Tag Archives: Economics and demography

An Interesting Result

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The consumer confidence index calculated by the the Nuremburg based GfK market research group fell this month to 3.5 from a revised 4.3 in May. This suggests that while Germans may vote in large numbers for a change of government, they are extremely guarded about the possibility that this will produce any notable turn-round in the economic situation, at least in the short term. (Also see this from the FT).

“Despite the announcement that the election will be held in the autumn this year, there are no signs yet of the consumer climate trend reversing,” the Nuremburg-based GfK research group said. “Germans are still uncertain about future financial pressures or relief and do not feel confident about making plans for their future.“

Too Hot to Change?

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The Cunning Realist takes a look at limits:

Since the bursting of the technology bubble in 2000, there have been four distinct periods in which the Fed has flooded the system with an extraordinary amount of liquidity in an effort to boost the stock market:

1. Immediately after 9/11.
2. During the second half of 2002 in response to widespread accounting scandals and the meltdown in the corporate bond market.
3. During the summer and fall of last year, just before the presidential election (draw your own conclusions).
4. The past two months.

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On The Button

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The Economists ‘Buttonwood” gets right to the point. Talking of the problems of funding acquired pension liabilities, he notes:

“There are a couple of weird circularities here. Most of the burden of filling these gaps will fall on the companies themselves, which will depress their profits. That, in turn, will depress share prices, which will make it harder to achieve adequate investment returns. And if asset managers turn en masse to bonds with long maturities to match their assets and liabilities more precisely, which is necessary especially for older plans, that will raise bond prices, depress bond yields and increase the present value of assets they must hold?again, widening the pensions gap. .”

The solution to this conundrum – both in the public and the private pensions sector – is by no means obvious.

Bonfire Of The Textbooks?

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The Greeks had a word for it ‘:aporia‘. That state of ignorance and confusion you are condemned to pass through before you can entertain even the vaguest hope of achieving clarity and real knowledge. Well, taking a long hard look at what we know, what we think we know, and what we know we don’t understand for sure, I would say that this expression gives us a working definition of where economic science may be right now: in a state of ‘aporeia’.

Essentially we are in the frustrating condition of repeatedly finding that what is taught in the textbooks, and what we are encountering ‘out there in reality’, don’t make easy bedfellows. Above all it is China that has caused most of the head scratching. Morgan Stanley’s Andy Xie may have started it off by having the guts to come out and urge us to: “throw away the textbooks”, later an influential paper by Dooley Falkerts-Landau and Garber argued that conventional macro was all at sea when looking at goods and financial flows between China and the US. Today it is the turn of Robert Samuelson to say toss the textbook.
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Micro Effects of Aging

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Following up on Edward’s entry, I just want to point out that the Washington Post recently reported on a part of the US whose demographics now approximate the national structure in 2025. The newspaper followed a study by professors at Wake Forest University’s business school (Sherry Jarrell and Gary Shoesmith, though the study doesn’t seem to be on the web) to look at the micro effects of an aging population. It’s interesting, and mixed.

The Lakeland [Florida] area is not a retirement community, dotted with shuffleboard courts and senior centers, but the businesses that cluster here reflect the subtle influence of a population that is markedly older than the current national average.

Polk Community College may attract ambitious young students, as college President J. Larry Durrence says, but they’re training to be nurses or respiratory therapists. His wife, an attorney, specializes in “elder law.”

Nearly a third of Maureen Shaw’s florist business comes either from out-of-state children sending flowers to their retired parents or seniors sending condolence bouquets. Keith DeLoach grew up here. After West Point, the Special Forces and combat in Afghanistan, the 32-year-old just moved back to open a financial services firm — largely to help retirees stretch their savings.

No Answers Only Questions

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One person who could rightly claim to know more about global ageing and its possible consequences than anyone else in the business is the German Director of the Manheim Research Institute for the Economics of Ageing Axel B?rsch-Supan. If there’s a conference being organised, he seems to be there. Actually his comments at both these meet-ups are well worth reading in and of themselves (here, and here).

In a sense B?rsch-Supan is almost uniquely qualified to express opinions on the topic since he has both devoted a large part of his professional career to studying the question, and he lives and works in a society which is already reeling under the impact. As he says:

“Today?s Germany has essentially the demographic structure that the United States will reach in a quarter of a century. The dependency ratio (the ratio of persons aged 65 and over to those aged from 20 to 59) is at 28 percent, and it will reach 75 percent in 2075, if we dare project that far. Almost one-fifth of the German population today are aged 65 and over. One quarter are aged 60 and over, which is relevant because the average retirement age in Germany is 59.5 years. Thus, in this sense the United States is not ?entering largely uncharted territory,? …. Rather, they can look to Europe?in particular to Germany and Italy?to see what will happen in the United States.”

I mention B?rsch-Supan because he serves as a good pretext for going over where we are to date with the issue. As he says himself. watching demography change is rather like watching a glacier melt, on a day-to-day basis it’s hard to see that anything is happening, but over time the impact is important.

