Report
Patrick Artus

What cannot diverge over the long term?

A number of pairs of economic variables cannot diverge over the long term, and if there is divergence, it must be corrected. The following pairs of economic variables come to mind: Wealth and income: persistently faster growth in wealth than in income would eventually lead to the disappearance of any buyers of assets (equities, real estate, etc.), as their prices w ould become too high; Real wages and productivity: persistently lower real wage growth than productivity growth would lead to huge excess corporate savings that have not been invested, and therefore to a collapse in growth; and also to a political crisis; Household debt and income: unlike public debt and corporate debt, household debt must be repaid, as households have a finite lifespan; Production costs in two countries with fixed exchange rates; if they diverge, one of the two countries will lose all its sectors exposed to international competition. So we know that if we see: Wealth growing persistently faster than income, asset prices will eventually collapse (example: Japan in 1990); Wages growing persistently slower than productivity, wages will eventually catch up (example: Germany since 2016); Household debt growing persistently faster than income, there will eventually be a household solvency crisis and deleveraging (example: almost all OECD countries in 2008-2009); Production costs increasing persistently faster in one country in a currency area than in another, there will eventually be wage austerity (internal devaluation) in the first country (example: Germany in 2000, Spain in 2009).
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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