Wednesday Briefs – 30 December 2020

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This week: Lord Inequality; Inflation; Demographics as a Predictor.

Lord Inequality

2020 was a bad year but not equally for everyone. For a small group of people, the year was good or very good, even if the suffering of others makes it difficult for them to shout it from rooftops. This was the year when inequality, which has been growing for years, came into our daily lives. In times of war or triage, the role of choosing winners and losers is left to cruel fate, to experts and other masters, chosen or not chosen. But this year, inequality was by default the new lord charged with this gruesome task.

For example, if you were at the end of 2019 a chef or a waiter at a successful restaurant and also had little in savings, you are now very likely out of a job and out of cash. On the other hand, if you were employed at a bank (for example), had accumulated wealth in previous years and were invested in growth stocks, you ended the year with solid prospects and an investment portfolio greatly beefed up by historic rises in the major growth sectors. Similarly, if you were at the start of 2020 an elderly African-American marred by failing health and with poor access to medical care, you were part of a group that was most fatally vulnerable to COVID-19. But if you were in a different age and race group, in better health and with employer-covered health insurance, your group fared significantly better.

In these cases as in many others, inequality at the start of the year resulted in more inequality at the end of the year. It wasn’t supposed to happen this way. Inequality generally widened or shrank due to competition (or lack of) and hard work, not as a result of random events. But this year, inequality determined life and death outcomes in a most dramatic way. We are learning the hard way that the inequality that seemed manageable in times that are relatively good, say when unemployment was below 5%, can quickly turn into a problem for everyone when a crisis strikes and unemployment soars. This will be unacceptable to more people than in the past and will continue to filter into politics.


There has been very little inflation for decades. But many economists are now asking whether the pandemic will lead to a return of inflation. The Economist recently dedicated its lead story to this question. Their thinking is that the massive input of monetary and fiscal stimuli in the economy will eventually push prices upward. The major contributors to disinflation (and deflation in some places) have been 1) globalization, for the outsourcing of goods to lower cost countries, 2) the internet, for providing consumers with fast and easy price comparisons and 3) the general state of US demographics, for dampening the growth in domestic demand.

On the last of these three, we wrote four years ago in America Without Immigration 2015-50 that the US population was growing at a progressively lower annual rate, as shown in the first chart. In theory, this would result in lower demand for goods and services year after year, in volume terms if not necessarily in dollar terms.

However, all age groups do not spend or consume equally. The years between ages 30 and 60 are the time of highest spending for most people. For example, the average age of a first-time home buyer is 33 and the average age of all home buyers is 47. It makes sense therefore to look at the size of this age group, shown in the chart below. Here, we see that the size of that population grew from 87 million in 1975 to 121 million in 2005 and then held flat near this level until 2020. Its growth is now about to resume for the next two decades, as millennials and Generation Z (those born in the 1990s and 2000s) replace in the calculation late boomers and Generation X. The 30 to 60 age group will rise from 121 million this year to 145 million in the late 2040s. This growth is less robust than in the 1975-2005 period, since it computes at 20% growth vs. 40% in the earlier period. Nonetheless, it is a big change from the 2005 to 2020 period when there was no growth at all.

In theory (and the very big picture as these things go), the demographics of the next thirty years are more conducive to some inflation than those of the last thirty years. Added to the above, the retirement of increasing numbers of boomers and the resulting pressure on government budgets would also contribute to inflation if health costs are not brought under control. Our own view on future inflation is agnostic: the turn of some vectors to a more inflationary direction is clear and undeniable but there are offsetting factors such as the spread of automation and others.

Demographics as a Predictor

In relation to the above, demographics are a fairly good, albeit not perfect, predictor of the economy, all other things being equal. Demography is not destiny on its own. If it were, the world would look very different. But demography is an important pillar of destiny, one of three pillars, the other two being Innovation/Productivity and Governance/Society.

In particular, the demographics of Japan, the US, Europe and China predicted slowdowns in those economies in the early 1990s, late 2000s and early 2010s. Markets tend to overshoot the underlying demographic data by months or even years. This makes the study of demographics more useful to long-term macro trend investors than to short-term traders. It is a good idea for the latter to keep an eye on demographic data however. When short-term market moves conflict with the longer term picture, there is eventually a correction to bring them back in line.

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