Uh oh. What if the Financial Times' David Keohane was right?*
From The Bank for International Settlements, November 15, 2022:
Summary
Focus
Advanced economies face an unprecedented rise in the population of older adults. Their high savings rate might lead to an abundance of savings and depressed returns, thereby potentially encouraging banks to reach for yield. Our paper investigates the consequences of population ageing for bank risk-taking and financial stability.
Contribution
Our paper makes two main contributions to the literature. It is the first to empirically investigate the effects of demographic change on bank lending standards and financial stability. In addition, it investigates whether there are geographic spillovers of local population ageing, as banks might reach for yield in other markets.
Findings
We find that banks more exposed to ageing counties in the United States relax lending standards as they grant new loans: loan-to-income ratios increase, in particular in counties where banks operate no branches. Banks with greater exposure also see a sharper rise in non-performing loans during downturns, implying an increase in credit risk due to population ageing. Further analysis suggests that these patterns are shaped by two forces: an increase in banks' available funds due to older adults' higher propensity to save in the form of deposits, and a contemporaneous ageing-induced decrease in the local demand for credit.Abstract
What are the implications of an aging population for financial stability? To examine this question, we exploit geographic variation in aging across U.S. counties. We establish that banks with higher exposure to aging counties increase loan-to-income ratios, especially where they operate no branches. Laxer lending standards also lead to higher nonperforming loans during downturns, suggesting higher credit risk. Inspecting the mechanism shows that aging drives risk-taking through two contemporaneous channels: deposit in ows due to seniors' propensity to save in deposits; and depressed local investment opportunities due to seniors' lower credit demand. Banks thus look for riskier clients in no-branch counties....
BIS: Aging Populations Are Inflationary
For the love of God and all you hold dear do not tell the FT's David Keohane*
From The Bank For International Settlements, August 2017:
three multi-decade global
trends
....2. Our key proposition: ageing will raise the equilibrium real interest rate
We argue that ageing will lower both desired savings and desired investment, but desired savings will fall by more. The resulting imbalance will require the real interest rate to rise for the market to clear. Just as the real interest rate has fallen since the 1980s thanks to a decline in desired investment borne out of the demographic sweet spot we described above, real interest rates will reverse course along with demographic trends and the resulting changes in savings and investment dynamics. This is clearly our most controversial proposition, and much of the pushback we receive is based on the argument that demographics will lower potential output growth, and hence real interest rates. We agree wholeheartedly with the first argument regarding output growth. But we disagree that it will also lower real interest rates. Indeed, there is much less reason to believe the two are connected than many believe.........3.1 Implication #1: ageing will raise, not lower, inflation
Inflation will be the inevitable consequence of the tax wedge that plugs the gap between inadequate savings and rising spending. If we are right in our political economy assumption that the social safety net will remain in place, then the age profile of consumption will continue to flat or even upward sloping. The ineluctable conclusion is that tax rates on workers will have to rise markedly in order to generate transfers from workers to the elderly. Workers, however, would not be helpless bystanders. Labour scarcity will put them in a stronger bargaining position. They will use that position to bargain for higher wages. This is a recipe for recrudescence of inflationary pressures. Today’s inflation is a cyclical rebound that has shocked the bond market, but the world is still not ready to think about inflation that is likely to be remain with us structurally. Central banks will, soon enough, have to revert to their normal behaviour. The zero lower bound (ZLB) was largely the consequence of a combination of a China effect, an unprecedented demographic backdrop and a deep cyclical shock. None of these will be ingredients in the future.
Ageing is inflationary empirically, too. Juselius and Takats (2016) uncover an empirical relationship – “a puzzling link between low-frequency inflation and population-age structure: the young and old (dependents) are inflationary whereas the working age population is disinflationary”. They use data from 22 countries between 1955 and 2014 and their analysis shows that 6.5% of the disinflation in the United States from 1975 to today can be accounted for by age structure. The age structure, they argue, “is forecastable and will increase inflationary pressures over the coming decades”. The intuition behind this result is simple....
....3.2 Implication #2: Piketty is history
FT Alphaville's David Keohane may be a gerocidal maniac.At first I thought his "Kill the old" mantra was a simple eccentricity, sort of like the "Eat the rich" signs I used to see stenciled on the sidewalk outside the tower, but I just did a search of the Financial Times website and it returned 43 hits for "Kill the old". All on the flagship blog.
So I tried to comfort myself with the thought that at least I'll go out with a neologism to my credit, insomuch as a quick Google search for "gerocidal" turns up only nine hits and those appear to be misspellings of genocidal.
But then I Googled the root noun, gerocide, and there are scores of uses, properly spelled.
Now I just feel like taking out a couple millennials as I go down....
Reused in 2021's ""Do Older People Have a Duty to Die?""
See also "Demographics Rule: The Coming Battles Between The Juvies and The Geezers" for an example:
From FT Alphaville:
...From MS again, with our emphasis, with more on why the change in demographics might produce inflation, reduce inequality and increase wages
Huh. Two years before the BIS paper. That's a pretty good catch.
note salmon bisque (not pink) color for ready identification.
