Wednesday, September 23, 2015

Ambrose Evans-Pritchard — Deflation supercycle is over as world runs out of workers

The demographic 'sweet spot' is vanishing. We are on the cusp of a complete reversal, spelling the end of corporate hegemony
When Charles Goodhart speaks it is important. He is one of the few people at the top of the chain that actually understands monetary economics and is MMT-friendly. So you'll probably want to read this, even if you don't pay attention to AE-P.

This is going to shift the conversation if it gets traction. Goodheart saying it and AE-P featuring itguarantee it will.

The world is in flux. The great leveling is already here in this view.

The Telegraph
Ambrose Evans-Pritchard


Dan Lynch said...

As cheap labour dries up and savings fall, real interest rates will climb from sub-zero levels back to their historic norm.

Maybe cheap labour is drying up in the UK but certainly not in the US. As MMT knows interest rates are a policy choice having nothing to do with savings.

I'm not aware of any evidence that demographics drives the labor market?

China will face a double hit, thanks to the legacy effects of the one-child policy. "They kept it going 15 years too long, disastrously," said Prof Goodhart.

Nonsense. The real threat is a growing population on a finite earth. Add climate change and stir.

scarce labour will set off a bidding war for workers, all spiced by a state of latent social warfare between the generations. "We are going back to an inflationary world,"

Inflation does not correlate to birth rate, it correlates to the price of energy.

We will see a reversal of the forces that have pushed the world savings rate to a record 25pc of GDP and created a vast pool of capital spilling into asset booms everywhere

Assumes loanable funds theory of lending.

I'm afraid I can't agree with a single thing this guy said.

Anonymous said...

"We all know what happened. Multinationals seized on the world's reserve army of cheap leader."

Well. Wasn't that quite the typo.

Ryan Harris said...

Excellent Article. Most financial markets and economic analysts ignore population changes. If anyone needs to be right on what is happening in the economy, they've got to study the demographics to make sense of the rest. It is the number one thing that must be understood to put the economic indicators into context and understand what is happening.

Anonymous said...

Too much AEP, not enough Goodheart.

Tom Hickey said...

Stephanie Kelton tweeted, "Going to part ways with my friend Charles Goodhart on this one."

Dan Lynch said...

Good for Stephanie.

I always roll my eyes when people talk about slow birth rate being a "demographic disaster" or some such thing. As MMT correctly points out, our real constraints are always real resources. Our real concern should be per-capita well being not aggregate something or another.

The problem is that capitalism doesn't know how to function without growth. Publicly traded companies are expected to grow, if they don't, then their stock price won't grow. But that's a problem with capitalism, it's not a problem with real resources.

NeilW said...

The 'cheap labour is drying up in the UK' argument is also false. We're a member of the EU with 23 million unemployed people able to work here from across a shattered Europe - and that's before we access the limitless supplies of people from India, Pakistan and Bangladesh all of whom would find vibrant communities of people from their part of the world in the UK.

This is all part of the 'interest rates must go up' push amongst the financial class.

Ignacio said...

Meanwhile, real unemployment, underemployment, poor quality jobs etc. are at levels not seen in decades.

I don't think the income share has much to do with the population pyramid, in fact with higher population growths a few decades back the income share of labor was growing, unlike now, which has been stagnant for two decades even if developed nations population is becoming short.

Youth unemployment is as high as it has ever been, while old workers keep avoiding retirement for many reasons (some social/personal, but in other cases because economic insecurity). If the population stabilization/decrease will help job market, is not something we are observing right now.

The problem is that the 'life spending cycle' has been disrupted because you people is being starved of income: poor jobs, underemployment, and being loaded with debt early on have restraint spending and consumption (and maybe there are also certain social trends too in effect).

NeilW said...

"The problem is that capitalism doesn't know how to function without growth. "

You can easily 'grow' without consuming any more resources. That's one of the beauties of financialisation. You get growth in numbers flying around computers ever faster without consuming anything particularly real.

But it has to be the right sort of financialisation - that drives efficiency in real resource usage. Less labour used, more machines, more efficient use of energy, easier to recycle and repurpose.

The problem with the environmentalists is that all they can think of are oak trees and stone castles in the quest for sustainability. Yet the best models are the annual flowers and the fruit fly - short lives, fully recycled, rapidly evolving to fit the changing environment, constant renewal.

