Monday, July 10, 2017

Bit of long-term interest rate thinking

Been reading a first-year geography text, and in the section on demography there's an interesting point made:

All the countries in the world are aging right now. Median age is going to go up in every single country over the next 30-40 years.

I immediately realized this means interest rates will continue to go down for decades to come.

Here's why:

1. Younger people are borrowers, older people are lenders. More older people per young person means more lenders attempting to lend to fewer borrowers. Supply and demand means the neutral rate has to go down to make that market clear.

2. Older people are austerians (except when it comes to government largesse towards old people of course), and they vote. Thus, with a larger fraction of the population made of old people, governments will pursue more and more austerity, meaning government debt goes down relative to savings. Again, supply and demand means interest rates go down.

3. Old people spend less than young people on goods, and they exhibit no yoy growth in spending; and by (2) above they'll also be voting for more and more constraints on young people's spending. Thus, consumer demand will remain weak, so no investment demand by corporations, thus less borrowing again.

4. And so on.

You'll have a few intelligent governments spending a fortune on growth capital because lending is so cheap, and they'll be all that keeps the entire world from plummeting deep into negative rates.

Think about it, it makes sense: when did we last see high rates? When the baby boomers started their families.

Demography is a major fucking input into rates, I think.

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