Demographics and Interest Rates

In my opinion, economists discount the importance of demographics. For example, here is a graph of the ratio of the 15-39 population and the 40+ population and 10-year interest rates. Pretty clear pattern. Why?

It’s all about demand and supply of capital. When we are young, we demand capital. We go to college (student loans). We buy a car (car loan). We buy houses (Mortgages). We start businesses (bank loans, PE). We unfortunately get into credit card debt. All of these demand capital.

When we are older, we pay off student loans, car loans, mortgages. We cash out of our businesses. And we start to invest so we have money to retire. In other words, we are suppliers of captital.

So when this ratio is high, there is high demand for capital, but low relative supply. What happens when demand is high and supply is low? Price goes up. In this case, price is interest rates.

When the opposite happens – like now – and the demand is low relative to supply, the price goes down and we have low interest rates.

This ratio is going to continue to decline over the coming decades. In 2040 for example, it should only be 0.58 compared to about 0.7 today. Thus, the expectation is that interest rates will continue to sink over the next few decades.