Perhaps the most significant thing that happened in the 2007-08 financial crisis, and is still reverberating today, is that people lost faith in either governments or markets to provide for them in retirement.
The main purpose of saving is for retirement. Up to 2007 the world’s population was able to rely on a combination of investment returns and government welfare to subsidise them in old age. That belief has been shattered, either by the obvious bankruptcy of governments or the end of the housing and equities bubbles.
The result is the paradox of thrift at work on a grand, global scale. This was the phenomenon identified by John M Keynes which states that if everyone tries to save more during recessions, then aggregate demand will fall and actually lower total savings in the population.
Savings rates in Japan, already high, went up even further after the crash of 1990 and stayed, contributing to Japan’s "lost decade”, now in its 22nd year.
Similarly, saving rates around the world have risen sharply in the past four years as households attempt to compensate for the fact that investment returns have fallen, along with house prices in Europe and the United States, and that governments with too much debt are cutting back on pension entitlements, or will obviously soon have to.
And adding some urgency to the need to save more for retirement is the rapid increase in life expectancy.
We can all see that medical science is performing wonders on the ability of doctors to prolong life by fixing the things that usually shorten it, such as cancer and heart disease.
Moreover we’re smoking less, partly because governments are cracking down on it, and that’s adding years to our lives as well.
Which is wonderful, except that the increase in average life expectancy is blowing out the cost of retirement dramatically at precisely the wrong time – when the baby boomer generation is starting to retire, dramatically increasing the number of people in retirement; when governments are going broke and cutting back on pensions; and when the returns from all forms of saving, especially interest rates, are at historic lows.
The result is that families around the world must to look to the amount of their savings to fund their retirement. The result is what Keynes calls the paradox of thrift and Ben Bernanke calls a "savings glut” – producing a deficit of consumption.
Yesterday Martin Wolf asked "Is unlimited growth a thing of the past?”, based on a paper by Robert J Gordon of Northwestern University, in which Gordon argued that the pace of innovation has slowed since the end of the second industrial revolution.
Gordon discussed six headwinds to growth in future, the first of which was the "reverse demographic dividend”. The original dividend was the movement of females into the workforce between 1965 and 1990, which raised hours worked per capita.
The retirement of the baby boomers is now lowering hours per capita at the same time as his sixth "headwind” takes effect, which is debt, both household and government (The debt we can't pay is growing, October 4).
Debt repayments are lowering real household disposable income; this is being exacerbated by the extra saving needed to make up for lower investment returns and lower house prices (we can no longer rely on cashing in the family home to fund retirement).
None of this is short term, as Japan has found, and adds to Gordon’s idea that the world is ex-growth for a long time.
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Shattered dreams in the grey years of growth
Just as rising life expectancy boosts retirement costs, governments are slashing pensions and investment returns sit at historic lows. The resulting savings glut will leave global growth high and dry.
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