[quote=gzz]The big underlying cause of declining rates is demographic. [/quote]
I’m not sure I buy this statement at all. I’ve felt for a long time the main cause of declining rates is that the federal reserve (and other central banks) have followed a loose money policy because they can. And why can they? Two main reasons:
1) Globalization has destroyed workers ability to demand higher wages. In the 1950’s and 1960’s American workers were able to demand pay at a certain level. But with globalization, we brought a couple billion more workers into the workforce, generating an oversupply of workers. (Particularly factory workers) This has held wages down and greatly reduced costs of labor, which otherwise would have been passed on into higher prices.
2) Automation. Increased automation has also greatly reduced the cost of labor, and allowed for the cheaper production of goods. Just like globalization, this is a very deflationary force.
I would put demographics a distant third to these two issues.
Which begs the question, could these trends change? I have no crystal ball, so I won’t make a prediction about what they will do, but only what they could do.
Globalization could be reaching the end of it’s deflationary run. At this point lots of agrarian poor have moved to the cities and are now trying to make their way into the consumer class. As they buy more stuff, (with their wages) that could turn the tide. (Maybe)
Automation: A lot harder to know. I would have thought by now we would have already seen a lot of deflation due to automation. But hasn’t happened on the scale I expected 10 years ago. We still don’t have driver less cars, delivery vans, or taxis. Maybe someday. There’s always been a debate in economics about whether automation would displace enough workers so that we didn’t have jobs for people. I used to think that was going to happen. Now, I’m not so sure. Maybe the side that says, “don’t worry, people will just find different, even better jobs” is correct. (Or maybe not, who’s to say)
Regardless of my uncertainty about the two above trends, I think your certainty that the lack of inflation and the inevitability of low rates is something you should rethink.
