Book Review: The Great Demographic Reversal – IMF F&D
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Bibliographic details
- Authors: VITOR GASPAR
- Published: March 1, 2021
Book summary and central thesis
- Title: The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival
- Authors: Charles Goodhart and Manoj Pradhan
- Publisher details cited: Palgrave Macmillan, London, UK, 2020, 280 pp., $24.40
- Core argument:
- The confluence of demographics and China’s participation in the global economy created deflationary forces over the past three decades that explain falling inflation and nominal interest rates.
- These forces contributed to weak nominal wages, increased inequality in many countries, and social and political upheaval.
- Going forward, both forces will operate in reverse, producing looming inflation pressure over the next three decades or so.
Key evidence and examples highlighted by the reviewer
- Japan presented as a counterexample to the book’s inflationist thesis, described as:
- policy rates at or close to the zero lower bound for 25 years,
- a declining labor force since 1995,
- falling population since 2008,
- inflation averaged approximately at zero and expected to stay there for the next 10 years.
- The authors include an engaging discussion of several objections to their main theses, making the book read like a conversation that prompts reflection and examination of conventional views.
Specific prediction emphasized in the book (post-COVID-19)
- The authors advance a precise prediction: “…what will happen as the lockdown gets lifted and recovery ensues, following a period of massive fiscal and monetary expansion? The answer, as in the aftermaths of many wars, will be a surge in inflation, quite likely more than 5% or even in the order of 10% in 2021.”
- Mechanism described:
- Demographic reversal plus very expansionary monetary and fiscal policies will lead to less saving and more investment.
- That will push the natural rate up.
- Accumulated leverage leads to financial fragility and discourages central banks from tightening, so inflation is bound to increase.
Reviewer perspective and context
- Reviewer: VITOR GASPAR (Special Advisor to the Managing Director, until the end of the month of November)
- Published in: F&D Magazine, Where We Are Headed, March 2021
- Reviewer notes:
- The book places demographics and slow-moving persistent trends at the center of macroeconomic discussions, echoing Knut Wicksell’s view that economics should start with population.
- As of early 2020, the authors did not have a tight view on timing of the inflection point; COVID-19 led them to a precise, inflation-focused prediction.
- One year after the pandemic declaration, uncertainty remains elevated: savings are high, investment is weak, workers are concerned about jobs and job prospects, inflation has been low for years, and monetary policy has been under the shadow of the effective lower bound.
F&D Magazine — VITOR GASPAR, March 2021.
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