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Wednesday, May 27, 2015

2008 WAS A TREMOR...WHY THE MAIN EVENT IS DEAD AHEAD

The reason WHY the Fed and CB's did what they and did since '08 needs better publicity.  Why they changed from marginal manipulation via interest rates, etc. to outright "being the market" since '08...why the big change???  And once you understand the problem, you understand why the Fed's actions are criminal because they were never going to fix what was broken...this wasn't an emergency or a liquidity issue.


It was a "flow" (not "stock") issue of new consumers that killed an already very flawed economic model.  The annual "flow" of new population growth in the US, EU, Japan, elsewhere generally peaked in the '80's and annual new population growth began ebbing.  By 2008 in the US, the 25-54yr/old annual population change went negative.  The sliding numbers of new consumers had been hidden for years by lower interest rates, more available credit (subprime, etc.), longer duration credit., etc. etc.  But the '08 outright annual decline of the new consumers was too much.


The Fed and CB's had to "suspend the free markets to save the free markets" (but what they really meant was they needed to suspend free markets because what a market would have done is found real pricing between lots of sellers and declining buyers).


Everything now is simply trying to hide the fact we have shrinking consumer bases and will for a decade...and maybe for the rest of our lifetimes.


THE DETAILS -


The annual growth of the 25-54 year old US population segment peaked in 1986 and, with it, the growth rate or "flow" of new potential consumers began declining.  Growth or "flow" in this critical segment entirely ceased in 2008 and has been declining nearly every year since (below).

This was an entirely predictable and foreseeable outcome of demographic trends...why the Fed and Federal Government weren't (and still aren't) preparing for this is stunning.  Clearly, the Fed chiefs and politicians are either unqualified and/or more likely have ulterior motives.


The implications of the declining core and growing older population???  A clean doubling of national debt since the core population growth ceased (below).  The Federal Government and Federal Reserve conspired to create false demand via credit (aka, debt) and rig interest rates to encourage greater indebtedness of both private and public parties.

Looking at the entire 25-64yr/old population, the segments annual population growth peaked in '98 at 2.4 million and has been waning since...under a million every year since '09.  And now the "flow" of blood to the heart of the economy, the 25-64yr/old population, is set to slow to a trickle or even potentially encounter outright declines in the coming decade. 

From '00 til '12, the bulk of the boomers swelled the ranks of the 55-64 year old segment.  The chart below shows the wave of the boomers making their way through the 55-64 population...and the population tide beginning to ebb out of this working segment to the retirement graveyard of the 65+ population. 

Now, boomers are leaving the last productive moments of their working careers, leaving the period of rising incomes and savings (lol), leaving asset rich but cash poor.


They are entering retirement with fixed budgets, generally spending at 3/5's of their previous working lives.  Facing forced liquidation of assets to raise retirement income due to ZIRP and low yields on typical bond portfolios.  They are downsizing (rightsizing) their homes and drawing on social safety nets minus adequate COLA's to keep up with highly inflationary (don't tell the Fed) rents, housing, medicine, insurance, etc. etc..  In short, these are not good "consumers" in the recent American tradition.  They are more akin to subsistence consumers looking for the best deals on adult diapers and medications than frivolous spenders of the recent past.


And what's behind the boomers?  Not only is the 25-54 year old population falling, this segments employment is falling significantly faster.  And full-time jobs across the entire economy are slowing to a trickle (below). 

And the supposed driver of population growth, immigration, is set to disappoint as the driver to attract the primarily low education (high birth rate) immigrants.  Without excess or adequate low skill job creation (lower demand combined with higher productivity, etc.), equals immigration below expectations, and thus no cure-all to native population inadequate replacement rates.  As an aside, all the above data includes all US permanent residents whether in the US legally or illegally.


We have a decade of this demographic rebalancing to go...does the Fed (and advanced economy central banks) have another decade of price rigging and monetizing in them?  Another doubling or tripling of national debt?  And will the populaces accept the perverse side effects of these policies favoring a small minority of asset holders at the expense of the many?  And once the populaces are rebalanced...population growth is unlikely to be an economic driver again in our lifetimes, so how would the debt ever be discharged? 


Perhaps this would be a good time to consider if things like building new housing, far in excess of a flattening population with declining core populations and full-time or jobs creation otherwise makes much sense (below)?  Clearly, the Fed's days of running anything (but their defense fund in their criminal trial) should be over.
All data is via the Fed's FRED page utilizing raw information provided by the OECD and US Bureau of Labor Statistics.

Extra Credit - Just in case talk of echo booms or other false economic saviors comes up...here is the most recent look at the 0-24 year old segment of the population.  With the US replacement rate down to 1.86 (from 2.1 in 2007) according to the National Center for Health Statistics...the youngest segment of our population looks to be entering outright annual decline.






