Down Under Daily, 26 June 2014

The Disinflationary 5
Developed economies face powerful disinflationary Exhibit 3
forces, despite a cyclical pick-up. This suggests that Older Workers Work Less
any prospective increase in inflation, nominal GDP 68
US LABOUR PARTICIPATION RATE

growth, wages and interest rates will be relatively 67

66

PARTICIPATION RATE %
FORECASTS
modest. Here are five disinflationary forces: 65
BASED ON UN
MEDIUM
FERTILITY
64 POPULATION
PROJECTIONS
First, leverage remains exceptionally high 63

throughout the developed economies (Exhibit 1). 62

PARTICIPATION RATE ASSUMING NO
61
High debt blunts the ability of low interest rates to
CHANGE IN AGE/GENDER PARTICIPATION
FROM 2004-05 AVERAGE
60
lift demand for credit. 59
WORKFORCE AS A PERCENT OF WORKING AGE POPULATION
58
1950 1960 1970 1980 1990 2000 2010 2020 2030
Exhibit 1
Note: forecasts are based on United Nations medium-fertility projections.
Leverage Remains High Source: BLS, NBER, UN; Minack Advisors
DEBT/GDP: JAPAN, US AND EUROPE
300
280
DEBT AND GDP AGGREGATED AT
SPOT FX RATE.
Dependency ratios (ratio of people not of working
260 age to the working-age population) are also rising.
240
NON-FINANCIAL DEBT
The US and Europe are following Japan (Exhibit 4).
220
% GDP

200
180 Exhibit 4
160
140
FINANCIAL DEBT
Dependency Ratios Rise
120 DEPENDENCY RATIO: JAPAN, EUROPE AND UNITED STATES*
100 1970 1980 1990 2000 2010 2020 2030 2040
53 53
80
JAPAN (BOTTOM) CHANGE IN
1999 2001 2003 2005 2007 2009 2011 2013 2015 51 DEPENDENCY 51
UNITED STATES (TOP) RATIOS FROM
% OF POPULATION

% OF POPULATION
49 +8.5% 49
Source: Federal Reserve, ECB, BoJ, Eurostat, BEA, ESRI, DataStream; LOWS
EUROPE (TOP)
Minack Advisors 47
+5.9% +8.5%
47
45 45

Second, demographic changes are damping growth 43 43

41 41
and weakening public finances. Labour force 39 39
growth is slowing in the US and Europe, much as it 37 37
* 0-19 & OVER 65 YEAR OLDS AS % OF POPULATION
has in Japan over the past twenty years (Exhibit 2). 35
1950 1960 1970 1980 1990 2000 2010 2020
35

Note: forecasts are based United Nations medium-fertility projections.

Exhibit 2 Source: UN; Minack Advisors
Demographics Lower Trend Growth
TREND LABOUR FORCE GROWTH: JAPAN, US AND EU
Third, globalisation causes wages to converge: good
2006
2.0
2008 2010 2012 2014 2016 2018 2020
2.0
for EM workers; bad for DM workers.
JAPAN (BOTTOM)
1.5 EU (TOP) 1.5
Exhibit 5
US (TOP)
1.0 1.0 Globalisations Thumbprint
%
%

0.5 0.5

0.0 0.0

-0.5 -0.5
5 YEAR AVERAGE ANNUAL GROWTH IN LABOUR FORCE. US
RECESSION STARTED Q1 2008. EURO RECESSION STARTED Q2
2008. JAPAN RECESSION STARTED Q2 1991.
-1.0 -1.0
1989 1991 1993 1995 1997 1999 2001 2003

Source: OECD; Minack Advisors

Labour force is slowing in part because population

growth is slowing, and in part because labour
participation tends to fall as the workforce ages.
This is very clear in the US (Exhibit 3).
Source: Autor, David H., and David Dorn. 2013. "The Growth of Low-Skill
Service Jobs and the Polarization of the US Labor Market." American
Economic Review, 103(5): 1553-97; Minack Advisors

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Thursday, 26 June 2014
So far, this convergence has hit hardest semi-skilled
jobs in developed economies. Exhibit 5 shows the
change in employment shares, ranked by skill level,
in the US between 1980 and 2005. The worse
effects were concentrated in traditional trade-
exposed goods sectors (largely farms and factories).
However, services are increasingly being traded
(Exhibit 6) that is, services are being globalised.
Exhibit 6
More Services Globalising
The fifth disinflationary force is rising inequality.
Incomes have become less equal in most developed
economies over the past 40 years (Exhibit 8). The
better-off tend to save more and my hunch is that
very high income earners are less sensitive to
changing interest rates than average households.
Exhibit 8
Rising Inequality In Most Rich Countries
CHANGE IN INCOME INEQUALITY
25
CHANGE IN GINI COEFFICIENT BETWEEN

CHANGE IN GINI COEFFICIENT

AVERAGE OF 1976-78 TO AVERAGE OF 2006-08. RISING INEQUALITY
20

15

10

5 DEVELOPING ASIAN
ECONOMIES
0
ADVANCED
-5 ECONOMIES

-10 FALLING INEQUALITY

-15

JPN
KOR

ISR
CHN
ESP

CHL

FRA

POL
NZL
MUS

IND

TUR

BEL

HUN
THA

MYS

ITA

GRC

CAN
IDN

SGP

PHL

DNK

ZAF

MLT

HKG
IRL

AUT

FIN

USA

NOR

GBR

BGR
Source: University of Texas, http://utip.gov.utexas.edu/default.html;
Minack Advisors

Note: Modern service exports include insurance, finance, computers and

information, royalties and license fees, and other business services. A few follow-on points:
Traditional services are transportation, travel, construction, personal,
cultural, and recreational services.
Source: IMF, http://www.imf.org/external/pubs/ft/fandd/2014/06/ First, all these factors tend to lower through-the-
loungani.htm; Minack Advisors cycle equilibrium interest rates one way to assess
whether something is disinflationary, in my view.
The potential for service sectors to globalise is
hugely increased by the fourth disinflationary force:
Second, these factors are linked. Globalisation and
digital technology. Digital technology can directly
digitisation magnify each other. Disinflation was
substitute capital for labour (Exhibit 7), or it can
one factor that has underpinned the credit super-
create competitive global service markets.
cycle which left the legacy of high leverage and
has contributed to rising inequality.
Exhibit 7
Digitising Labour
Third, globalisation has been disinflationary in
Risk of computerisation, US labour market
developed economies but in emerging economies it
has lifted growth, boosted wages and more-often-
than-not reduced inequality.

Fourth, most of these trends have been bad for

growth but have been good for investors. In
addition, the trend decline in interest rates has gone
hand-in-hand with the re-rating of risky assets.

Source: The Future of Employment: How Susceptible Are Jobs To
Computerisation? Carl Frey & Michael A. Osborne; Minack Advisors
The disinflationary forces of labour cost arbitrage
and technological improvement have so far been
focused on blue-collar workers; now they seem
likely to spread to white-collar service workers.
Finally, the big problem with the disinflationary
trend is that reduces the ability of monetary policy
to stimulate activity. We are at that limit, in my
view. Monetary policy has been largely ineffectual
boosting growth in the current recovery: activity
levels remain well below pre-crisis trends in DM.

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Thursday, 26 June 2014
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Thursday, 26 June 2014