Central Banks’ Reliance On Defunct Economic Theory Makes People Worry

“Average UK wages in 2022 could still be lower than in 2008” 
UK Office for Budget Responsibility

While Western stock markets boom under the influence of central bank money-printing, wages for ordinary people are not doing so well. So it is no wonder that Populism is rising, as voters worry their children will be worse off than themselves at a similar age.

The chart above is the key to the story. It shows births in the G7 countries (Canada, France, Germany, Italy, Japan, UK, USA) since 1921. They are important as until recently, they represented around 50% of the global economy. Equally important is the fact that consumer spending represents 60% – 70% of total GDP in each country.

As the chart shows, the absolute number of consumers saw a massive boost during what became known as the BabyBoom after the end of World War 2:

• The US Boom lasted from 1946 – 1964, and saw a 52% increase in births versus the previous 18 years
• The Boom lasted longer in the other G7 countries, from 1946 – 1970, but was less intense
• In total, there were 33 million more G7 births in 1946 – 1970 versus the previous 25 years
• This was the equivalent of adding a new G7 country the size of Canada to the global economy

Today’s dominant economic theories were also developed during the BabyBoom period, as academics tried to understand the major changes that were taking place in the economy:

• Milton Friedman’s classic ‘A Monetary History of the United States’ was published in 1963, and led him to argue that “inflation is always and everywhere a monetary phenomenon”  
• Franco Modigliani’s ‘The Life Cycle Hypothesis of Saving‘ was published in 1966, and argued that consumers deliberately balanced out their spending through their lives

Today’s problem is that although both theories appeared to fit the facts when written, they were wrong. 

We cannot blame them, as nobody during the 1960s realized the extraordinary nature of the BabyBoom. The word “BabyBoom” was only invented after it had finished, in 1970, according to the Oxford English Dictionary.