Monday, December 8, 2008
Demographics and Interest Rates
When I was back there in seminary school, I came across a journal article entitled " The Fisher Theorem - An Illusion, But Whose?"
The authors of the article proved their thesis by constructing several regression equations that predicted the yield of corporate bonds and inflation using only U.S. population data. They separated the population into "consumers" (aged 15-34 & 65 and older) and "savers" (aged 35-64). Their results were quite interesting in that the prediction strength was quite high.
I have recreated their analysis in a less robust fashion, but I think the point is clear:
The above graph tracks the ratio of consumers to savers versus corporate bond yields. As the the growth in the number of consumers outstrips the growth in the number of savers, yields rise because producers of goods are chasing funds that are in lower supply. Conversely, as savers grow faster than consumers, there are more funds available for producers. The forecasts from 2009 and beyond are based on the Census Bureau's population projections.
The above graph tracks the model projected yield level (black line) versus the observed yield.
Posted by MK at 5:36 PM