If the debts are to be repaid, we need growth to generate surpluses and tax revenues.
We need an expanding army of young workers, earning and spending their rising wages, but instead their numbers are shrinking.
The only expanding army is the swelling cohort of retirees, who tend to save, don’t buy cars or new kitchens and would rather sit on their very expensive property.
China is at the very heart of the demographic dilemma; thanks to decades of rigid fertility controls, it will soon reach a tipping point at which the available labour force begins to shrink.
Without expanding cohorts of young workers, economic growth needs greatly enhanced productivity and China is investing heavily in robotics.
However, we don’t yet know if the AI economy will in the long term generate more activity and wealth or simply create a bigger army of enforced early retirees.
In the short term, we have a real dilemma: the rich countries of the world are geared up to the eyeballs in borrowing just as the central banks are preparing to raise interest rates and shed the assets they acquired over almost a decade of monetary engineering.
In a recent staff working paper, the Bank of England concluded that the effect of quantitative easing on inequality in the UK had been marginal.
In terms of income, younger people did well, because of increasing employment levels in a relatively easy environment of cheap credit for consumers and businesses.
Older people, however, suffered from poor savings and annuity rates. But in wealth terms, older people did better than the young, thanks to rising asset prices: property and shares.
However, it prompts the question, what happens when the central bank policy reverses?
The Bank of England doesn’t offer answers but suggests we should expect “broadly offsetting effects in the opposite direction” — in other words, rising rates and falling asset prices.
One might assume that the stock market will drift, the house I am sitting in will be worth much less (ho hum) but the young family down the road might see their mortgage interest payments soar, an outcome that would make the 2008 crash seem like a storm in a teacup.