Ryan Harris said...

The US will likely be at sub 4% unemployment, Lockhardt said yesterday the Fed expects 3.8% by next year. At the torrid pace that Europe is creating jobs, I don't where they will be, Currently 10.8, maybe 8.9% in a year. Japan is already at 3.3% unemployment. UK is at 5.5%, maybe below 5% by next year.

Even resource exporters like Brazil or Australia that have been hid hard by the China Rebalance/Credit Collapse are at or near record numbers of employed persons even though their unemployment rates have risen a bit as people are being displaced from resources investment. It doesn't seem too far fetched to think we could get a bit of wage inflation.

Matt Franko said...

"This is all part of the 'interest rates must go up' push amongst the financial class."

Neil's got it... they are going to do it soon despite what Bill pointed out the other day...

I see it as a contest to see who will go first between the US and UK... whichever one goes first the other will then go immediately next...

Ignacio said...

Employment to population ratios are awful, even when taking into account demographics (more so! I suggest you look at that at USA, given that actually USA demographic pyramid is not inverted like in Europe, is scary). Long term unemployment and not reported unemployment, underemployment, etc.

I don't know how it is in the USA (other than the statistics published, which look better on paper), but in Europe is pretty awful right now except maybe the UK and a couple more countries. Even the 'exemplar' Germany is full of mini-jobs and the job market has been crappified.

Wage inflation? Not any time soon, here at least, reality on the street does not back up this. It's always 'sluggish', work insecurity is very high, business activity is uncertain; it does not pick up, for example construction which is a main driver of activity doesn't pick up, this is one of the effects, too, of low youth incomes (family formation, buying new houses) + inverted population pyramid. Unless you are a multinational (which with the EM's bubbles exploding are also getting hit) the environment is very hostile.

Ryan Harris said...
This comment has been removed by the author.
Matt Franko said...


They (US & UK) will do it anyway... Gross was out yesterday screaming for higher rates those "managed-money" guys are dying... once they start it will help the economy greatly generally but will do not much for Picketty type distributional aspects... imo probably make them even worse...

They will rationalize it somehow like this fossil Goodhart (ha!) is doing here....

Anonymous said...

"This is all part of the 'interest rates must go up' push amongst the financial class."

Yes, but these economists are also fighting back against the new socialist push in the US and UK, and increased support for pro-social, anti-neoliberal politics among the young. They are terrified, and are trying to convince everybody that the capital/labor balance issues are going to take care of themselves and require no political intervention.

Tom Hickey said...

Well, we are reading Goodhart through the eye of A E-P. I'd like to see a Goodhart paper on it.

Overall he is correct and Bucky Fuller anticipated it fifty years ago, explaining how the number of births per family declines in proportion with energy use. As the remnant of the rural agriculture age completes the transition to agribusiness globally, there trend will be toward urbanization, as the Chinese leaders have realized and are accommodating by building "ghost cities."

Demographic studies show declining birth rate with rising standard of living and more people per unit of land.

This the trend worldwide and it is picking up speed, even in recently undeveloped areas.

While conventional economics tends to oversimplify the assumption that labor and capital are substitutes for each other it is true to a degree. When labor becomes scarcer, labor bargaining power increases and the wage bill rises. At some point, it becomes economically efficient to substitute capital for labor.

This has been delayed in developed countries by importing embedded labor from less developed ones, but that trend is now winding down. Even China is automating and robotizing.

Goodhart's view may look silly from today's conditions but he is correct in perceiving a trend that has been going on for some time and was predicted much earlier.

There wouldn't be any discussion about automation and robotics replacing workers anytime soon if this were not the case. Firms would not be considering it seriously as near-term option as long as they could substitute cheaper labor even though technological advances were providing alternatives.

In fact, this is an argument for increasing the minimum wage. It shortens the time before labor become economically inefficient wrt to capital and replacing labor with capital increases productivity and growth. Then the issue becomes how to handle the increased opportunity for leisure generally.

That's not a difficult issue to solve as owners of capital realize that their profits depend on maintaining demand for their output. Or just cut to the chase and dump the capitalistic market state for the socialistic welfare state.

Dan Lynch said...

