Demography and Deflation

Japan’s experience over the past 20 years provides solid support for those who believe that there is a causal link between demographics and deflation.

As societies such as Japan age, the large numbers of people approaching retirement tend to save more and consequently spend less on current consumption.  The thinking is that this type of large-scale deferred consumption can lead to price decreases.

For anyone interested in exploring this issue further, David P. Goldman produces some very interesting content on the topic.

For example, Goldman writes a blog that is part of the online magazine First Things.

Goldman has also produced a regular column for the Asia Times Online.  Many of the pieces produced under this column deal with the economics of longevityThis article, for example, suggests that longevity has given rise to the Tea Party in the United States.  

The economics of demographics and longevity are highly relevant to what is currently playing-out in the United States.  A debt fueled asset bubble is followed by a severe crash in asset values, and this crash happens to coincide with the onset of 70 million retirees.

The inflation-deflation debate in the wake of the financial crisis and unprecedented government stimulus tends to be skewed towards the inflation camp.  It is worthwhile, though, to consider the long-term deflation scenario as the longevity/demographics thesis and Japan analogy may not be far off the mark.