multiple economies (including the largest, China) will be going through this process and this will overwhelm global deflationary forces.
There is a question of whether India/Africa can counter-balance demographic trends in West Europe/China by generating global deflationary forces via their more favorable working age demographics. The authors are pessimistic. China's unrelenting deflationary force over the last 30 years resulted from strong governance that is lacking in India/Africa.
Interesting argument. I buy that wages will rise, but I'm not sure they'll rise after taking into account inflation/tax hikes. Imo there's huge generational justice issues given personal pension savings were inadequate even while the national govt ran big deficits. The working age population need to find their political consciousness otherwise this transfer will be voted through by the retired voting bloc. Workers with family born in AEs will at least inherit something (at least if care costs don't eat it up)/can swallow it because it means their family is less dependent, but its incredibly unfair on immigrants who move to AEs.
I'll try and summarise, would love comments on what i get wrong. The argument centres on demographics. Aging populations in West Europe + China mean a collapse in savings at the same time as dependency rate soars. This means less capital investments while the primary care/health sector gobbles up more labour share. Aggregate supply will fall (at least in relative terms) and so we'll have less goods/workers being chased by the same amount of savings, hence expect inflation.
Mainstream econ discounts this possibility because Japan faced the same demographics earlier and maintained low interest rates/inflation. But Japan went through this process as a mid sized economy who could take advantage of global deflationary pressures + there are idiosyncracies of Japanese labour market in which employees accept lower wages. In contrast, multiple economies (including the largest, China) will be going through this process and this will overwhelm global deflationary forces.
There is a question of whether India/Africa can counter-balance demographic trends in West Europe/China by generating global deflationary forces via their more favorable working age demographics. The authors are pessimistic. China's unrelenting deflationary force over the last 30 years resulted from strong governance that is lacking in India/Africa.
Interesting argument. I buy that wages will rise, but I'm not sure they'll rise after taking into account inflation/tax hikes. Imo there's huge generational justice issues given personal pension savings were inadequate even while the national govt ran big deficits. The working age population need to find their political consciousness otherwise this transfer will be voted through by the retired voting bloc. Workers with family born in AEs will at least inherit something (at least if care costs don't eat it up)/can swallow it because it means their family is less dependent, but its incredibly unfair on immigrants who move to AEs.
November 9, 2021
This book's main argument is that worldwide inflation rate, which has been dropping for half a century or so, will reverse, which is against consensus of most economists.
Goodhart explains the decade-long drop in inflation rate (and, as a result, interest rate) worldwide as a combination of globalization & China's supply of abundant cheap labor. Essentially, labor force & productions are deflationary (workers are paid less than their output for capitalist to amass a profit), whereas aging population and kids are inflationary (they consume and do not produce). Globalization allows China's massive labor force entering the global market is hugely deflationary, and therefore resulting in the drop of interest rate (central banks no longer need to hike up the rate to control inflation).
As this engine of deflation loses its momentum (China's aging fast), Goodhart predicts a reversal in the inflation rate, and therefore, interest rate. This is not fun due to the huge public debt that developed economies are carrying (rates hiking -> new debt carrying higher rates -> borrowers need to repay more -> tax more or cut public expenditure (made worse by aging people need more medical care)).
There are three possible counterarguments. First, India/Africa can take over China's role as the new deflationary engine of the world. Second, governments will increase retirement age and labor participation after retirement age. Third, Japan is a precedent for everyone else. If Japan is not facing the stagnation, we will not as well. Goodhart countered these three counterarguments one by one, suggesting lack of institutional power in India & separated economies in Africa (1), aging people's voting power, along with already high retirement labor participation rate (2), and Japan leveraged China's labor to rein in its inflation & stimulate growth (in Goodhart's argument, Japan has done reasonably well given their demographic structure).
This book can be very technical in places (especially in Chapter 6-9), but overall you can get away without understanding those economics terms and theories and get what Goodhart is talking about.
Goodhart explains the decade-long drop in inflation rate (and, as a result, interest rate) worldwide as a combination of globalization & China's supply of abundant cheap labor. Essentially, labor force & productions are deflationary (workers are paid less than their output for capitalist to amass a profit), whereas aging population and kids are inflationary (they consume and do not produce). Globalization allows China's massive labor force entering the global market is hugely deflationary, and therefore resulting in the drop of interest rate (central banks no longer need to hike up the rate to control inflation).
As this engine of deflation loses its momentum (China's aging fast), Goodhart predicts a reversal in the inflation rate, and therefore, interest rate. This is not fun due to the huge public debt that developed economies are carrying (rates hiking -> new debt carrying higher rates -> borrowers need to repay more -> tax more or cut public expenditure (made worse by aging people need more medical care)).
