Demographics Imply Interest Rates Rising

from Time Money:

Looking at the global economy in terms of demographics tells us a lot more than meets the eye if you know what to look for. The obvious narratives are that the emerging markets have young populations which are growing quickly (excluding China). This along with the inclusion of free markets has led to their economies adding millions of people to the middle class. On the other hand, the developed countries are enduring an aging population which means more reliance on government programs like Medicare, Medicaid, Social Security and lower tax income, straining the balance sheets of the governments.

Those are the basic effects, but using demographic trends can help us predict more economic metrics such as changes in wages, inflation, inequality, and stock market valuations. One of the most important changes in demographics was the addition of labor supply from China and Eastern Europe since the 1980s.

As you can see from the blue line below, over 300 million workers aged 20-64 were added to the global workforce from those regions from the mid-1980s to the mid-2010s.

This influx of labor pushed down wages and pushed up inequality within countries, but pushed down inequality between countries. It weakened private sector trade unions, lowered interest rates, and lowered inflation. Lower wage growth in America reduces the incentive companies have to make workers more productive. This means less private fixed investment which would improve productivity growth. Low interest rates support the stock market, giving it a higher earnings multiple. This encourages corporations to flood the market with buybacks, further pushing stocks higher.

This explains the current situation we are in as wage growth has been low and stocks have been rising. The reason this trend is pivotal to highlight is because it is reversing. The chart below shows the baby boomers retiring in America, lowering the ratio of the working age to the total population.

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