Last week financial
press had two interesting articles about economic effects of declining
populations. FT mentioned a paper by Masaaki Shirakawa, former governor of BoJ,
where he claims that decline in a country’s working age population leads to
deflation. Older people spend less than the young, and take less debt. As a
result, domestic demand falls and deflationary pressures build. This is where
the second article picks up. A research paper quoted in Reuters claimed that
monetary policy becomes less effective as societies age. Older people save
more, borrow less and therefore are less sensitive to interest rate changes
than the young. Therefore, as societies age, central banks have to pull harder
to achieve the same end results.
Central banks in
ageing western (and some Asian) countries are already doing that. Policy rates
are at historic low and for historic long. QE, a different version of the same
concept of cheaper debt, also has no end in sight. The effect is higher
investment flows leading to asset price inflation, and potentially a bubble
somewhere. That somewhere may well be developing markets. Huge amount of hot
money inflow is having destabilizing effect in these countries. Asset price
inflation with possible asset bubble is one such effect. Higher interest rate volatility
and market uncertainty are others.
The second
observation of fall in domestic demand in ageing countries also suggests that these
economies may need to be rebalanced away from credit fueled domestic
consumption. Then, fiscal policies become more important for economic growth. Also,
deflation may only be a mechanism to shrink industry down to demand level.
Then, central banks might want to rethink their stance of fighting deflation by
all means. Net conclusion – rethink current monetary policies.
