And part of the reason they are in such a fiscal black hole resides in the explosion in their structural, age-related liabilities. According to the IMF, the net present value of pensions, healthcare and long-term care out to 2050 dwarfs the costs of the banking crisis everywhere. Based on policy commitments in mid-2009, it is over 600% of GDP in Spain and Greece, 500% GDP in the U.S., 335% in the UK, and between 200 and 300% in other major EU countries. The precise numbers are less important than the orders of magnitude, and the implications for public policy.
It is no accident that this year, in Greece, Spain, France, the UK, and several U.S. states, for example, budgetary pressures have forced governments to implement or consider a variety of demographically driven policies. These include an increase in the retirement age, a temporary freeze on pensions, higher public employee contributions to pension schemes, and schemes to get citizens to pay more towards healthcare, or to specific conditions.
Will it be Deflation or Inflation?
There’s little doubt that, while an acceleration in inflation is always possible under closely specified conditions, the biggest risk that asset markets face in the foreseeable future is deflation. Banks and consumers are on the back foot, government balance sheets are shot through, and listed and medium-sized companies do what they can by seeking out markets and volumes in emerging markets. That’s just a verbose way of saying there’s a shortage of aggregate demand, and that’s what defines deflation. In real time, population aging is of peripheral significance.
But it is most likely that population aging, itself, is a deflationary phenomenon—at least for now—to the extent that it is starting to sap actual and potential economic growth performance, and necessitate a sharp improvement in both private and public savings. Just look at Japan, whose baby boomers came into the world several years earlier than in the West, and whose bubble burst just about the time when the demographic dividend started its long erosion.
If there’s a vital difference between Japan and say, the U.S., it is that Japan’s creditor status meant there was never any pressure for a rather rigid political structure to change tack and get to grips with either its economy or its demographics. Perversely, an economic and demographic crisis may be—repeat, may be—just the ticket for debtor nations in the West to do so. But so far, there is little evidence the crisis is bad enough yet to force such a change, and it is by no means clear that all nations will be up to the task. In any event, we can assume relatively safely that any structural reform-cum-reflation strategic shift isn’t going to happen for a while. Even if it did so, the implications of population aging, and savings and consumption shifts would be a long-lasting weight on inflation.
