The Great Demographic Reversal

Beginning in 1990, several forces converged to shape the global economy. Globalization, demographics, technology, deflation, debt, and interest rates have all played a role. Now, according to a recent book, at least two of those forces are reversing. In The Great Demographic Reversal, authors Charles Goodhart and Manoj Pradhan describe these forces and their influence on the last thirty years of economic activity. With this convergence, the world experienced an extended deflationary period, which per the authors, was driven in part by a labor supply shock. The book said the following:

Combining these two factors, the rise of China, globalization and the reincorporation of Eastern Europe into the world trading system, together with the demographic forces, the arrival of the baby boomers into the labor force and the improvement in the dependency ratio, together with greater women’s employment, produced the largest ever, massive positive labor supply shock.

With this positive supply shock came a weakening of labor’s bargaining power and a downward pressure on wages. Now, the authors believe that both globalization and demographics will reverse. The massive pool of labor that came from China and Eastern Europe is succumbing to an aging society (Japan is the poster child). That same aging dynamic will reduce the working age population. As this reversal accelerates, deflationary forces that caused inflation to remain at or below Central Bank inflation targets reverse as well. The conclusion (a hotly debated one) per the authors is that the future is one of:

  • Inflation
  • A fall in working age population
  • An aging society that struggles with the ravages of dementia
  • Declining growth of real output
  • An increase in labor’s bargaining power
  • Possible interest rate increases
  • Increased health expenses
  • A reduction in inequality

The authors state several times that their findings are controversial and counter to the views of mainstream economists. Judge for yourself. I have added the book to my Book Library

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