Harry Dent is always entertaining to listen to, but is he right about the link between demographics and inflation?
There is simply no way the Fed can win the battle it’s currently waging against deflation, because there are 76 million Baby Boomers who increasingly want to save, not spend. Old people don’t buy houses! At the top of the housing boom in recent years, we had the typical upper-‐middle-‐class family living in a 4,000-‐square-‐foot McMansion. About ten years from now, what will they do? They’ll downsize to a 2,000-‐ square-‐foot townhouse. What do they need all those bedrooms for? The kids are gone. They don’t visit anymore. Ten years after that, where are they? They’re in 200-‐square-‐foot nursing home. Ten years later, where are they? They’re in a 20-‐square-‐foot grave plot. That’s the future of real estate. That’s why real estate has not bounced in Japan after 21 years. That’s why it won’t bounce here in the US either. For every young couple that gets married, has babies, and buys a house, there’s an older couple moving into a nursing home or dying.
In my opinion there is a clear link between credit growth and inflation: the faster credit grows, the faster the money supply grows, and the higher the rate of inflation. Demographics are one of the factors that drive credit growth, but they are not the only factor. Interest rates are just as important: when interest rates are low we tend to save less and borrow more. And jobs, as the Fed discovered, are also important: if you haven’t got a job, you can’t borrow from the bank even when interest rates are low.
At present I would guess that jobs are the biggest constraint on credit growth. Later, interest rates will rise when employment recovers — as the Fed attempts to take some of the heat out of the economy. Only then may demographics become the major restriction on credit growth, with older households down-sizing outnumbering younger households up-sizing. But that is by no means definite: solving the jobs crisis alone could take decades!
Harry dent quoted from John Mauldin | A Decade of Volatility: Demographics, Debt, and Deflation (application/pdf Object).
De-leverage, de-flate, de-value.
There is structural unemployment in the U.S with many companies unable to find qualified and willing employees among the current unemployed. With the deleveraging going on as noted by Dent, it may be many years before the employment rate normalizes. It seems like this is a necessary condition for inflation to occur regardless of the current growth in the money supply. Only when demand comes back will business need the loans that will forecast significant inflation. In the interim it seems that increasing deflation will occur.
The Fed won’t fail … it just won’t succeed! It’s not only demographics. Median family income in the US has been slowly declining as workers lose one job and take another at lower pay. This negative change more than makes up for the increase in the number of jobs created (positive change). When overall wages are declining there will be virtually no inflation (except for modest commodity inflation). It is still a question whether slow commodity inflation can offset the deflationary pressure in wages. In such a scenario, living standards must erode slowly … and the only accomplishment the Fed can achieve is to manage this decline in such a way there is no major dislocation (like the 1930’s). So far it has succeeded, in this aspect of economic management, but it cannot resurrect the creation of high paying jobs with this approach.