[The Editors' Verdict] The Great Demographic Reversal May Further Increase Debt Burden

Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University

Global saving glut is a term coined by Ben Bernanke, then Chairman of the Federal Reserve (Fed) in 2005, to explain the massive current account imbalances (global imbalances) between the United States and China. In 2001, China joined the World Trade Organization (WTO) and flooded the world with cheap labor-armed manufactured goods. As a result, China and the United States experienced huge trade surpluses and deficits, respectively, while labor in advanced countries including the U.S. lost out in competition, and income inequality increased significantly.

Bernanke explained the current account imbalance between the two countries as a saving imbalance, particularly an excess of savings in China. The Chinese capital, financed by the surplus with the U.S., flowed back into the United States. It was as if the U.S., which lacked savings, borrowed funds needed for consumption and other expenditures, which ultimately deepened the trade imbalance. Meanwhile, emerging countries including China, which cannot produce global safe assets on their own, invested in safe assets such as U.S. Treasury bonds and expanded their huge foreign exchange reserves. The global saving glut is a phenomenon resulting from a significant increase in the supply of savings relative to investment demand as the share of emerging countries in the global economy, such as China, rises. As a result, real interest rates in the global economy have been under downward pressure since the 21st century.

Following the global financial crisis and the investment demand contraction caused by the Southern European debt crisis, real interest rates fell even further. The yield on U.S. Treasury Inflation-Protected Securities (TIPS), which is cited as the real interest rate among market participants, began to show negative values in the fourth quarter of 2010, and the academic community started discussing a long-term stagnation.

The prominent scholar Goodhart, formerly of the Bank of England (BOE), co-authored "The Great Demographic Reversal" (2020), which forecasts that this trend will soon reverse. Aging in China and other Asian emerging countries will reduce the proportion of the working-age population, shrinking production activities while increasing consumption activities. As a result, emerging countries like China will export inflation rather than deflation to the global economy, causing the global saving glut to disappear. Furthermore, as labor supply shortages occur in emerging countries, real wages in advanced countries will rise, alleviating income inequality, and in response, corporate investment demand for automation will increase, pushing up real interest rates in the global economy.

Whether this prediction will come true is uncertain, but it provides a framework for thinking about the future global economy. When emerging countries like China exported deflation worldwide, major central banks including the Fed responded with expansionary monetary policies. As a result, asset inflation occurred instead of price stability, and debt increased. Conversely, if these countries export inflation, central banks can respond with tightening monetary policies, but there is a risk that asset deflation may occur, leading to debt overhang that hinders growth. Moreover, the COVID-19 crisis has led to extremely expansionary monetary and fiscal policies, causing government debt to increase at the speed of light, further exacerbating the risk of debt overhang.

Next is the sustainability of national debt. Even if the national debt-to-GDP ratio is high, the argument that national debt can be managed stably because real interest rates are lower than economic growth rates has been persuasively made. However, the Great Demographic Reversal acts as a factor that raises real interest rates in the global economy. If the increased real interest rate exceeds a country's growth rate, the level of national debt will rise accordingly, increasing the risk of sovereign default. Although it is unknown when the inflection point of the Great Demographic Reversal will come, considering the high predictive power of demography, it is a matter of great interest.

Kyungsoo Kim, Professor Emeritus, Sungkyunkwan University

This content was produced with the assistance of AI translation services.