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John Taylor On The Dollar, Growth And Immigration
The Dollar, Growth, and Immigration
May 27, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Although those of us who invest in the currency market have to pay careful attention to the daily price twitches resulting from economic releases and political speeches, the foreign exchange value of individual currencies actually moves glacially with wide emotional swings around the central value. The emotion has often run against the dollar. Before the start of the euro, the Deutsche mark was the market favorite. Two societal attributes probably contributed to this consistent bias. First, the Bundesbank and the German government preached and usually followed a more conservative monetary and fiscal strategy than the Fed and the US government did, which resulted in marginally tighter liquidity on average in Germany. The two governments’ different leanings could partly be explained by the historical accident of the ruinous hyperinflation that Germany suffered in 1923, terrifying modern Germans, but more critical was the fact that the US population was younger and growing faster than the German one. Because the tendency to consume is higher in the early years of adulthood and trails off dramatically as retirement age approaches, Americans bought more and saved less than the Germans. Furthermore, the US had to spend more on its infrastructure and social services than Germany, just to handle the higher level of household formation. Looking over the past 40 years, it seems that countries with growing populations and with faster growing economies tend to have weaker currencies than those with a more stable population and slower growing economies.
We think this is about to change. Stability is now passé and the optimal currency of the future will have high relative growth in output and in population. Demographics are the key to the future median value of currencies, and the winners will include countries like Brazil, Australia, Canada, and the United States as GDP = population growth plus productivity. Among the losers will be Japan and the Eurozone countries. The fast growing countries with birthrates above the levels necessary for replacement combined with societies open enough to allow immigrants to assimilate with the native population will be the big winners. The population of the US should rise by about 33% over the next forty years, and those young workers, both native-born children and new arrivals, will help pay the retirement costs of the aging ones. In Japan and Western Europe, where the birthrate is way below the replacement rate and immigration is either severely restricted or not well assimilated into the society, the burden of the aged rises so dramatically that their social structures might collapse under the strain.
In only 10 years, the dependency ratio in Japan will probably rise to the point where every two workers will have to support one retiree. Although the number of retirees is rapidly growing, Japan’s working age population is shrinking. Unless Japan allows dramatically increased immigration, this picture will continue as the incoming class of schoolchildren should be the smallest since shortly after the end of World War II. The European numbers are not as bad as the Japanese, but the dependency ratios still rise to dramatic levels, where fewer than 3 workers must support each retiree. Making the European situation worse is its highly centralized labor structure. The pressure groups and unions in stable and socially unified societies have, over time, reached favorable distributional bargains that make the retirement support structure even more debilitating. The Greek example is in the press every day.
Deals like ‘full retirement for hairdressers at the age of 47 because of the risk they suffer from exposure to harmful chemicals’ can only develop in a society with a stable population that is not growing rapidly. The US with few unions, new immigrants, and social mobility is less likely to have cozy retirement schemes. Emerging countries that can manage the growth formula, like Brazil or Singapore, should have the flexible society allowing them to outperform the G-10 leaders: the US, Canada, and Australia.
h/t Teddy KGB
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Thanks, Tyler is still working at Memorial weekend. Let's talk about next month's stock market. I guess it will go lower and dollar go higher
Uncle Ben is smarter than you think and smarter than Alan. Containing a disease is much difficult than spreading a disease. He printed 3T fiat yet last year's BigMac still costs same as this year's. Thanks Ben and McD.
Good analysis. Also needs to go into quality not just quantity of population growth.
In Europe, population numbers and youth are propped up by Muslim immigrants and their children. There are indications they are very large net consumers of social welfare in European countries. If so, while the numbers may seem to diminish the potential welfare/worker ratio, in fact they may exacerbate the situation, and this form of immigration certainly produces less social cohesion than in Japan (do we imagine a large group of ethnically middle eastern Muslims are going to be happy working to support an elderly population of European?)
