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Demographics will reverse three multi-decade global trends

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Super interested to get your thoughts on this paper out from the BIS.

http://www.bis.org/publ/work656.pdf

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Posted by Ryan Taylor
Posted on 09/12/2017 2:57 AM
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Ryan, I’m sure you want Cullen’s thinking and not mine. Anyway, the economic problem points raised in this article, (e.g. world wide demographics are at the heart of the problem), are well supported. At the end of the article (at pgs 27-28, I did read the whole thing), they type about the solutions. This IMHO dovetails with my question. Nations can add equity into their economies (e.g. fiat cash — the ultimate equity), rather than debt issuances. There is so much work to do around the world, yet no cash to pay the folks to do it. Doing the work will add to the value and productivity of the various economies and will convert fiat cash into real stuff! Don’t issue so many bonds!

“The paths to deleveraging – and our preferred method of issuing more equity like instruments”

“There are three main paths to deleveraging: inflating away debt, forgiving it, and making it permanent. Historically, the former two have played an important role, and while both will feature in this episode, we doubt they will play the lead role. A significantly high level of inflation will be needed to make a dent in the real burden of debt – this may be hard to generate quickly. Even if it was possible to raise inflation, we doubt that inflation targeting central banks would allow inflation to rise rapidly initially.

“Our preferred method is to issue more equity-like instruments. The problem with debt instruments is their lack of state contingency, i.e. that the fixed servicing cost of debt stands at odds with fluctuations in revenues and asset returns. There are
solutions that can be considered for households, corporates, banks and governments to design optimal equity-like instruments that can reduce leverage and allow the servicing of the new liability to fluctuate in line with the state of the world at a point in time. The debt-equity swaps that have been under way in China’s banking sector for quite a while now are a step in the right direction.”

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Posted by Dennis
Answered on 09/12/2017 5:19 PM
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    Hey Ryan. Thanks for posting this. I am actually turning it into a post. It’s SUPER interesting.

    Keep an eye out. I’ll also post it here when I am finished.

    Thanks!

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    Cullen Roche Posted by Cullen Roche
    Answered on 09/15/2017 12:40 PM
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      Great! Glad you liked it.

      I will definitely keep an eye out for the post.

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      Posted by Ryan Taylor
      Answered on 09/16/2017 10:36 PM
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        I share my counter arguments with supporting evidence in charts below for your reference, and am interested in seeing your rebuttals to my counter arguments if you agree with the reasons and conclusions mentioned in this article.

        (A) “a drop in real labor earnings”

        The reality is that
        (1) a rise not drop in both real and nominal labor earnings.
        (2) a stagnant in YoY % change in real labor earnings
        (3) a drop(still positive) in YoY % change in nominal labor earnings.
        (4) inflation, wage-push inflation and YoY % change in nominal labor earnings are correlated.

        The definitions and color lines in the chart are:
        (a1) real labor earnings(blue dash line) = (total wage/payroll)/price level
        (a2) YoY % change in real labor earnings(blue line)
        (a3) nominal labor earnings(black dash line) = total wage/payroll
        (a4) YoY % change in nominal labor earnings(black line)
        (a5) inflation(grey line) = YoY % change in price level
        (a6) wage-push inflation(red line) = YoY % change in the ratio of total wage over RGDP


        https://fred.stlouisfed.org/graph/?g=f5Ts

        (B) “demographic developments over the last 35 years have driven falling real interest
        rates, inflation and wages” “Put simply, the ratio of those of working age rose sharply relative to the dependent young (since the birth rate was falling) and to the old (since the population was still growing fast and longevity was slower to increase as much)”

        The reality is that the 16-34 age curve(not lower dependency ratio) has driven falling YoY % change in nominal labor earnings, inflation and wage-push inflation. The reason is that young workers have higher YoY % change in salary increase than old workers’ YoY % change(not necessary the total amount of salary increase). Baby boomers are born between 1946-1964 and belong to the 16-34 age group between 1962-1980. After the peak in 1980, the ratio of 16-34 age group over total population starts falling along with falling YoY % change in nominal labor earnings and wage-push inflation.

        The definitions and color lines are as follows:
        (b1) 16-34 age curve in employment level(black line)= 16-34 age employment level/civilian employment level (b2) 16-34 age curve in labor force(green line) = 16-34 age labor force/civilian labor force
        (b3) 16-34 age curve in population(yellow line) = 16-34 age population/total population
        (b4) inflation(grey line) = YoY % change in price level
        (b5) wage-push inflation(red line) = YoY % change in ratio total wage/RGDP
        (b6) production-pull inflation(blue line) = YoY % change in ratio GDP/total wage

        Note that
        (1) inflation = wage-push inflation + production-pull inflation + hybrid effect(= wage-push inflation*production-pull inflation). P=(Wage/Q)*(GDP/Wage), thus %P = %(Wage/Q) + %(GDP/Wage) + %(Wage/Q)*%(GDP/Wage)
        (2) production-pull inflation is in a bounded range of +/- 3% in past. Wage-push inflation and YoY % change in nominal labor earnings are correlated to 16-34 age curves as shown in the chart.


        https://fred.stlouisfed.org/graph/?g=f5Vc

        (C) “why real interest rates will rise thanks to ageing, and then why wages and inflation will rise”

        The reality is that wages/inflation/real interest rates will not rise if the ratio of young worker(16-34 ages) population over total employment level is not significantly rising. Ageing has caused more old workers staying in the job(beyond 34 year old and still working) in the employment. This does not improve the young worker population ratio, thus it will not improve YoY % change in nominal labor earnings, inflation or wage_push inflation. Thus the real interest rates will not rise if inflation is low.

        (D) “The debt-equity swaps that have been under way in China’s banking sector for quite a while now are a step in the right direction.”

        Authors, are you kidding? You really do not understand China’s political economy. Debt is the money that companies owe to bond owners. Now if you swap debt to equity, then bond owners become shareholders of the companies and you owe money to yourselves. Debt-equity swap is a way of debt default. There are huge debts in China’s companies (both private and SOE) that can no longer pay back to bond owners. It is a step that China government confiscates the debts.

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        Posted by pliu412
        Answered on 09/17/2017 11:42 PM
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