If you’re like me, you got the biggest bucket you could find and you’ve got it held up to the global money taps. And now you’re watching governments fall over themselves to send gallons upon gallons of cash flooding your way.
Not literally, obviously. But some days it feels like that.
The only question now is how long can it last?
It’s a good question. When you’ve got a Godzilla of money stomping around the globe, you want to make sure you’re not in the way when it goes rouge.
So how will we know? What are we looking for?
Well, assuming civilisation holds it together (and I’m not making any promises there), the tipping point will be a flip from the current deflationary environment into inflation.
The “Doomsayers” love this. They’re scaring the living daylight out of all the mum and dad investors with the whole inflation thing, costing them thousands in lost opportunity.
Don’t listen to them… Not yet anyway.
Don’t get me wrong Inflation is coming, given the scale of money printing going on in the US, even hyper-inflation, but not yet and not right now. What you need right now is a bucket (and a big one) to fill it with all this easy money around.
But while the possibility for a money-bust is real, even-garden variety inflation will have the central banks turning off the taps and interest rates starting to rise.
And it is true that all this money printing, even the EZ money on offer here in Australia, must be inflationary at some point. In fact, that’s exactly the point.
But while you’ve got the wall of money in one corner, in the other corner you have a number of massive deflationary super-trends that are keeping prices suppressed (oppressed?).
On my reading, there are at least 7 deflationary super trends that mean that governments around the world will leave the money taps on for a lot longer than most people think.
Let me lay ‘em on ya.
This is the big one. I talked a bit about it in a blog a week or so ago. The basic idea is that a large chunk of the growth in the run up to the GFC was due to both households and businesses taking on more debt.
I also published this graph here, which I think is worth another run:
This shows the story for Australia. You can see the levelling off of household debt levels, and the sharp fall in corporate debt following the GFC.
It’s a story that’s repeated around the world, though on a global scale we’ve had a pretty easy ride of it.
So around the world right now, banks are tightening their standards, and households and business are using any surplus they can get their hands on to pay down debt.
This means that before a wall of money can spark levels of growth that are going to worry inflation, it will have to work through the debt hangovers of the GFC.
How long will this take? Well that’s anybody’s guess. But it took us more than ten years to get into that mess…
2. Increased saving
Associated with an unwillingness to take on more debt is an increase in household saving. Australians were dis-savers before the GFC. Now they’re saving more than 10 percent of their disposable income.
This isn’t just about changing attitudes to debt, though that’s part of the story. A big reason for it is that other sources of equity have taken solid knocks to the head.
The stock market gave people a surprise when it started going backwards, trampling all over super funds on the way down. And with house prices stalling for a couple of years, people have stopped drawing down housing equity, particularly to go play in a losing market.
This has driven an aggregate return to savings as a store of wealth.
It remains to be seen whether this new level of savings is a new normal or not. But either way, that wall of money has to keep working harder to stop the cooling effects an increased saving rate is having.
3. Fertility and Ageing
This trend is so slow moving but so powerful, that by the time that most countries realised what was happening, it was too late to do very much about it. And now there’s no easy way out of the fix we’re in.
The world is ageing. Fertility rates across the globe fell as we got richer, and now there’s a baby-boomer bulge in our age distribution moving into the retirement years. There are just fewer young people coming up through the ranks.
At the same time as we started having less children, we also started living longer, and spending more and more years in retirement.
So what this means is that national dependency ratios – the number of people supported by the workforce, relative to the workforce itself, are increasing.
We’ve got a pretty steady increase scheduled in for Australia over the next 30 years (it’s easy to predict because we know how many people are alive right now, and fertility rates are slow to change…) But some European countries, like Italy have a real headache on their hands. So does Japan. And so does China.
It’s a headache because an increase in the dependency ratio reduces an economy’s productive capacity, and puts a solid drag on growth.
This in turn creates solid and sustained deflationary momentum – across a generation. Money market tinkering, even on the scale we’re seeing now, pales in comparison.
If your with me and want to find the 4 other reasons why there are seriously great times ahead, click here to keep reading.