Why would corporations need more workers if there is no growing demand for their product? The history of capitalism is a history of imperialistic conquest of new markets since domestic markets are easily satisfied. The trend continues to this day with Germany seeking to dominate the EU market for manufactured goods, and the petro states competing to sell gas to Europe.

From the point of view of real resource constraints, there is absolutely nothing bad about zero population growth or even declining population.

Who gets to decide population policy? In practice it is decided by religious sects who seek to procreate their way to social dominance, and by the elites who benefit from cheap labor and a growing domestic market. Polar bears, wolves, sage grouse, and bison have no say in the matter. The average person certainly does not benefit from population growth.

Matt Franko said...

Dan it is pure self-interest on their part.....

There is no direct conflict...

Ignacio said...

Tom, 20% to 30% of the existing jobs, most of the white collar jobs, are going to be destroyed in the next decades by automation. Except commercial jobs, all the jobs that require to manipulate and analyze data can be done better by machines. Dexterity is not needed, so is raw computational data and efficient algorithms, not robotics, what is needed for that. Most of the jobs out there are non-creative, they can be automatized, this is the future, it happened in agriculture, it still is happening in industry, and it will happen in service sector.

Is not a bad future if we figured out we can employ people in doing things machines cannot do (maintaining and building those machines ofc, but that's insufficient to replace the lost jobs, it's not happening), and distribute the produce of that work better. But right now this ain't the case, the global population pyramid will be flattening, but with it also will flatten consumption and production, meanwhile the productivity gains are being monopolized and skewed towards the top of the economy.

Diminishing population does not necessarily mean improving conditions for labor because it's becoming more scarce, it's all relative to the share and depends on the context.

P.S: Paradoxically jobs that require dexterity will be safe for a while, as is much harder to make machines interact with the environment in a safe way, specially under uncertain non-mechanizable conditions, which is what organic life has to deal with all the time.

Tom Hickey said...

There is going to be a huge expansion of leisure and leisure doesn't meaning lolling around doing nothing and not consuming anything much but more alcohol and dope..

Education expands with leisure and need for educators and educational facilities. Even though a lot can be accomplished through distance learning made widely available by technology, people still need interpersonal contact. This will become just one aspect of a huge service market.

Machines will do most of the production, but they will not replace a lot of potential work in service.

Look at Maslow's hierarchy of needs. Production is concerned mostly with the base of the pyramid.

Self-actualization, at the apex, will also be huge.

Maslow's eupsychian psychology and management is about living the good life in a good society – ancient issues brought up to date in the 20th century. Humanity is going to take that a lot further in the 21st and beyond. People and Maslow and Fuller were developing these ideas back in the Sixties and Seventies and they still remain fresh.

Joe said...

Interesting discussion..

Is Tom is being overoptimistic? I think the elites will take a more "surplus population" view. We'll have a large class of "moochers" and "takers" while the number "producers" grows ever smaller. So yes, there'll be leisure for the unemployed, but I think it'll be a bare minimum subsistence level (we're running out of money dontcha know? Trump said 24 Trillion's a tipping point on Colbert the other night), can't let the moochers be too comfortable, I hear the poor even have refrigerators now... You know, the poor today live better than Royalty did 400 years ago... never underestimate the elite's utter contempt for the commoner.

Back in the real world, I can't see how a smaller population could possibly be bad. As long as remaining workers are productive enough, enough goods and services will be produced. And large retired population needing goods and services will provide much needed jobs for the youth, just gotta make sure the retired folks have enough money... oh right, the deficit.....

Ignacio said...

Right Joe, the problem is not real, decreasing population is good, not bad. But we have to see this through the prism of the 'scarcity' mindset. The scarcity mindset is the 'we are running out of money' ideology, as long as that's the dominant paradigm and people has to fight over income everything else is a dream and won't outcomes won't happen.

There is a lot of 'leisure' time nowadays given the crapification of the job market, but this does not result in anything else than cliques and bullshit, like the "sharing economy" (what's so cool to work as a taxist without license or renting rooms of your apartment for scrap income) , surrounded by buzzwords and marketing idiocy selling the kool-aide.

One thing that "free time" does though is breaking the confidence in the current system and raising awareness and critique. But that could take a while to transform into something, although we are finally starting to see the first signs appearing.