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The integration of China into the global manufacturing complex by itself more than doubled the available labour supply for the production of tradeable products among the advanced economies (AEs).
These two politico-economic developments, the rise of China, and the return of Eastern Europe to the world trading system, provided an enormous positive supply shock to the available labour force in the world’s trading system.
a result, globalisation surged ahead, with trade flows over the years 1990 until 2017 growing by 5.6% per annum, compared to the growth of world GDP of 2.8%.
Combining these two factors, the rise of China, globalisation and the reincorporation of Eastern Europe into the world trading system, together with the demographic forces, the arrival of the baby boomers into the labour force and the improvement in the dependency ratio, together with greater women’s employment, produced the largest ever, massive positive labour supply shock.
When such a positive supply shock to labour occurs, the inevitable result is a weakening in the bargaining power of the labour force.
‘Great Moderation’. Indeed, in many ways, these were the best 15(plus) years for general economic success in the history of the world.
First, the declining growth rate of the labour force will necessarily reduce the growth of real output, unless there is an unexpected and quite remarkable surge in productivity
Second, our highest conviction view is that the world will increasingly shift from a deflationary bias to one in which there is a major inflationary bias
With the supply of labour shifting down, standard economics suggests that their bargaining power will increase, and that real wages and the relative income share of labour will start rising again.
The most fundamental explanation for the rise in inequality can be traced back to the global surge in labour—and hence its reversal will also lead to a decline in inequality.
In effect, we are in a debt trap. Debt ratios are so high that increases in interest rates, especially at a time in low growth, may drive exposed borrowers into an unsustainable state.
Around a decade ago, the growth strategy in China switched from a centralised one of promoting growth to one of decentralisation of economic decisions.
Shocked by the loss of future retirement income, households would raise their savings immediately and the ‘paradox of thrift’ would then lead to a consumption collapse and push Japan into a depression. Thus, the ‘leakage’ of Japan’s debt cancellation via household spending is just far too big.
First, China will no longer be a global disinflationary force.
Second, falling savings related to the ageing population and to the end of financial repression will push the current account into deficit.
Third, China’s ability to introduce labour-saving and productivity-enhancing technology depends on the not-inconsiderable innovations that can be generated at home.
As China’s labour force dynamics change direction, the savings-investment balance within and even outside China will change as a result. Demographics will ensure that China’s extraordinary savings will fall.
Japan in two ways: (i) labour will shortly become more costly and will become even more costly in an absolute and relative sense and (ii) the manufacturing sectors have seen neither the large capital expenditure growth nor an increase in private sector debt of their EME counterparts.
the generosity of a country’s pension system is inversely related to the participation rate, and our key assumption is that pension/retirement benefits can be reduced, but not by drastic amounts.
Why the USA did so much better than Europe in restoring its banking sector Because Tim Geithner could use TARP (Troubled Asset Recovery Program) moneys to recapitalise banks, as necessary, he could establish credible stress tests, and require bank equity to be brought up to levels consistent with the desired ratios applied to deposit levels as at the date of the stress test. The application of such public (TARP) moneys to the relatively few banks falling below the desired levels was then protected by constraints on such banks’ dividends, buy-backs and enhanced executive remuneration until all
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The losers will be savers, pension funds, insurance companies, and those whose main financial assets take the form of cash.
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.