27 comments:

  1. The above stuff is important because credit must expand continuously in order to service previously issued debt. However, in order for money that has been lent into existence to retain its value relative to the goods and services available then econonomic growth must keep pace with credit expansion. If economic growth cannot be restored, the end result is national default. - Dmitry Orlov.

    Spoiler alert - inevitable (hyper)deflationary collapse followed by a bout of hyperinflation Dmitry Orlov.

    When? When confidence that economic growth is here / nearly here is replaced with realisation that economic contraction is here / nearly here. - me

    Re-read the article, slowly. Spend an hour reading my comment. Take a week off work. Think. Think. Think. You owe it to yourself and your loved ones.

    Read Dmitry Orlov five stages of collapse. You will understand why the system will crash and why the system is so dehumanizing. Until the crash, expect things to get worse. Then you adapt and thrive or you don't. I hope you have skills that your local community will benefit from and appreciate. Otherwise, move.

    The entire financial system is based on credit and debt. Mere promises to pay. There is no money. Money isn't a thing it is an idea. Without confidence that people will pay, there is no financial system. Without growth, repaying debts gets increasingly difficult and then impossible.

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    1. David - hope you feeling better and always seems worthwhile reading Orlov...I'm off to Utah for a week of canyoneering...and think I'll download some of his work to ponder along the way.
      Cheers

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  2. Promises... Promises and faith!
    Change! You can believe in!

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    1. https://www.youtube.com/watch?v=gG1BUXW1-E4

      Apropos i think.

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    2. seems a fair appraisal and as likely as not.

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  3. http://research.stlouisfed.org/fred2/graph/?id=CRDQUSAPABIS (Total Credit to Private Non-Financial Sector, Adjusted For Breaks, for United States)

    http://research.stlouisfed.org/fred2/graph/?id=CRDQCNAPABIS (Total Credit to Private Non-Financial Sector, Adjusted For Breaks, for China)

    http://research.stlouisfed.org/fred2/graph/?id=TOTALNS (Total Consumer Credit Owned and Securitized, Outstanding)

    http://research.stlouisfed.org/fred2/graph/?id=CRDQUSAPABIS

    Yeah play with the total credit numbers. Demographics factor into it but doesn't tell the entire story.

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    1. Right you are...more than just demographics but most are simply means to try and disguise an inevitable demographic failure...broaden credits availability (subprime, student aid, car loans, .Gov mortgage lending), lengthen credits terms (no interest, ARM's, 30 to 50yr mortgages, etc. etc), push the cost of credit to ZIRP....but it's all simply disguising falling demand. When new customer (aka, population) growth began slowing and turned negative, coupled with wage growth well below inflation...the Ponzi's was falling...and the inevitable was only delayed by massive debt creation.

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    2. Right, Mr. Hamilton. I'd say our civilization (at current technology) reached "peak development". And It's not just about oil or people.

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  4. Expanding on the above...Look for longer terms to expand the credit. Longer mortgage terms like in Japan and parts of Europe in the 50-100 year range. Longer terms on auto loans like we are already seeing in the 8-10 year range. Longer terms on student loans like we are seeing. LENGTHEN the term to EXPAND the credit. Other options? Increased real wages or lower credit standards.

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  5. Well, Mr. Hamilton, they do say "Demography is destiny". I saw Demographic Winter (2008) when it was relased on YouTube a few years ago.

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    1. Sorry to say I hadn't seen the documentary 'til tonight (lol). I'd heard Dent speak previously but I just backed my way into many similar conclusions after crossing every other possibility off the list first. Glad I got to solid ground even if it was the long way round.

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  6. The future is in the pages of Scientific American. I believe physics can revolutionize (again) our system of production. We will move beyond coal and oil, Newton and Einstein, in order to launch a new industrial revolution.

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    1. I have no doubt you are correct and that through innovation we will continually need fewer workers to achieve greater output...the question I have is where will the growing population of consumers come from to buy all goods we'll make with fewer employees???

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  7. What happens if the stock market crashes - the > 55 year old people will lose a lot of their assets since the bonds and stocks are overvalued and juiced up with FED dollars, and SS has been tampered for a long time. The < 54 year old don't have a prayer - i know i am one of them - saving money in stocks not compounding fast enough compared to the year 2007 or less and the cash in bank is not gaining interest lol. The retirement goal of your age x your income/10 as your presumed retirement income is also a farce. Watching and observing the outcome that is coming. We all played the game. However the rules of the game is "the house always wins"

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    1. 13th follower: Bonds will crash before the stock market. Ohh...there may be a dip and panic and the herd will move capital into bonds but the bonds will not hold then look out below capital will flee right into equities and blow the share market to the 30 and 40k range. Also, once the Euro and the EU begins to collapse and 'smart' capital will flow right into the dollar and equities too.

