Back during Japan’s lost decade of 1990-2000 (the first lost decade, that is), Japan’s population had just began to age dramatically. In 1990 the elderly dependency ratio stood at 17%, but it had risen to 25% by 2000. As the Japanese aged, their appetite for savings grew, and as their stock portfolios and home values crashed, they saved more and more. The more they saved, the worse the economy did. Interest rates of 0.25% or less and spectacular government deficits couldn’t make a dent in the vast shift towards a propensity to save. The result was deflation: falling asset values and a strong yen.
Fast forward to America in 2010, with an elderly dependency ratio of 19%, right around where Japan was in 1990. By 2020, it will rise to 25%, almost as fast as Japan’s.
United States of America
Americans also have seen their stock prices and home values crater, and have suddenly shown an insatiable appetite for savings.
Savings are deflationary: we don’t spend on current goods but on future goods (securities). The government may attempt to substitute for household spending but it never quite works, no matter how many public works projects the government sponsors (again, Japan poured more cement than anyone else).
There is another deflationary dimension to aging. Old people are creditors, young people are debtors. Inflation is a transfer of wealth to debtors from creditors (debtors pay back debt in cheaper dollars). A country with a preponderance of old people will show strong political pressures against inflation. As Uwe Parpart, Cantor Fitzgerald’s market strategist, pointed out to me in conversation, that’s why the Japanese never objected to deflation. As old people, they benefitted.
The fundamentals point to deflation, not inflation. There’s an old saying: take a bite, and hope you’re wrong. That’s why I’ve been buying commodity stocks in the current decline. I might be wrong. But deflation is the way to bet, which means that most of my portfolio remains in high-quality fixed income.