There are three possible counterarguments. First, India/Africa can take over China's role as the new deflationary engine of the world. Second, governments will increase retirement age and labor participation after retirement age. Third, Japan is a precedent for everyone else. If Japan is not facing the stagnation, we will not as well. Goodhart countered these three counterarguments one by one, suggesting lack of institutional power in India & separated economies in Africa (1), aging people's voting power, along with already high retirement labor participation rate (2), and Japan leveraged China's labor to rein in its inflation & stimulate growth (in Goodhart's argument, Japan has done reasonably well given their demographic structure).
This book can be very technical in places (especially in Chapter 6-9), but overall you can get away without understanding those economics terms and theories and get what Goodhart is talking about.
May 12, 2021
Livro que aborda uma tese polêmica sobre os efeitos do envelhecimento e encolhimento da população.
Segundo os autores, a redução da população economicamente ativa nas principais economias do mundo somadas ao esgotamento do excedente de mão de obra chinês pressionarao o mercado de trabalho e o crescimento. O fenômeno reverterá uma tendência de menor poder de barganha do trabalho, implicando em aumento dos salários e inflação, alem da queda da desigualdade dentro dos países.
O aumento do salário estimulará as empresas a investir, o que somado a uma população mais idosa (consequentemente, menos poupadora) alterará o equilíbrio entre investimento e poupança, causando subida dos juros.
Para validar essa tese, o livro explora o caso do Japão, país em que o envelhecimento e redução da população ativa é mais severo e que não teve os resultados esperados. Argumenta que a inflação anemica e juros negativos são motivados pela migração da manufatura para países em desenvolvimento, o que fez com que o mercado de trabalho não tivesse super aquecimento, causando ainda um deslocamento da mão de obra japonesa para ativadades com maior produtividade. Esse movimento não será possível no futuro para os demais países, uma vez que o envelhecimento é uma situação que maioria dos países enfrentará.
Por fim, colocam alguns fatores que poderiam suavizar a tendência esperada, como o aumento da automação e maior utilização da mão de obra da Índia e dos países africanos.
Caso estejam certos, um mundo com, juros e inflação mais altos, menos crescimento e desigualdade nos espera.
Particularmente, questiono a expectativa de aumento de investimento e queda na poupança.
Acho que em mundo com perspectivas de menor crescimento é provável o arrefecimento da demanda por novos projetos. E é provável que uma população com salários mais altos e pensões menos vantajosas aumente sua poupança privada.
Segundo os autores, a redução da população economicamente ativa nas principais economias do mundo somadas ao esgotamento do excedente de mão de obra chinês pressionarao o mercado de trabalho e o crescimento. O fenômeno reverterá uma tendência de menor poder de barganha do trabalho, implicando em aumento dos salários e inflação, alem da queda da desigualdade dentro dos países.
O aumento do salário estimulará as empresas a investir, o que somado a uma população mais idosa (consequentemente, menos poupadora) alterará o equilíbrio entre investimento e poupança, causando subida dos juros.
Para validar essa tese, o livro explora o caso do Japão, país em que o envelhecimento e redução da população ativa é mais severo e que não teve os resultados esperados. Argumenta que a inflação anemica e juros negativos são motivados pela migração da manufatura para países em desenvolvimento, o que fez com que o mercado de trabalho não tivesse super aquecimento, causando ainda um deslocamento da mão de obra japonesa para ativadades com maior produtividade. Esse movimento não será possível no futuro para os demais países, uma vez que o envelhecimento é uma situação que maioria dos países enfrentará.
Por fim, colocam alguns fatores que poderiam suavizar a tendência esperada, como o aumento da automação e maior utilização da mão de obra da Índia e dos países africanos.
Caso estejam certos, um mundo com, juros e inflação mais altos, menos crescimento e desigualdade nos espera.
Particularmente, questiono a expectativa de aumento de investimento e queda na poupança.
Acho que em mundo com perspectivas de menor crescimento é provável o arrefecimento da demanda por novos projetos. E é provável que uma população com salários mais altos e pensões menos vantajosas aumente sua poupança privada.
June 29, 2023
The Great Demographic Reversal : Ageing Societies, Waning Inequality and an Inflation Revival (2020) by Charles Goodhart and Manoj Pradhan looks at aging societies and the likely impacts that it will have on global economies. Goodhart is an economist at the LSE and Pradhan also has a PhD in economics and is the founder of Macroeconomics advisory firm.