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    2. Sorry - traffics way up...you're #14.

      And my crystal ball is pretty cloudy - your guess is as good as mine. Still, my official guess is none of it will crash...bonds will always be "bid", stocks always bought, currencies played (if anything, it's RE that is hardest to game and potentially most vulnerable). So, my guess is it's the economy that breaks down and American's not enjoying the creation of flavellas and barrios in America while a shrinking portion lives in growing opulence. Or maybe they'll just keep on accepting it like they do now?

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  8. Actually predicting the future is tricky. I like to have as many potential futures in mind as possible so that I can make the best of whatever happens.

    One future I can rule out is, the next twenty years won't look like the last twenty years. Good. All this consumerism and pointless 40 hour working week is destroying my soul as well as the planet. I hate being a slave to big government and the financial sector. My enhanced physical comfort comes at too high a price.

    I say that now but these are the good old days. Keeping warm may take up more of my time than strolling over to my thermostat! We shall see, at least we are mentally prepared for collapse so perhaps we will more readily adapt rather than wonder when obama/clinton or Bush will save us.

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  9. Continued economic degradation with recession conditions into eventual depression.
    January 2012: Double Cheeseburger McDonalds $1.07 inc tax
    January 2013: Double Cheeseburger McDonalds $1.29 inc tax
    January 2014: Double Cheeseburger McDonalds $1.59 inc tax
    January 2015: Double Cheeseburger McDonalds $1.70 inc tax
    Collapsing empires revert to war.
    Stagnant wages and all markets manipulated until all hell breaks loose.
    Maybe a Nazi government with us "non-elites" regulated to enslaved Jews.
    Eventually us Paupers revolt.
    The final chapter the Elites took the booty and left town.
    Greece today Amerika tomorrow..

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  10. Ah, Harry Dent's son; the tone & resemblance is unmistakable.

    The Debt based monetary system was always destined to fail.
    The elite appear to be pushing an equity based system as a replacement, although, judging how India,China,Russia (and repatriating others) are/have acquired Gold, it would seem likely to have a place at the table also. Though perhaps not for the man in the street.

    You and the commenters overlook one thing, the elite will use FORCE (that's force on steroids) to implement their replacement system if need be. Many of you will be caught flat footed and stammering .... "but,but,but, that's not fair".

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    1. Dent is right on the fact that demographics is the driver...but wrong in his assessment that markets are headed for a crash...all the reactions and counter-reactions to the rise and fall of population growth are entirely political (but not the kind you vote for). However, attempting to pick valuations based on free markets or supply and demand is simply a waste of time...because there are variables entirely missing from the equation...such as a what level do leaders and elites and banks need to stay in control. Find the missing variables, add them in, and you can guess that prices must go higher despite falling market fundamentals...it's almost surely considered a national security threat.

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  11. If cash is eliminated, how does the black market function? What becomes valuable? What can be easily traded? What retains value?

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    1. Cigarettes, whisky, dish washer tablets, possibly even whiskey. However, human ingenuity will find a way. Also, a couple of the elites make good coin from the black market so they will put forward their own solution, perhaps silver and gold?

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  12. IOER will be altered. At what point does the Fed reach the point on IOER that is too much? 1%? 1.5%? 2%? Hmmm rates can't normalize without IOER also going up or rate increases will effectively take out $2.6 trillion in excess reserves. The spread will be important, but the overall rate on IOER will also be important. Chris - Look into IOER and read some fed policy discussion. IOER manipulation coupled with ON RRPs will be the way to "normalization" in the coming years. Focus on the most likely manipulated variable to determine policy moves and investment opportunities.

    Note: Section 128 of the Emergency Economic Stabilization Act of 2008 allowed for IOER to rise above 0, thus raising the excess reserves in turn.

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    1. Nobody told me there'd be homework with this blog??? Alright, I'll dig. Cheers.

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  13. Here's a blog that explains the 'money' side of the equation:
    http://carl-random-thoughts.blogspot.com/

    The only ones who benefit from the conflation of money and credit are the issuers of credit with no money.

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  14. As a geography major I can definitely appreciate these population charts. It's a great way to think about the unsustainability of our consumer-based economy. I hadn't really ever thought about justifying it in those terms but it makes perfect sense and is something that translates well as an explanation to the average joe about why the exponential growth of investments we we were taught in Econ 101 is sure to disappoint a lot of people. Good analysis.

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  15. If you are right, this will happen in Japan first. Their entire population peaked a few years ago and is now in decline. If it doesn't happen in Japan, then it likely won't happen here. So watch Japan closely.

    By the way, the demographics in Italy in particular, and much of Western Europe, are also worse than in the USA.

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