By John Richardson
US Federal Reserve chair Janet Yellen’s solution for the failed monetary stimulus policies of the last seven years? More of the same, which is a further signal to investors desperate for yield that they have little choice but to spend even more money on risky assets.
Don’t blame the investors, by the way. They are just doing their job of trying to achieve good returns.
Why not more froth in oil prices then, that would have little to do with the fundamentals of crude supply and demand – provided, that is, Britain doesn’t vote to leave the EU tomorrow?
More oil and equity market froth would be the result of the Fed outlining a new trajectory for US interest rates at a press conference last week: The benchmark rate will be 2.4% at the end of 2018, down from its March forecast of 3%. And it cut its forecast of the longer-run rate – to 3% from 3.3%. This is the policy response to Yellen’s admission that the real economy is failing to respond in the way that the Fed imagined.
But more of the same will still not work – it cannot possibly work – as a growing number of commentators are arguing. Their views are in line with what we have been saying since 2011 – that the retirement of the Babyboomers makes the Fed stimulus a waste of both time and money. As David Rosenberg, for example, superbly summarised in this Business Insider article:
The first of the boomers are turning 70; the median age is 60. They are well past their peak spending years, are downsizing, preparing for retirement, and are in savings mode. Whole short on savings, they are saturated when it comes to ownership of household durable goods. So for the first time in four decades, we cannot expect to see the demographic support to consumer spending from the baby boomers.
For the age groups that come up behind the boomers, the fact that so many older folks are working longer to sustain the cash flows to fund retirement lifestyles has impeded job growth for the 20 and 30 year olds who are saddled with a mountain of student loans because their parents were too financially constrained themselves.
And he added that the bursting of the tech and housing bubbles has made young people even more unable to spend the US economy out of trouble. The bursting of these two bubbles has also badly dented the savings of all the retirees, making it even more likely that they will cut back on their spending.
The angst of the Fed comes as the data stacks up on just how weak the US economy really is. As Rosenberg again says:
- Industrial production is down in six of the past eight months and at a 2.1% annual rate.
- Nominal income growth in Q1 softened to 2.9% from 4.3% in the same quarter last year. It is running at the same pace or lower than five of the past six official recessions.
This latter point is a further indication of the long-running stagnation in US middle-class incomes.
So what’s the solution? US politicians and central bankers need to say that demographics are destiny, whilst also admitting that previous policy decisions have done nothing to resolve the problem.
What to do next? Lots of spending on US infrastructure would be a good thing, including addressing “basic needs” such as water shortages resulting from climate change. The climate change challenge has clearly nothing to do with ageing populations, but it can be tremendous new source of economic growth.
This very obviously doesn’t just apply to the US, but is a global issue and so the expertise developed by US chemicals and other companies could be exported.
In the developing world, better provision of basic needs such as food and water will unlock the added benefit much more global growth through raising people out of poverty.
And the fantastic news is that because a billion more people globally can expect to live much longer today than in the past, thanks to improvements in medical science, this a vast new source of demand.
The US should thus cash-in on this health dividend by raising retirement ages, whilst also incentivising employers to retain older workers.
Won’t this take jobs away from younger people? No, not at all, because the extra spending of these workers, who would otherwise be living on straitened retirement incomes, will help get the US economy going again.
Older employees can also pass on valuable experience to younger employees. Raising retirement ages might thus resolve another problem highlighted last week, after the Fed made its latest interest-rate projections: Falling productivity growth that was partly attributed to less experienced Millennials replacing the Babyboomers in the workforce.