One of his recent papers has the intriguing title: “Global Ageing: Issues, Answers, More Questions“. It is a good up-to-date review of the ‘state of the art’, and a quick examination of the points he makes probably serves as a good starting point, since I can’t help thinking, in the case of global ageing, it isn’t so much what we know that matters, it’s what we don’t know.

So here we go, a review of what we “know”, what we think we know, and what we don’t know:
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Time It Stopped Snowing

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John Snow is in Europe, globetrotting on the G8 round. He had some advice for us here in Europe: “I think the important thing is that Europe continue to focus on the things that need to be done to encourage domestic growth”.

I’m glad he raised the point, since otherwise it might have escaped us. These comments, and other similar ones, are widely interpreted as recommending that we focus on reform. Well I couldn’t agree more, but sometimes isn’t it better to start putting your advice in practice at home. Looking at the state of global trading imbalances I would say that the US has its own problems, and they seem to need attention. Looking at the trade figures, German and Japanese companies don’t seem to have any special problem of being competitive internationally. I don’t want to seem tendentious, but isn’t it the US manufacturing company which is having difficulty being competitive these days, at least if the ability to sell at competitive prices in international markets is anything to go by.

Of course Europe and Japan are light on internal demand growth, but there is precious little we can do about it since this is largely a product of demographic changes, not structural weakness. This is a part of the ‘new global reality’ and the sooner politicians like John Snow face up to this, the better for all of us.

China Trade With EU

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I’m not very happy with the ‘US Trade Figures‘ post I put up last Friday. I think it’s a glorious mess. The key to the problem is that I tried to deal with two – interrelated but disinct – topics at once: the euro and China trade. So today lets ignore the euro (which has once more resumed the downwards drift, even as I write) and take a bit of a closer look at where we are – in trade terms – with China. (Btw: the planet has finally returned to its orbit, and Brad Setser has an analysis of the US trade data here).

The big item in this weekend’s news is, of course, the agreement reached with Beijing on textiles. The EU textile industry will now have three years to adapt, but since textile manufacturers don’t appear to have taken too much advantage of the ten previous years, it is hard to know whether this will serve any useful purpose. Doubly so, since it is not yet clear how the calculations will be made, and I have the distinct impression that much of the recent surge in imports will now, in effect, be consolidated.

Be that as it may, what about the broader issue?
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US Trade Numbers Are In

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So are the China trade surplus ones. Dave at MacroBlog has the details on China. I’m waiting for Brad Setser to post, but he must be either doing his sums, or having a late breakfast :). Before we get some blog analysis (even Brad Delong is quiet today) you can get the basics here. In fact the rise in the April CA deficit to $57bn, from $53.6bn in March, is supposed to be good news, since the increase wasn’t as big as expected.

Essentially I am outside the Atlantic blog consensus here, since I think the US dollar will hold, and that it is the euro which is in trouble. I have a little post on this here. Logically if the other major alternative as a reserve currency is in trouble under Bretton Woods Mark I, everyone goes home to Daddy. I think that is how it will be.

Update: Well Brad still isn’t there but Stephen Roach is. I think his view is the dominant one on the US blogging scene, and shared by non-blogging economists like Paul Krugman. I’m sorry, I think it’s wrong, and by a long way.

Update 2 I’m getting a little tired of waiting (incidentally General Glut has just passed by in comments, and he *does* have a post on the topic). Now the politically sensitive US trade gap with China widened $14.0 percent in April to $14.7 billion. This means it was $12 billion in March, or that it rose $2.7 billion. Now China’s surplus widened to $8.99 billion from $4.59 billion. Doing the arithmetic the surplus rose $4.4 billion. $4.4 billion minus $2.7 billion gives $1.7 billion, a hell of a big chunk of which was probably with Europe. I wish someone who really knew about this would write something, but my educated guess is that Chinese import penetration in Europe is now big and getting bigger by the month. Hence the row about globalisation in the French referendum. Basically what I am saying is that having this kind of issue in the Free Trade US of A is one thing, having it in the more anti-globalisation European core is going to be quite another. China the global imbalance to end all (im)balances.

Now if you want to understand something about China:
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When You’re Done You’re Done

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You know I’m sure most of you think my constant references to Argentina in the context of Italy’s economic problems is troubling, possibly even irritating. You may well be right. I have to say that I followed Argentina steadily from 1998, waiting to see the inevitable happen. The principal problem was, lets be clear, the 1:1 dollar peg. This was the epoch of the internet/ICT boom, and a rapidly rising dollar. It’s not clear to me at all that had Argentina pegged to the dollar in 2002 it would have had the same problems so quickly. One of the problems with being attached to a rapidly rising currency is that your imports get cheaper, and your exports dearer.

Now for an apochryphal story. Late in the crisis, before the geyser finally blew, back in early December 2001, a friend of mine visited Argentina. Seeing some nice shoes in a shop window he entered the shop (you will remember Argentina was famous for its leather products: all those cows). On asking where the leather came from, he was informed ‘it’s from Brazil, Argentinian leather is too expensive’. One month later it was all over bar the shouting. Well…..
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