Prior to the emergence of COVID-19, as I have previously indicated, the defining characteristic of the 21st century was the inexorable aging of its population. Almost a fifth of the population of the industrialized countries of the world were age 65 and older. In earlier centuries, the vast proportion of the population worked until they died. Retirement as we know it today was a rare outcome. As a political consequence, retirement benefits, especially Social Security and healthcare, escalated significantly and are now projected to expand materially further in the decades ahead.

As a consequence, pension funds and individual investors nearing retirement have been seeking means to sustain secure income further into the future, and thus the demand for safe long-term assets has risen significantly. For example, the yield on the 30-year US Treasury bond has declined by well over 1000 basis points since the early 1980s as demand for the security has increased.

For the United States, over the last half century, the sum of gross domestic savings and government social benefits payments (as a percent of gross domestic product) has remained a remarkably stable 30%. What has changed is the makeup of that sum—we can see from the data that the increase in social benefit payments has coincided with a nearly dollar for dollar decrease in gross domestic savings. Thus we infer that added spending on entitlement programs is crowding out gross domestic savings. For Britain and the rest of Europe, the relationships are similar. Most unexpectedly, they are for China as well.

COVID-19 is obviously a once-in-a-century force that has gripped the global economy. The unfortunate truth of the matter is we know virtually nothing for certain and all the “experts” are expressing not much more than informed
guesses on where we will end up.

One of the consequences of confronting the COVID-19 crisis has been an increase in federal deficits already large enough to induce inflation. As they have in the past, federal budget deficits that are looming in our future will increase unit money supply which inevitably increases the rate of inflation. There is little change in my long-term outlook, which ultimately will be confronted with the inflationary increase in the impacts of rising unit money supply on inflation.

At some point, the pandemic will fade, as all past century phenomenon like it have, after a period usually measured in a year or longer. At that point, longer-term economic forces, especially the aging of the population, will then again become the dominant factors in the economic outlook. Some of the pandemic adjustments that have already been made will, even as the virus disappears, remain a formidable force in the economic outlook.

Since 1929 and earlier, gross domestic investment for the United States has followed gross domestic saving very closely. In recent years, however, investment has outpaced domestic saving. This gap was made up with money borrowed from abroad, reflecting the increase in net foreign saving. This money borrowed from abroad is reflected in the US net international investment position, which is now approaching $10 trillion annually.

In the future, the international competitive position of the United States and China will, if anything become a more dominant force on the world scene. From a long-term economic perspective, China is saving and investing a much larger proportion of their GDP than does the US, one of the many reasons they’ve exhibited such a dramatic rise in real GDP per capita and living standards. I’ll dive deeper into that long-term relationship, and its historical roots, next month.

About the Author

Dr. Alan Greenspan

Dr. Alan Greenspan

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was...
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