Investors should pack a copy of the Old Testament for the beach

All wars are inflationary, as they divert resources from consumers to the military. But in the longer-term, ageing populations create a major deflationary headwind for companies and investors, as I describe in my new letter to the Financial Times

It was good to see Philip Coggan highlighting the importance of demography for long-term investors (“Five factors count when weighing up the dangers ahead”, The Long View, FT Weekend, August 5).

Disappointingly, however, he repeats the myth created by Charles Goodhart and Manoj Pradhan that suggests ageing populations are inherently inflationary. Ageing clearly reduces the number of workers as more people retire. But this needs to be balanced by the impact on demand.

Data from the Office for National Statistics for 2022, for example, shows UK spending peaks in the 30-49 age group and then begins to decline. It has fallen 41 per cent by age 75. Data for the other major global economies shows a similar pattern. Older people already own most of what they need and their incomes reduce as they move into retirement.

This matters for the economy as these Perennials 55+ are now the main source of population growth in the world, and in nine of the 10 largest economies (India is the only exception), due to the combination of increasing life expectancy and lower fertility rates. In turn, they are creating a significant headwind for economic growth, as consumption is 60-70% of GDP in large Western economies.

Investors with a long-term approach therefore need to prepare for much slower, or maybe even negative growth and deflation. Optimistically, one can hope this paradigm shift will be good news for Net Zero investments. But it also makes it more difficult to reduce the vast debts created by recent stimulus programmes.

When heading for the beach, therefore, investors might find it useful to pack a copy of the Old Testament. Its history lesson on Debt Jubilees might provide a helpful alternative to the risk of a return to the Great Depression of the 1930s.