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Is there a surplus of rich people, not a surplus of middle-aged people? What is it that drives down interest rates?

I expected nothing interesting to happen at the Fed’s Jackson Hole meeting, and it turned out to be wrong.Federal Reserve Chairman Jay Powell’s speech was of course boring, but three scholars introduced a dissertation It is best for investors to read.

They believe that the main force driving down interest rates is not demographic changes, but income inequality. This is important for investors because (theoretically) the demographic trend that puts pressure on interest rates is about to reverse, and the trend of rising income inequality seems to have been locked in.

Atif Mian, Ludwig Straub, and Amir Sufi agree with supporters of demographic views, such as economists Charles Goodhart and Manoj Pradhan (I have already Fair quantity of space Here), a key factor in the decline in interest rates is higher savings. Savings chase returns, so when there are more savings and the same amount of deposits, the rate of return must fall.

However, Mian, Straub, and Sophie disagree about why more and more savings are flowing around. This is not because the huge baby boomers are getting older and saving more (when they all retire, this trend will quickly change direction). On the contrary, this is because more and more national income will flow to the highest tenth of income. Because one person can only consume so much, a few wealthy people tend to save most of their income instead of spending it. When these savings are invested, this directly pushes down interest rates, thereby pushing asset prices up and yields down; indirectly, by weakening aggregate demand.

Why all the cash that the wealthy push to the market is not turned into productivity in the end invest, Is it at home or abroad? Tricky question. For now, it is enough to note that this has not happened-the savings of rich Americans have reappeared as debts owed by the government or low-income American households. (In another PaperMS&S pointed out that this means that the high income share of the rich has harmed aggregate demand in two ways: the marginal propensity to consume of the rich is low, and the government and non-rich people are forced to shift the dollar from consumption to debt services. Economically, high inequality is a real hot topic. )

MS&S prefers inequality interpretation for two reasons.Use Fed data Consumer Finance Survey (Dating back to 1950) They show that compared with different age groups, the savings rate within any given age group is much different. In other words, savings are growing faster because the rich are getting richer, not because the baby boomers are getting older. See these charts:

The Y-axis in both graphs shows the ratio of savings to income. The chart on the left shows that the 10% of households with the highest income have a higher savings rate than anyone else, and (proportionally) more than all people aged 45-54 (the age group with the highest savings rate), as shown in the right chart Show.

Another way to visualize the same points. This is a heat map that matches the savings rate (shown in color) with the income deciles (Y-axis) on the one hand, and the age group (X-axis) on the other:

As you move from left to right on this chart, moving across age groups, the color does not change much. Crimson hues (that is, high savings rates) are crowded at the top, the richest people in each queue.

This effect is dramatic and a very big change. In the past 20 years, compared with the period before 1980, the highest one-tenth has taken one-third more national savings for yourself:

We estimate that from 1995 to 2019, compared with the period before the 1980s, the top 10% saved 3 to 3.5 percentage points of national income. This accounted for 30-40% of total private savings in the U.S. economy from 1995 to 2019.

The second reason for thinking that rising inequality is a better explanation for the increase in savings is that inequality has steadily increased during this period, rather than interest rates have fallen—that is, since about 1980. In contrast, as the baby boomers age and then begin to retire, the savings of middle-aged people have fluctuated. In other words, the correlation between inequality and interest rates is much closer than that of demographic data. In fact, MS&S believes that SCF data shows that there is no correlation between the overall savings rate and the middle-age income share at all.

What would Goodhart and Pradan say? I don’t want to answer for them, but there are two things that impressed me. One is that MS&S only focuses on US data, while G&P emphasizes that because capital and production capacity flow across borders, you must focus on the global situation. For example, Japan has not experienced falling interest rates or rising inflation during its aging process. It can depress prices by transferring production capacity to China. Second, G&P believes that saving is only part of it; the supply of workers is also important.

I let better economists solve the struggle between demographics and unequal parties, but I will say that I find MS&S’s point of view very persuasive. But who is more correct is undoubtedly important to investors, because the two sides diverge on the most likely interest rate path.

Further explanation. I think if MS&S is right, then the political influence will be particularly bad. In their view, inequality is self-perpetuating, and the feedback loop runs at a low rate. Excessive savings of the rich depress interest rates; low interest rates push up asset prices; the rich are getting richer and richer. Many governments are implementing monetary policy, which is likely to make this flywheel spin faster. How long will people sitting outside this wealth machine—most voters—tolerate this situation? If the G&P is correct (the old struggle to maintain a social safety net when people of working age are fighting higher taxes), this shocks me more than you expected intergenerational conflict.

Those of us who have some assets and have done a good job in recent decades should think about it.

A good book

As we all know, M&A lawyers think M&A bankers are annoying. The lawyers thought they did all the work, and the bankers took all the glory. But who is annoying to M&A bankers? Private equity executives, obviously.