The book carefully looks at how aging societies will impact growth, inflation and government budgets. The analysis is very careful. The authors also consider the likelihood that treatments are found that work on dementia and make the point that only 1/12 of the money spent on cancer research is spent on dementia research. They also go into just how expensive dementia care is.
The book looks at whether there will be enough people to overcome ageing societies and whether immigrants will be able to fill the gaps in rich economies. They find that China has aged and India is aging while only Africa may have enough population growth.
The case of Japan is also examined and the authors make the point that Japan could handle it’s aging in part because other countries hadn’t already aged and Japan could invest overseas and make good returns and avoid some of the economic problems that come with aging societies. But this won’t work as more societies also age.
Inflation is seen as something that was dealt with and kept low during years of a global demographic bulge that brought many workers to prime age. The authors suggest that containing inflation will be much harder if wages increase due to a reduction in the number of workers.
The Budgets of rich countries are seen as something that will greatly suffer as dependency ratios worsen. If combined with inflation and higher interest rates the outlook is quite alarming.
The Great Demographic Reversal is an excellent book that carefully describes plausible scenarios for the now aging world.
The book carefully looks at how aging societies will impact growth, inflation and government budgets. The analysis is very careful. The authors also consider the likelihood that treatments are found that work on dementia and make the point that only 1/12 of the money spent on cancer research is spent on dementia research. They also go into just how expensive dementia care is.
The book looks at whether there will be enough people to overcome ageing societies and whether immigrants will be able to fill the gaps in rich economies. They find that China has aged and India is aging while only Africa may have enough population growth.
The case of Japan is also examined and the authors make the point that Japan could handle it’s aging in part because other countries hadn’t already aged and Japan could invest overseas and make good returns and avoid some of the economic problems that come with aging societies. But this won’t work as more societies also age.
Inflation is seen as something that was dealt with and kept low during years of a global demographic bulge that brought many workers to prime age. The authors suggest that containing inflation will be much harder if wages increase due to a reduction in the number of workers.
The Budgets of rich countries are seen as something that will greatly suffer as dependency ratios worsen. If combined with inflation and higher interest rates the outlook is quite alarming.
The Great Demographic Reversal is an excellent book that carefully describes plausible scenarios for the now aging world.
October 9, 2021
A valuable contribution to one of the hottest current debates amongst the investment world as well as the large ranks of the retirees without a gold-plated inflation-linked pension: are we seeing a revival of inflation after it went to sleep for 30 years?
One aspect of trying to answer that question is the effect of demographic change on inflation. The book is a broad analysis of this factor - by two clear and curious minds - that has its genesis in, and expands out from the Aksoy et al (2015) model (reproduced on p.85). In a nutshell, this model showed that an ageing population will save less and spend more (those over 60 run down savings) but the net impact on inflation depends on the behaviour of investment, where unfortunately the model did not produce a statistically categoric answer.
[Given that this wave of ageing is occurring at a time when we are rapidly adopting measures to combat environmental damage, clean energy, and resilience to viruses - and companies either have a lot of cash or can borrow cheaply - it seems likely that fixed investment will be robust enough to put demand pressure on resources].
The authors devote a full chapter to debunking the argument that because the combination of ageing and monetary stimulus in Japan has not produced inflation in 30 years, it won’t happen now in other countries. The authors argue that Japan has been different because it has a history of total wage income - and not unemployment - taking the strain of cyclical adjustment by the economy; and that this was enhanced in a multi-decade period which saw a backdrop of global deflation which Japanese corporates could tap jnto by relocating manufacturing capability to China, Vietnam etc.
[PS: for full disclosure, Prof. Goodhart examined my PhD]
One aspect of trying to answer that question is the effect of demographic change on inflation. The book is a broad analysis of this factor - by two clear and curious minds - that has its genesis in, and expands out from the Aksoy et al (2015) model (reproduced on p.85). In a nutshell, this model showed that an ageing population will save less and spend more (those over 60 run down savings) but the net impact on inflation depends on the behaviour of investment, where unfortunately the model did not produce a statistically categoric answer.
[Given that this wave of ageing is occurring at a time when we are rapidly adopting measures to combat environmental damage, clean energy, and resilience to viruses - and companies either have a lot of cash or can borrow cheaply - it seems likely that fixed investment will be robust enough to put demand pressure on resources].
The authors devote a full chapter to debunking the argument that because the combination of ageing and monetary stimulus in Japan has not produced inflation in 30 years, it won’t happen now in other countries. The authors argue that Japan has been different because it has a history of total wage income - and not unemployment - taking the strain of cyclical adjustment by the economy; and that this was enhanced in a multi-decade period which saw a backdrop of global deflation which Japanese corporates could tap jnto by relocating manufacturing capability to China, Vietnam etc.
