David Frum: The era of cheap money is not over, but it will soon be over.
We had what has aptly been called a global savings glut that started in the middle 1990s and that has lasted to now. And it has been driven above all by the extraordinary economic rise of Asia, so that people in countries like India and China, had much more wealth than ever before combined with extremely primitive and unreliable financial systems in a nation. So they had more wealth and they didn't have good places in which to put it, and it was very difficult for Asian societies to tap the savings of their own country.
And so what we ended up doing was accumulating a lot of savings in places like central banks in these sovereign--let me start that again.
The era of cheap money may not be over, but it is going to be coming to an end. We had in the 1990s more savings worldwide than there are good places in which to put savings and there was an immediate demand for consumption with this huge accumulation of wealth in Asia and China and India, coupled with very poor institutions in places like China and India, for people to save their money.
Now, what is going to be happening is, as the planet ages, we are going to shift from being a planet of workers and savers to being a planet of consumers. And we are going to find that there are more and more demands for the accumulated wealth as we have to pay the pensions, not just of aging Americans and not just of aging Europeans, but of, again, Chinese. China is also a rapidly aging society.
There are going to be huge demands on medical care. Not everybody in the world is going to be able to pay for their own medical bills. Governments are going to step in. And so we are going to be moving into an era in which capital, having been very abundant, it's going to find it's got all kinds of new demands on it in the form of immediate consumption.
Question: Are you saying the world is shifting towards consumer-based economies?
David Frum: Look, when you are 40, what you are presumably doing, if you're making good decisions, is consuming less than you earn because you're going to get old, you may get sick, you have children to raise. So you earn a certain amount and you consume rather less.
And what also then happens is you get taxed, and if your government is doing its job right, it is not immediately consuming everything it taxes, it is also finding ways to put that toward investment, whether putting it in trust funds for future pension claims or for roads and bridges, those also represent wealth, they contribute to society's ability to create wealth in the future.
Now, you're 70. When you are 70, you are almost certainly consuming more than you earn because you've reduced your work effort and your demands. Not only do you need a pension, but through your demands on the health care system, you're probably consuming more.
A society with a center of gravity, where there are a lot more 40 year olds than there are 70 year olds, is going to be saving more than it consumes. A society in which the proportion of 70 year olds is growing rapidly is going to be one that consumes a lot more than it's able to save. Well, every country in the developed world, and many in the underdeveloped world, are going to be looking like more of countries of 70 year olds in the near future than they are as countries of 40 year olds. And that is true not just in the United States, not just in the developed countries, but in China as well.
Question: What does that mean?
David Frum: What does that mean? If you're a Norwegian pension plan, your members have been contributing to now more than they need to receive in return. And you've been taking their contributions and you've been looking for investments all over the planet and every year you are buying more investments than you are paying out in benefits because most of your members of the pension plan are in their 40s.
Now, fast forward to a world in which most of the members of your pension plan are in their 70s. Each year they're going to be cashing out more from the pension plan than they're paying in. So if you're a Norwegian pension plan in 1995, you are buying more than you're selling; if you're a Norwegian pension plan in 2025, you will probably be selling more than you are buying. And so, whereas in the 1990s you had a lot more savings and there were business opportunities, and so interest rates were low, in the 2020s there are going to be a lot more business opportunities than there are savings.
Recorded on: May 5 2008