My first breakthrough economic discovery was the Spending Wave in 1988. It’s a 46-year lag on births to project the peak spending of new generations, which made a lot of sense when I first discovered the correlation with the economy and stock market.
As new generations aged, earned, and spent more, the economy would rise; then it would fall when each generation saw its kids leave the nest and started saving for retirement.
My next discovery in 1989 wasn’t as obvious at first…
I observed a close correlation between workforce growth and inflation rates, as you can see in the chart, and then found that it was closest on a two-and-a-half-year lag.
“What the hell would workforce growth have to do with inflation?” I asked myself. Then I finally got it…
While young people are the most important investment we make in the future, there’s no denying that they cost everything and produce nothing for a large chunk of their lives!
It takes around $250,000 for the average parents to raise the average kid, and that doesn’t include college. Increasingly, governments have to fund education costs for kids.
Then, when they finally enter the workforce — at age 20, on average — businesses have to invest in training them, while providing them with a workspace and the necessary equipment. It takes about two-and-a-half years for a young new worker to start to earn his employer more than he costs.
So when you have a new generation of 20-somethings entering the workforce en masse, inflation peaks about two-and-a-half years later.
Eventually, of course, those young people become highly productive, spending and borrowing until they reach age 46, on average… and driving the economy up in the process.
Those are among the two most important economic facts I’ve gleaned from all my demographics research.
Now, I understand that inflation is obviously a complex phenomenon, with many things impacting it in the short term. Things like monetary policy, oil prices, food prices, economic booms and busts, currency exchange rates (which affect import prices), and even the weather.
But that just makes it even more impressive that this one simple indicator — my inflation indicator — would correlate so well over time. It boldly proves that inflation is not “purely a monetary phenomenon,” as Milton Friedman first proclaimed.
People are the primary cause of inflation, just as they’re the primary driver of any economy. Economists and governments ultimately don’t have as much control over the economy as they like to believe.
If monetary policy is the cause of inflation, then explain why we’ve seen unprecedented money printing and falling inflation in recent years.
That said, I will admit that, like all of my fundamental, long-term indicators, there are often short-term divergences because monetary policy, oil and food prices, and currency exchange rates do have some influence on inflation.
There has been some divergence between my indicator and actual inflation since 2008. Inflation sunk more rapidly than this indicator would forecast in 2008.
And then, when my indicator suggested a bout of deflation into late 2011, we saw mild inflation instead… thanks to unprecedented money printing (QE) to fight the deflation that set in during 2008 and early 2009.
Yet I maintain that deflation is clearly the trend. Governments continue their desperate attempts to create inflation to fight deflation, but despite their massive money printing, inflation has remained very low.
But the long-term correlation between work-force growth and inflation is unbelievable… and undeniable. If any economist can show a leading indicator that correlates this well, I want to see it!
And since my indicator has been pointing up in the last two years, we could see a surprise temporary surge in inflation if the economy doesn’t slow down soon, and if the Fed tapers very slowly.
That said, it’s already pointing toward deflation again from 2015 forward. The projection is for workforce growth to slow to near zero (and, of course, much lower when unemployment spikes again during the great downturn ahead). Deflation will come in at minus 12%, if not higher.
The Fed could get whipsawed soon, and look really stupid in the next few years.
Don’t look at government policies beyond their short-term impacts. And don’t listen to clueless economists.
If you want to see trends before they occur, watch and project what people will predictably do as they age.
P.S. The best thing about my Inflation Indicator, like my Spending Wave, is that we can project workforce-growth trends decades into the future by simply combining the number of people who’ll enter the workforce (on a 20-year lag, on average) and the number of people who’ll retire on average at age 63. This is how I knew, back in 1989 already, that we would see the greatest booms in history, especially in the 1990s and into 2007. That’s how powerful this stuff is.
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Ahead of the Curve with Adam O’Dell
Ten-year Treasury-bond yields rose sharply — in other words, bond prices fell sharply —from May to September as investors prepared for the Fed taper that never happened.