I don't normally blog about macroeconomic issues because I know enough to know that I will be wrong most the time. However I feel I need more than the 140 characters on twitter to explain why I am unconvinced that negative rates are that unnatural.
Alas you are going to have to go through a fairly long-winded argument. And I am far from sure of all this - so I really want the comments to criticise my thesis. I am apt to change my mind.
Step 1: the impossibility of collectively deferring consumption
Very roughly almost everything I have consumed this year was made this year. The restaurant meal, the haircut, even the flight I took. There are a few exceptions. The plane trip that I made was made in a seven year old plane (but it wasn't made in a 20 year old plane).
Very few services I consume at all are produced in any way more than say a decade ago (or with capital equipment more than a decade old).
There are a few exceptions.
- I snitched a 15 year old bottle of wine from the cellar last week (it was very nice).
- And much more importantly the housing services I consume are in a house that was built 30 or 40 years ago.
But with those exceptions what I consume in this decade is almost entirely produced in this decade.
And for that matter what I consume in the five years from 2030 to 2035 will almost entirely be produced in those five years.
I can inter-temporarily move consumption around (saving money/capital now) and consume a little more than I earn in 2035.
Everyone individually can do that. That is what capital markets are for in part.
But collectively we can't.
You see everything that everyone consumes in the years 2030-2035 will roughly be made in the years 2030-2035.
We can all save individually saving money, deferring consumption, but collectively we do not defer consumption. We just rearrange claims on that consumption.
Step 2: ageing populations
In every country that matters economically populations are ageing - very sharply. Indeed this is the most rapidly ageing population in human history.
And ageing people want to defer consumption. Individually we have huge populations wanting to defer consumption.
Step 3: the problem - we cannot collectively defer consumption
And now you see where I am going. Individually we all want to defer consumption. Collectively we cannot because what is consumed in 2030-2035 will roughly what is produced in those years.
So I am going to assert that collectively we are very likely to be disappointed. People will not get (in returns) what they expect to get.
Step 4: How is this disappointment to be settled on people?
Since I am asserting that collectively we are going to be disappointed (as we can't collectively defer consumption) the next twenty to thirty years will be in large part trying to work out how to settle that disappointment on people.
And if you can work out all the ways (and timing) that settlement is disappointed on people you should be able to make money (trading the other side). I would love to be able to do this. But here are a few suggestions.
- Pensions default. We all think by working hard and earning a pension we are looking after ourselves - but collectively we are disappointed.
- Inflation takes away our savings
- Interest rates don't keep up with inflation - we have 20 years of negative real rates - maybe sharply negative after taxes,
- Asset prices in real terms fall for decades - so your Singapore apartment isn't going to be worth what you think it is - nor is that Sydney or London place, and equities are destined to disappoint.
And it won't matter if you used socialised methods of savings (pensions) or capital-market measures of savings (equity accumulation funds) you can't in aggregate escape the disappointment. Returns are negative. Get used to it.
Is there any out?
There are a few outs. The first one is such large productivity growth that you don't disappoint anyone because just so much more is produced in 2030 than now that you can give the then dissavers a low share and still not disappoint them. I know my Silicon Valley friends are optimistic enough to believe that is possible but I doubt it.
I doubt it for a good reason. Economic growth has to be faster than the ageing population - but the main innovation is likely to be in life-extending medicine - thus exacerbating the ageing population issue.
The second out can be done for some countries but may not be done globally. And that is to muck around with the age profile of your population. Age profile for a country is a choice. Our former finance minister Peter Costello used to argue that mothers should have three kids, one for him, one for her and one for the country. But that was what you did (as Australians) if you wanted to solve the population age-profile issue and you still wanted a white Australia. You can have any population profile you want if you take immigrants. And if you want your welfare/retirement-savings systems not to collapse you are probably going to have to do it. (Nigel Farage and his ilk want a population profile that makes your pension default. But I doubt UKIP will tell that to the voters.)
But beyond that I see no outs.
There are dozens of implications - and I am far from sure of any of them.
But one is pretty obvious to me. The market clearing real interest rate is negative and should be for some time.
There is nothing in capitalism that guarantees you a positive rate of return and the legion of people who argue that the Fed should raise interest rates just because they believe returns should be positive should be labelled for what they are: ideological capitalists against market clearing. (Okay - now I teasing a little - but I am surprised that people think they are entitled to positive returns.)
I am happy to be argued with here. I am very uncertain of all this stuff. Much less certain than many of the twitterati who prompted this post.