1. Deleveraging. Imagine a country where households went deeper and deeper into debt, until they couldn’t anymore because their biggest piece of collateral — their homes — had collapsed in value. Call it, “America.” Well, suddenly they’d have to start paying back what they owe, which would increase savings and push down rates. And, as Eggertsson and Mehrotra argue, this can cast a long shadow, since young people who take on less debt today can save even more when they’re older — keeping rates low for quite awhile.
2. Inequality. The rich are different from you and me. They have more money to save. Not only that, but they can afford to save it, too. That’s not as true, economists Atif Mian and Amir Sufi point out, for poor households that are much more likely to spend what they have. So if more and more money is going to the people at the top, like it has the past 30 years, then that means there’s more and more money being saved, all else equal. And that, of course, pushes interest rates down a little more.
3. Declining population growth. If the workforce doesn’t grow as much, then the economy won’t either, and we won’t need to build as many new houses or offices — which only hurts economic growth even more. It’s an accelerator effect. In other words, Alvin Hansen was right that lower population growth can lower investment demand enough for the economy to stay stuck in a permaslump. He was just wrong that it would happen in 1940s America. But it’s a real concern now that the Baby Boomers are about to retire. Japan, once again, is the canary in this deflationary coal mine: Its working-age population started declining in 1997, and that, the IMF says, has helped push its inflation rate into negative territory. That’s left interest rates at zero, and the economy to languish.
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