By John Richardson
AN economic theory is only of any use if it actually works in practice and if it becomes obvious it doesn’t work what is the first thing you should do? Well, of course, the answer is you scrap that theory and start again.
Not, sadly, in the case of the Fed who, because of its continued belief in the “Bernanke doctrine”, has compounded its error. The doctrine, developed by former Fed chairman Ben Bernanke in 2002, was that it was a drop in spending that forced manufacturers to cut prices. So all you had to do was to get people to spend more and you would end up with a return to healthy inflation. This has led to three rounds of quantitative easing.
The fatal flaw in the Bernanke doctrine is that today there are not enough people capable of spending more money to generate inflation. This means that no amount of monetary stimulus can possibly make any difference whatsoever to the underlying problem: A lack of wage earners.
The demographics data tells us this:
- 600 million people will be joining the New Old 55+ cohort between now and 2030, taking their numbers to 1.8 billion.
- This is twice the number joining the Wealth Creator 25 – 54 cohort, which will total 3.3 billion in 2030.
- It means there will have been a six-fold increase in the New Old cohort versus the 190 million in 1950.
- More than one in five of the world’s population will be in the lower-spending and lower-income New Old 55+ age group within 15 years. There was one in 10 in the group just 15 years ago, in 2000.
It is not just the Fed that has tried to “print babies”. So did, in effect, China as it created vast surpluses of real estate and manufacturing capacity in 2008-2014 just as its own population was rapidly ageing along with most of the rest of the world. But thank goodness that at least China has had the common sense to change course.
This explains why the world is in deflation rather than inflation – as I have been warning since last October,
Deflation can only get worse if the European Central Bank (ECB) prints more money. We will end up with further deflation if the Fed opts for a fourth round of quantitative easing. I had thought only two weeks ago that QE4 would likely happen in late 2016 or early 2017.
But as the macroeconomic data worsens, I am now beginning to wonder whether QE4 – or at the very least a long delay in a US interest rate rise – could happen a lot sooner. Why not soon after more gloomy data and analysis emerging from the IMF/World Bank meeting in Lima, Peru, later this week?
Let’s be optimistic, thought, and assume that the Fed, the ECB and the BOJ instantly wise up to their mistakes and stop printing more money. As the FT pointed out yesterday, this will still leave us with a staggering five-fold increase in non-financial emerging market corporate debt over the last five years.
This debt has been built-up on the assumption that there are lots more rich Westerners willing to buy ever-greater volumes of exports from the emerging world – along with, of course, hundreds of millions of “middle class” people in the emerging markets themselves ready to snap-up all these goods.
What are the policies that instead make sense? Here are two suggestions for the West:
- Increase retirement ages. The great news is that people are living longer – a lot longer than a century ago. So they can work well into their late sixties and even into their seventies.
- Deal with income inequality. This is not socialism, but just plain common sense. We have to find a way of replacing the richest and biggest genuinely middle- class generation in the history of the world – the Babyboomers.
Until or unless these types of policies happen, we are going to get nowhere in the West, whereas at least China is already heading in the right long-term direction.
And in the absence of this critically important shift in policy, we are left with this one inescapable fact for chemicals companies everywhere: The pressure on oil cost and so therefore, of course, chemicals prices can only be downwards.