I don't know about Canada, but Australia has a selective immigration policy, which puts weight on education, wealth, health and youth. The young typically come by entering Australia to do an educational qualification (so have to be reasonably intelligent), working part time to sustain themselves while in-country (so have a work ethos) and then gaining the right to stay and work, and later become citizens. It doesn't mean only young, wealthy, smart immigrants come to Australia, but the bias is that way.
Unless the US has an immigration policy that supports primarily the interests of the US rather than primarily those of the arrivals, the long term results will not be as positive as the raw numbers may suggest.
I call bullshit. This sounds more like he's advocating for open borders than giving an economic analysis. The US is rife with both unions, particularly in the public sector, and more than cozy retirement schemes. The future will not be any better in this regard under the boy king.
Always amazes me how some analysts talk about non-white immigration into white countries as if it is just a purely mechanical thing. Like everyone who comes immediately plugs into the society and participates like natives in it. Not talk about crime, violence, trashing of neighborhoods, welfare tax burden, unlivable conditions for the natives. If US population increases by 33% in the next decades thanks to non-white immigration, god help USA. It won't matter what its GDP per capita is, as all the middle class will be living behind barbed wire like in Brazil or South Africa. I take Japanese stagnant society with no immigration, over this open border nonsense any day. Quality of life is what counts, not the amount per capita of GDP.
"Not talk about crime, violence, trashing of neighborhoods, welfare tax burden, unlivable conditions for the natives."
And the stench. My god, man... the stench!
Trimmed hedge,
you a hedge trimmer by any chance?
Let me tell you about this site.
Racism on Blacks: okay.
Racism on Chinese: okay.
Prejudices against Muslims: okay.
Prejudices against Jewish: you will get yourself detractors.
Israel is the Jewish State and that is racist. It should embrace diversity and open its borders for faces of all races, like Jew controlled civil rights organization advocate America do. Zionism is racism according to UN.
Agreed.... the analysis reads like another utopian socialist agenda,one designed to fool the naive liberal.
Breakout looks imminent..
More deleveraging forcing panicked hedge funds to buy dollars.
"Breakout looks imminent.."
Actually, I see a gap that needs to be filled back at $22.20.
"Funny" how charting works, eh?
John Taylor. Incompetence or outright dishonesty?
http://fraser.stlouisfed.org/historicaldocs/762/download/30925/martin57_...
Next he will be telling us that we should target inflation at or near 2%.
oh !? ...
John Taylor, what do you expect from a former member of Duran Duran.............
http://www.johnbtaylorsblog.blogspot.com/
i think, we are talking about j taylor from stanford economics, a different dude but still just a crack pipe as far as his liberal socialist utopian future of colored people from south leading the world in innovation, economics and proper management of world affairs. kinda like when i lived under communism they had the 5 years plans and the outcome was never that, instead a old school tractor that couldnt complete on world markets...sad to hear that this comes now from stanford
all you have to do is look at the "quality" of work done by obama to see what this dude is talking about
John Taylor...........
http://www.youtube.com/watch?v=oOg5VxrRTi0
In the short-term it seems simpler. Isn't Uncle Ben printing just enough to allow deflation, shrinking M3, in an orderly way through deleveraging, foreclosures, bankruptcies and liquidations? $ strength, because there are more $ out there to debt deflate.
Emerging markets, hopefully, will enjoy the fruits of their rise to prosperity eliminating imbalances of all kinds vis a vis the West.
I'm a bit skeptical of his call on the US situation. While I agree with some of what he says I don't see any how it will be achieved when everything is service sector and consumption is down and we produce very little.
Further, we would need to have massive change in compensation structure in order to compete and that just won't happen, you can't do it. Best I see is rock vs. hard place in US, we certainly have enough workers, but I don't see any way to employ them at a compensation level sufficient to exist...it may adjust but that will take time, and that doesn't even account for the regulatory problems with wage levels.
I'm no expert, but he counts the US in this group of beneficiaries when I don't think it's justified.
These two sentences define a big problem for Japan. I'm not criticizing, just observing, but non-Japanese are simply not assimilated into this society and it will not be easy for them to change.
Updated DOW charts :
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1