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Sunday, August 30, 2015

Global Growth = 3 Legged Stool Increasingly with No Legs?!?

Global growth is like a three legged stool increasingly missing all three legs.  Population increases are declining, GDP growth declining, and private credit growth declining.  In the absence of these, the final source of "growth" is government debt (deficit spending plus monetization whose principal is never intended to be repaid, interest costs never remotely borne) being substituted to prop up declining demand. 

This article will attempt to gauge future organic global demand vs. how much more synthetic government debt and monetization will be necessary to maintain centrally determined "growth".  Ideally one would multiply estimated population change by est. changing GDP per capita by est. change in credit, each by nation.  The real wild card is change in I'm leaving it out but I'll discuss this later.  Still, with population change multiplied by GDP "purchasing power" per capita, one should have a good gauge to understand global growth and consumption for (like I-phones, TV's, cars, etc. etc.) plus commodities from which all those are made. 


Methodology?  Take the 12 largest nations on earth (counting the EU as a with me) and this represents 4.5 billion of earths 7.3 billion inhabitants...or nearly 2/3rds earths inhabitants.  Utilize the OECD estimations of nations future population changes and multiply them by nations projected GDP on a per capita basis.  Focus on the changing 15-64yr/old segment as this segment represents nations working and consuming core.

Only two variables here, GDP per capita (how much does the "average" person have to spend) and what is the change in core populations.  Multiply that and you have a dollar figure each nations changing population has to spend in the global commodities market (aka, purchasing power) for oil, steel, wheat, etc. and likewise consumer goods.

First chart shows GDP per capita (blue) and population gains by nation (brown).  Hard to miss India as the population growth engine with +13 million 15-64yr/olds annually and conversely Japan's core shrinking by nearly a million annually, closely followed by declines in the EU and Russia.  As for GDP per capita, or what can roughly be seen as purchasing power, the US has the greatest capacity while Bangladesh is on the opposite end of the scale at $3k per capita...or it takes about 18 Bangladesh citizens to equal the purchasing power of one American.

For those interested in seeing what exactly these changing populations are estimated to look like over the last and next 40yrs...check the link.

The charts below are comparative snapshots of nations annual "consumption power" over time.  It's not hard to see that from a growth perspective, China's day has come and gone...and India's time has come...but the US growth coupled with it's population growth mean it remains a growth engine...entirely premised on the US maintaining immigration policies favorable to legal and illegals alike.

The chart below shows purchasing power change in constant 2015 dollars solely changing the populations (edit - 2015 total should be $148 billion rather than $128 billion).

The chart below shows purchasing power change in variable GDP plus changing populations.

Regardless constant or variable GDP (per capita purchasing power), demand continues to decline and, with it, growth.


As for credit, it continues growing far faster globally than economic activity it provides (GDP).

A quick look at the four sources of the global debt in the chart below; Household, Government, Corporate, and Financial.  No net deleveraging among any of the four sources of debt.
But let’s compare and contrast the rate of the growth in debt, both in dollar terms and percentage terms.  The chart below shows that global debt grew 63% from '00-'07 but the rate of growth slowed to 40% over most recent 7 year dollar terms the debt growth was almost identical over the two periods.
SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis
The charts below are a break down from which of the four sources the growth in credit and debt came from. 
  • Government debt (below) grew in both periods but, not surprisingly, ramped up after 2008 (both in total and as a percentage).SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis
  • Corporate debt grew evenly in percentage terms over both periods (below).
SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis
  • But household and financial sources pace of debt growth slowed dramatically both as a percentage and in dollar terms from the earlier to the latter periods (charts below).
SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis
SOURCE: Haver Analytics; national sources; World economic outlook, IMF; BIS, McKenzie Global Institute analysis
The '00-'07 period of global growth in credit / debt was driven by a near doubling of household and financial debt.  Think mortgage debt, HELOC’s, credit cards, and securitization of every sort imaginable on a foundation of growing government and corporate debt.

However, the '07 - '14 period debt creation came from significantly different and concerning sources:
  • $25 trillion in global government debt was driven by a hike of $19 trillion in advanced economy government debt.
  • $18 trillion in global corporate debt was taken on in massive bond sales and loans taking advantage of record low yields and rolling (refinancing) existing debt to ever lower rates.
  • $7 trillion in global household debt may have (net-net) been entirely due to China’s housing bubble creation of over $21 trillion in new Chinese debt…roughly half of which was attributable housing.  The US, UK / Ireland, Spain and select other recent real estate boom / bust patients saw declining mortgage debt creation and consumer deleveraging.
  • $8 trillion in global finance
Ominous warning lights and alarms should be going off about now considering 2015 and forward.  The ’07-’14 debt drivers have run out of steam and the sources of ’00-’07 debt appear to be slowing rather than revolving back to previous debt glory.  Core populations growth is slowing to outright declining.  Interest rates can go no lower. 


Net / net, with slowing global credit and debt creation, declining population growth, and slowing purchasing power...well, things like consumer demand and commodity prices are collapsing, shipping indexes tanking, global economic activity spiraling, and government debt via QE / shadow QE are becoming commonplace but insufficient.  With slowing global credit and debt, demand is significantly falling from credit driven excesses back to what can be supported by wages and savings (aka, a lot less…or in the vernacular, a depression). 

Perhaps the long feared deflation and depression are finally overwhelming central banker and government attempts to avoid the inevitable.  Maybe, maybe not...but it sure looks like the global flow of credit and population growth are decelerating...and maybe precipitously, baring all the credit induced excess capacity of nearly everything. 

Or perhaps more simply put in a world where economic growth depends on ever greater credit and debt by ever more people, the inevitable reality that infinite growth in a finite world was a pretty stupid plan…and in the absence of these components…falling demand and excess capacity creates a recession.  The recession repeatedly avoided by even more credit and debt…eventually the imbalance of organic demand and synthetically created supply is so great a depression is the inevitable outcome.  And the greatest fear of all is that governments, with their lapdog central banks, will attempt to fill the void and keep the game going...even if only for one more day and at an unthinkable cost.


  1. Great analysis Chris. Mind doing a follow up with U.S. focused numbers charts? Basically QE4 will be needed to fund much higher government deficit loads to offset deleveraging seen in mortgage and credit cards.

    Looks like the world's central banks may be playing a game of hot potato with QE. The question is, whose turn is it next?

    Also, I look to much higher student loans. No collateral backing student loans and significant flow through to GDP. Easy to inflate and "monetize" 20 years down the road through repayment programs. Any insight into the student loan market? Looks like the U.S. should be thanking students instead of criticizing them for taking on record levels of debt for education.

    This also makes a rate hike seem like the Fed is planning on crashing the economy in order to implement new policy tools without much push back from the public or politicians.

    Lots to think about. Always enjoy your analysis and insight! Keep up the good work and keep spreading your thoughts. You are on to something here that is not heard in the main stream media.

    1. Student loans is pretty interesting...last I checked the # of college students peaked two or three years ago and is declining...but the costs and debt are spiraling...and the payoff looking more of a gamble. And the delinquency on this non-collateralized, non-defaultable debt seems to be going through the roof. This is likely to blow up and become big trouble and perhaps big bailout by Obama as his swan song?!?

      But without significantly higher deficits ("only" $600 billion this year...of course this doesn't count the $5T + of unfunded going on but that can't be monetized) what the Fed will buy/monetize is an open question...unless it's those $6 trillion in foreign held treasuries to be added alongside the Fed's current $2.5 trillion!?!


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