[PS: for full disclosure, Prof. Goodhart examined my PhD]
July 6, 2025
The authors should be praised for trying to incorporate an inevitable demographic trend into future macroeconomic projections. However, the commendable stops here.
The editing of the book was quite poor with many images pixelated (I presume these are screenshots from other sources), others, repeated a few pages from one another, and others, yet, with wrong legends.
The main issue I have, however, is with the conclusions of the book. Any one person that wants to make long-term projections will inevitably have to make some assumptions. The issue I have is that these tend to not be consistent throughout. For instance, their main conclusion, that inflation will inevitably rise as population age rises, hinges upon the political-economic consideration that central bank independence will come into question as the preferred policy diverges from the politically easier low interest stance. In fact, recent evidence suggests that markets can act as a check on political interferences in monetary affairs. At the same time, their preferred method to raise revenues is to have taxes on land. In this instance, they forgot to mention any political-economic consideration.
Finally, another assumption on which their thesis relies is that there will not be a significant enough increase in productivity for inflation to be curtailed. They mention they say this to remain agnostic about artificial intelligence and other technologies. I do not blame them for reaching this conclusion in 2019. However, I do wonder whether they may have changed their stance because of recent advancements in the industry.
The editing of the book was quite poor with many images pixelated (I presume these are screenshots from other sources), others, repeated a few pages from one another, and others, yet, with wrong legends.
The main issue I have, however, is with the conclusions of the book. Any one person that wants to make long-term projections will inevitably have to make some assumptions. The issue I have is that these tend to not be consistent throughout. For instance, their main conclusion, that inflation will inevitably rise as population age rises, hinges upon the political-economic consideration that central bank independence will come into question as the preferred policy diverges from the politically easier low interest stance. In fact, recent evidence suggests that markets can act as a check on political interferences in monetary affairs. At the same time, their preferred method to raise revenues is to have taxes on land. In this instance, they forgot to mention any political-economic consideration.
Finally, another assumption on which their thesis relies is that there will not be a significant enough increase in productivity for inflation to be curtailed. They mention they say this to remain agnostic about artificial intelligence and other technologies. I do not blame them for reaching this conclusion in 2019. However, I do wonder whether they may have changed their stance because of recent advancements in the industry.
June 15, 2025
dense reading, but a provocative thesis that is hard to refute
Reading intended for economists, replete with jargon and many terse points that retired me to reread and think hard what they meant.
The thesis is that the world economies have had decades of tailwind from growth of low cost labor from Asia, principally China, which has depressed wages and inflation, but which is coming to an end and tipping into aging, reduction of labor pools globally, and rising expense (spending) of the retired and increasingly care dependent aged population.
The inevitable result, they argue, is inflation and rising interest rates, likely loss of central bankers independence, and challenges to escape the debt trap of high debt service costs on a declining productive segment of the populations, that will likely be resolved in part by inflating away the debt.
An entire chapter is devoted to the question of why Japan hasn’t already experienced these outcomes, arguing that while Japan has begun to experience aging, it has still had the opportunity to outsource its economy to China, which opportunity is more coming to an end.
Written before the pandemic of 2020, it also contains a postscript written in 2020 addressing the likely implications of the pandemic, with some surprisingly good predictions, including a surge of stubborn inflation, increasing peer to labor, a turning point of populist tendencies to trade barriers, etc. The main miss is in the expectation that the pandemic would be over later in 2020!
Reading intended for economists, replete with jargon and many terse points that retired me to reread and think hard what they meant.
The thesis is that the world economies have had decades of tailwind from growth of low cost labor from Asia, principally China, which has depressed wages and inflation, but which is coming to an end and tipping into aging, reduction of labor pools globally, and rising expense (spending) of the retired and increasingly care dependent aged population.
The inevitable result, they argue, is inflation and rising interest rates, likely loss of central bankers independence, and challenges to escape the debt trap of high debt service costs on a declining productive segment of the populations, that will likely be resolved in part by inflating away the debt.
An entire chapter is devoted to the question of why Japan hasn’t already experienced these outcomes, arguing that while Japan has begun to experience aging, it has still had the opportunity to outsource its economy to China, which opportunity is more coming to an end.
Written before the pandemic of 2020, it also contains a postscript written in 2020 addressing the likely implications of the pandemic, with some surprisingly good predictions, including a surge of stubborn inflation, increasing peer to labor, a turning point of populist tendencies to trade barriers, etc. The main miss is in the expectation that the pandemic would be over later in 2020!
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