Wednesday, December 9, 2015

Demographics and Deflation (UPDATED)

Update below.
Original post:

From Mish's Global Economic Trend Analysis:

When Does the Demographically-Related Pension Ponzi Scheme Blow Up?
Reader "GM", an actuary student in Malaysia pinged me with an accurate observation on demographics, but missed the boat on a solution.

GM writes ....  
 I thought I would point out the reason for this monetary madness, which I believe you had brought up before.

Aging populations consume less, and have different consumption patterns to working populations. Retirees consume less food, autos and real estate compared to young working couples. They use more healthcare instead. Also, aging populations take on less debt. These factors combined make the economic effect of lowering interest rates and printing money less pronounced than they would be in different circumstances.

As a student actuary who is also doing my CFA I believe that demographics has a far greater impact on the economy than current economic models allow for. I live in Malaysia, where civil servants receive pensions based on their basic (not final) pay. But even this is unsustainable - The Edge newspaper earlier this year reported that nearly 40% of government operating expenses goes to pensions and emoluments, hence a need for pension reserving arises.

Perhaps governments and corporations alike may want to encourage higher birth rates to avoid destroying the monetary pinnacles they have built for themselves?

Singapore, for all her freedom, cannot seem to encourage more births. There is an unwritten understanding in Singaporean corporations that a woman joining corporations cannot give birth within 5 years of joining, and later if she does, there are little or no maternity benefits.

They now have a TFR lower than Japan, and are facing a real estate bubble collapse.

Maybe we could investigate this for the sake of asset prices?

What's the Solution?

Demographics are indeed a problem, but what's the solution? To encourage more births when housing prices are sky high, asset bubbles exist everywhere, and education costs in the US are totally insane?...MORE
Demographics and Deflation II: Longer Lives, Lower Interest Rates