Having attended Pete’s talk at the Economics Research Council, Michael Baxter of the Share Centre has posted two blog entries.
The first examines the Great Demographic Shock that will come about for inflation as a result of the declining birth rates around the world.
The birth rate is below replacement levels in pretty much every developed market and has been plummeting in most emerging ones including South America and nearly all SE Asia. For example in Bangladesh birth rate has declined from 6 children per woman in the 1980s to the current level of around 2.
Only in parts of Africa is the birth rate above replacement levels. Even here, I suspect the official projections are under-estimating the decline that we may witness in the coming decades. Recent research suggests that what has lowered the birth rate most is access to TV. Academics argue whether this reduction is caused by changing women’s attitudes (the so called “novella effect”) or just that people then have something else to do in the evenings. But be sure that at some point widespread TV will come to Africa (possibly wirelessly) and with it populations will probably decline as they have done elsewhere in the world.
The second picks up, Pete’s analysis on money supply vs prices since 1900 in the UK. This implies that price have to double from here or the money supply shrink in half to satisfy the basic theory of exchange. The key chart is:
You can read more about the analysis here.
Pete’s view is that the most likely scenario to resolve this imbalance is some form of deflationary shock caused by something like a sovereign bond market crash. You can read more about this in Chapter 18 of Inflation Matters.