Demography and Debt Dr Stephen Kinsella University of Limerick University of Melbourne
Two main points Debt doesn t matter as long as 1. You can service it & Someone is willing to give you more BUT 2. Debt levels are high in Aus/Ire/UK/Euro Area and interest rates are going up. This implies increased fragility in the household sector.
Debt Composition by age & country/region
Australian Version of this Story 120 100 Type of Debt By Age, ABS (2015) 5.4 2.6 3.4 5.1 80 60 26.6 31.7 46.3 59.7 40 20 0 58.3 62.8 45.9 28.2 8.3 1.3 2.2 2 <30 30 to 50 50 to 65 >65 Student Housing Credit Card Investment Personal
Median debt-to-income ratio (per cent), conditional on holding debt
Incomes and loan terms of mortgaged households
-5% Change in disposable income after mortgage repayments for a given change in mortgage interest rate (medians) 0% 35-39 40-44 45-49 50-54 -1% -2% -3% -4% Simulated interest rate change +1% +2%
Nangle-Goodhart Thesis Demographic sweet spot (a rising proportion of the population being of working age) + globalisation (the great doubling of the global workforce available to Western capital post-1990) resulted in a global glut of labour. Oversupply of workers depresses the relative price of labour, pushing down the labour share of national income in the advanced economies and depressing wage growth. The availability of cheap labour globally reduces need for labour saving, productivity-enhancing capital investment in the developed world. Lower demand for capital (and less inflationary pressure from wages) reduced real & natural interest rates.
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Demographic/Productivity Sweet Spot 65 60 55 50 World Population 15-64 1 0.5 0-0.5-1 Average Population 15-64 % Change
The De-cumulation problem Australian Households $0-450k -> State 450k -> 1.5m -> Sequencing Risk 1.5m+ -> Should be fine but still exposed to large losses in mkt correction 11
Social Expenditure, % GDP 70 IE 60 50 CZ HU LU AU UK FR BE FINSW NE DEN 40 MA ES CY LI PO GE 30 20 PO BU RO LA IT GR SP y = 2.2331x + 10.8 R² = 0.4581 10 0 0 5 10 15 20 25 % Change in Gini Coeffeicient, 2009-2013
Cultural Change Gig economy workers don t take out pensions. Cultural change in nature of work implies large change for returns in the Super industry.
Labour share of income (Guerrerio 2012) Figure4. Average values of LS6 over time, by level of development Developing countries Developed countries Source: Author s calculations. e situation becomes even more complicated when analysing the relationship between
OECD Labour Share Study labour productivity has outpaced real average wage growth in a group of nine advanced G20 economies for which data is available since 1999 (Figure 5). Figure 5. Evolution of average wages and labour productivity in selected advanced G20 economies, 1999-2013 120 115 Labour productivity index (per cent) Figure 3. Changes in labour shares in G20 countries (plus Spain) Panel A. Advanced economies 1970-2014 0.0-5.0-10.0-15.0 110-20.0 Spain Italy Republic of Korea United States Japan Australia Canada Germany France United Kingdom 105 Real wage index 5.0 Panel B. Emerging economies 1995-2012 0.0 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Notes: Data refer to Australia, Canada, France, Germany, Italy, Japan, Rep. of Korea, the United Kingdom and the United States. Real wage growth is calculated as a weighted average of year-on-year growth in real average monthly wages in the advanced G20 economies (for a description of the methodology, see ILO Global Wage Report 2014-15, Appendix I). Index is based on 1999 because of data availability. (per cent) -5.0-10.0-15.0 Sources: ILO Global Wage Database; ILO Trends Econometric Models, Apr. 2014. In most of the G20 advanced countries for which data is available, the aggregate growth of real wages was significantly slower than that of aggregate productivity even taking into -20.0 Turkey Saudi Arabia Mexico South Africa China India Brazil Russian Federation
Results of Nangle-Goodhart Thesis Result of NGT: lower inflation, weaker wage growth, lower investment, falling real rates and rising inequality
Can Fragility come from Stability?
Macro- economic policy has led us into a debt trap
Summary Shift out of debt-laden areas like housing if you can once interest rates start to rise Or: invest in anti-cyclical recovery tools, but be prepared for large losses.