In February of 2020, on the eve of the pandemic, SocGen’s Albert Edwards made a remarkably prescient call.
“As helicopter money becomes increasingly inevitable, the big news is that we are calling for the thawing of the Ice Age after the next recession — whenever that arrives,” he said after surviving an earthquake and narrowly dodging a tsunami while on vacation in Jamaica.
As it turns out, the next recession arrived less than two months later, when the pandemic briefly plunged the world into a fleeting depression. “Helicopter money is on its way,” he went on. “You can call it Modern Monetary Theory (MMT), you can call it ‘Fiscal and Monetary Co-operation,’ or you can call it whatever you like.” Within three months, developed markets around the world were engaged in precisely that.
Albert’s suspicion that fiscal-monetary partnerships were inevitable informed his contention that the “Ice Age” (Edwards’s secular deflation framework) would soon give way to the “Great Melt,” with higher nominal growth, inflation and bond yields.
Unable to resist the temptation to predict one, final deflationary bust, Edwards said in June of 2020 that prior to the onset of the “Great Melt” there’d likely be a “Great Meltdown.” That never really panned out, but his remarks around stimulus coordination, and the likely macro read-through, certainly did. “Massive monetary stimulus is combining with frenzied fiscal pump-priming in an attempt to paper over the current slump,” he remarked, in the same June note. “Mainlining liquidity directly into the veins of the global economy will be much more effective in boosting GDP than QE,” the February 2020 missive read.
Fast forward three years, and the IMF isn’t ready to give up on some elements of Edwards’s Ice Age thesis. But he still is.
“The IMF believes that demographics — low growth in the working age population — combined with poor productivity growth have been the main factors driving real interest rates lower since the 1990s and that those key drivers simply haven’t gone away,” he wrote, summarizing. “So once policymakers wrestle the current inflation gorilla to the ground (quite a fight admittedly), the IMF thinks we will return to the low bond yields of the Ice Age.”
In his view, the IMF is “falling into a behavioral trap,” and perhaps not appreciating the extent to which economics is a soft science.
Although the Japanese experience “tells us that aging populations should be deflationary,” recent events demonstrate that, depending on the circumstances, aging populations can be inflationary. During the pandemic, when stimulus inflated the value of retirement funds and homes, people retired en masse, shrinking the labor pool, worsening worker shortages and thereby contributing to wage-price spiral dynamics.
“The future impact of poor demographics may have entirely the opposite effect from the past. Such is the nature of social science,” Edwards said Thursday. “We just do not know how this will work out and neither does the IMF.”
To be sure, it’s easy to follow the IMF into this “trap” (if that’s what it is). We know that “increasingly sluggish labor force growth [can be] associated with slow pay and, importantly, slow investment,” as Edwards wrote, recapping a recent piece by Gerard Minack.
He used the charts above from Minack in his Thursday piece. When we think “demographics” in the context of the macro discussion as it played out during the Great Moderation years, we typically think deflation or, at the least, disinflation.
But, the world might’ve changed beginning in 2020. Edwards thinks it has. “Secular stagnation can be defined as having been caused by excess savings relative to investment driving down the equilibrium real yield, but I believe recent geopolitical events have conspired to trigger a new secular investment boom,” he wrote, before enumerating five key areas of likely investment:
- Corporate operational and security resilience
- Defense
- Climate change
- Public sector infrastructure investment
- Business investment as wages rise due to labor shortages
If that sounds familiar, it should. I’ve made similar arguments here on innumerable occasions, and not because I’m especially bright or original. The 2020s have been a wakeup call on a number of fronts. Our newfound “wokeness” (and I’m not talking about America’s culture wars or anything to do with Disney and Ron DeSantis) will almost invariably lead to investment in all of the five areas Edwards identified.
For Albert, the implications are clear. “This higher rate of investment will ultimately soak up excess savings, which means that while we might visit lower yields in the next recession, it should prove to be only a brief cyclical visit. Conclusion? The IMF is wrong. The Ice Age is dead. Long live higher real yields.”
Isn’t Japan a bit of an outlier in that the country’s policy on immigration has played a major factor in never ending deflation? The protectionist movement in the U.S. and other developed countries in recent years may only add to deflationary pressures in the years ahead (not to mention how AI may only exacerbate these pressures). The market seems to be making this bet as well. So while I’m perfectly happy taking 4%+ in risk-free assets for now, the path of least resistance for risk assets is beginning to tilt higher due to policy errors resulting in rate cuts much sooner than I expected, in my humble opinion.
I am reading the 4th turning right now and I have been thinking about how the cycle (crisis) will continue into the next phase which supposedly should be a time of great consensus building, stronger institutions and social cohesion. This feels like it may be the answer after some sort of climax to the current geopolitical tensions, if everyone can decide to work together on these topics he lists out. I do personally feel like the world is finding a whole lot of reasons to fight with each other when really the biggest focus should be on how we are going to re-structure our energy economy in order to meet climate commitments/goals. Contingent upon a lot of course but interesting to think about how these forces could actually be very productive for society if we can move past the immediate threat of global nuclear war.
Given the demographic headwinds in the USA, I am not convinced that real rates are going up on a secular basis. Edwards is a very clear headed analyst though- notice he did not say rates were going up immediately, but that rates would be higher on average once we got past a possible cyclical dip. I would be in the higher rate camp if something changed the demographics- that is if the birth rate went up, folks stayed/came back in the labor force and were healthier to work longer, or immigration was permitted to increase.
The IMF is likely going to be right for the wrong reasons. I would not expect labor shortages to continue beyond the next few years, particularly in white-collar jobs, due to the advances in generative AI. The same applies to many basic service jobs. The question is whether or not some of those soon-to-be-unemployed workers will be able to make the transition into blue-collar jobs that require physical labor. Generative AI might be able to draw up blueprints for a house, but it can’t build the house.
Inflation will recede as the labor shortage eases, inequality worsens, and prices are forced back down. I expect a lot of tech workers will start to fall into the bucket of long-term unemployed over the next couple years, and they’ll be followed by other white-collar professionals and service workers. At that point, I hope we have the political will to invest more in much-needed elder and child care as well as UBI.
This comment got me to thinking about the trades. I wouldn’t be surprised to see wood shop, auto shop, welding, plumbing/HVAC, electrical classes come back to high schools one day.
already has with states starting to reinvest in voc tech. Relative had high school welding elective senior year and already making $35-45 at 19 yrs o!d. Only up from there.
Predictions of Tech Workers unemployed exist from before the Dot Com Bust but that’s never going to happen as the leverage from Technology will always make it the most desirable/profitable place for talent.
AI will exacerbate the “have/can tech” vs blue collar divide and the inequality that technology hyper-efficiently-vacuums and aggregates.
UBI already exists via SSI and disabilities so like Obama-care a good strategy would be to extend it’s reach: helicopter payments for all parents who have children under 5.
This thing about being right for the wrong reasons seems important to me. I’ve been thinking about this a lot. I’ve seen some big arguments between two famous people I respect- one was right, righter than he expected, and I realized the winner was right for the wrong reasons. This is almost never discussed, which means it is more, not less important. I’ve looked at my prop trading over the years- I think half the time I was right, it was for the wrong reasons- a good case for humility.