Deflation supercyle is over as world runs out of workers
The demographic 'sweet spot' is vanishing. We are on the cusp of a complete reversal, spelling the end of corporate hegemony
Workers of the world are about to get their revenge. Owners of capital will have to make do with a shrinking slice of the cake.
The powerful social forces that have flooded the global economy with abundant labour for the past four decades years are reversing suddenly, spelling the end of the deflationary super-cycle and the era of zero interest rates.
"We are at a sharp inflexion point," says Charles Goodhart, a professor at the London School of Economics and a former top official at the Bank of England.
As cheap labour dries up and savings fall, real interest rates will climb from sub-zero levels back to their historic norm of 2.75pc to 3pc, or even higher.
The implications are ominous for long-term US Treasuries, Gilts or Bunds. The whole structure of the global bond market is a based on false anthropology.
Prof Goodhart says the coming era of labour scarcity will shift the balance of power from employers to workers, pushing up wages. It will roll back the corrosive inequality that has built up within countries across the globe.
If he is right, events will soon discredit the sweeping neo-Marxist claims of Thomas Piketty, the best-selling French economist who vaulted to stardom last year.
Mr Piketty's unlikely bestseller - Capital in the 21st Century - alleged that the return on capital outpaces the growth of the economy over time, leading ineluctably to greater concentrations of wealth in an unfettered market system. "Piketty was wrong," said Prof Goodhart.
What in reality happened is that the twin effects of plummeting birth rates and longer life spans from 1970 onwards led to a demographic "sweet spot", a one-off episode that temporarily distorted labour economics.
Prof Goodhart and Manoj Pradhan argue in a paper for Morgan Stanley that this was made even sweeter by the collapse of the Soviet Union and China's spectacular entry into the global trading system.
The working age cohort was 685m in the developed world in 1990. China and eastern Europe added a further 820m, more than doubling the work pool of the globalised market in the blink of an eye.
"It was the biggest 'positive labour shock' the world has ever seen. It is what led to 25 years of wage stagnation," said Prof Goodhart, speaking at a forum held by Lombard Street Research....MOREHT: Marginal Revolution
Previously on New Ambrose:
Roubini Dismisses China Scare as False Alarm, Stuns With Optimism
