Demographics and Global Imbalances?
The connection between the two concepts featuring in the headline for this post should not come as a major surprise for regular readers of Alpha.Sources. As such, I have on several occasions argued for the inclusion of demographics in the analysis of global imbalances both here on AS and in my notes over at GEM. Now, it appears as if I am getting some support in the form of the recent speech/note from William Poole at the St. Louis Fed entitled Changing World Demographics and Trade Imbalances; hat tip, Mark Thoma. Looking at Poole's list of references obviously shows that the idea of a link between global macroeconomic imbalances and demographics is not exactly an entirely new conception but still it is one of the most comprehensive accounts I have seen on this specific subject although the idea of 'dis-savings' and the magnitude of it still needs to be properly explored I think. I will have much more to say about this at a later stage and essentially I will keep plugging away but until then I leave you with Poole's conclusion ...
It is generally recognized that the world is undergoing a major demographic transition. Population growth is slowing and the age structure of the population is changing, with the shares of the young declining and the elderly increasing. Assessing the precise implications is complicated by the fact that different countries are at different stages of this demographic transition. It is also important to recognize that the scenarios I have highlighted above are not precise forecasts, but rather are attempts to isolate some key impacts of the demographic changes. It is reasonable to expect that these demographic changes will cause policy changes that will produce changes in working, saving and investment behaviors that are not fully captured in the existing models.
To the extent that this analysis is correct, differential rates of aging across countries are responsible, in part anyway, for the patterns of current account deficits and surpluses we observe. These deficits and surpluses may be desirable outcomes of optimizing behavior rather than imbalances. We should not interfere with a process that is allowing the global economy to cope in an efficient manner with the changing demographics.
Anytime that I venture my belief in a strong connection between demographics and international capital flows and hence the imbalances I always make an effort to state that demographics are not destiny and that monocausal explanations won't bring us anywhere. Yet, I do believe that given the magnitude and trajectory of global ageing across countries and regions it is almost illogical to assert that this has no bearing on international capital flows at all. This obviously brings us to the how and crucially to the 'how much' ... Poole seems to belief that demographics can exert a strong explanatory power over the long in terms of capital flows and I tend to agree with him in so far as the point that demographics are important. However, I also think Mark Thoma's point is important ...
I agree demographics is part of the explanation, but I'm not convinced it is as important as he has concluded, particularly if it means we become complacent about the potential for a sudden rebalancing of global accounts:
We should never be complacent but the inclusion of demographics as an explanatory variable in terms of global macroeconomic imbalances crucially suggests that they are structural in nature. Moreover, we should not forget that any talk a major and abrupt re-balancing process of the current accounts also would entail a major currency correction as the dollar plunges to reflect the fundamentals of a whopping current account deficit. Yet, if the dollar plunges other currencies need to surge and here the window of opportunity is closing fast in terms of the Euro and the Yen and essentially I would argue that the window is already closed and blinded with hefty fenders too.
Indeed, demographics are not destiny (go read Brad Setser for example) but pretty important I think in order to get to the real picture. At some point of course I will need to actually do a paper, you know, with real empirical data and theoretical justification :), and don't worry it is coming at some point. Until then I will be plugging away here at AS.