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Friday, September 11, 2015
Demographics Driving Declines in Oil Consumption, Mounting Debt, & Central Bank Mismanagement
Sometimes, the simplest answer really is best. I contend the primary and simplest factor that need be watched to gauge present and future economic activity are the changes in core populations (15-64yr/old segment of the larger population) for any nation or grouping. The core's declining growth and outright shrinkage appear to be the trigger for declining oil consumption*. In turn, this slowing activity drives central bank reactionary interest rate cuts intended to incent credit creation and leverage...all to get more (raise consumption) from less (a declining population set). *Oil is generally irreplaceable by other sources and offers a good barometer of a nation's general economic activity.
The chart below highlights the Bank of Japan's (BOJ) interest rate reactions to the changing demographic nature of the Japanese population. As Japan's core population began declining, the BOJ pushed rates lower to incent more credit (consumption) from a declining set of consumers. And the Fed, faced with similar though less dire US demographic circumstances, emulated the BOJ's actions despite the BOJ's utter lack of success (below).
Central banks round the globe, at best, are blinded by their formulas and hubris to the inevitable and certain demographic and population headwinds now very much upon us. These central banks are reacting to the least surprising, most reliable, and most important data in existence. Central banks, entrusted with economic stewardship of nations, have acted out of greed or the stupidity only an academic can talk themselves into. They have sailed downwind with all sheets available to make the good times fantastically better but left nothing for the entirely predictable changing conditions we now face...negative demographics and population trends coupled with exhausted interest rate policy, over-indebtedness, and massive overcapacity for declining core populations.
This article will focus on various core populations, associated oil consumption, and debt incursions. I will also include Purchasing Power Parity (PPP...a calculation of relative capability of consumption per capita based on GDP/population). PPP will be used to compare declining wealthy core population's consumption capacity vs. ascending poor and old populations. *All population data and estimations come from the OECD, oil consumption from EIA (US Energy Information Administration), PPP from the IMF, and debt from various sources.
JAPAN - 127 million; PPP = $37.4k
Japan's annual core population growth peaked in 1984 and went outright negative (YoY) in 1996, the same year Japanese oil consumption also peaked and began it's ongoing, nearly 20 year decline (a 25% reduction in consumption over those 20yrs). Japan's debt load after having been fairly stable for a decade, began its moonshot from approx. 70% in the early '90's to today's 250%...all in an effort to entice a declining consumer base to make up with leverage what they lacked in income growth and sheer quantity.
It should be noted Japan's total population didn't peak until 2010 and is down just over 1% since while oil consumption has fallen by 25% from peak. However, unless Japan undertakes the unlikely step to import population growth, the Japanese core population (which has already fallen nearly 11%) will ultimately fall in excess of 50%. This is probably good from a sustainability perspective but catastrophic for the younger Japanese for dealing with the mountains of debt and obligations to Japan's elderly.
Somehow no one ever forced the Bank of Japan to answer how decades of foreseeable population declines (at a minimum) offset only by debt and ZIRP could ever be resolved by fewer people paying off or even servicing far more debt?!?
EU - 510 million; PPP = est. $38k
The 27 member European Union saw peak core population growth (YoY) in 1983. By 2005 the EU hit peak oil consumption and by 2011, the core population began outright shrinking.
GERMANY - 81 million; PPP = $46k
German peak core growth (YoY) likely occurred prior to 1980 and by 1998, Germany's core population began outright shrinking...the same year Germany's oil consumption peaked and began an 18% fall that has yet to end. However, Germany was able to avoid the large debt increases of its neighbors due to the advent of the Euro and EU giving Germany an EU wide, single currency market for its superior export engine. Germany's economic well being amid a massive core shrinkage can only be continued by the maintenance and health of the EU (likely contradictory factors). Otherwise, Germany's ongoing massive population declines, if not offset by enormous numbers of immigrants, will cripple its economy, just like Japan (http://econimica.blogspot.com/2015/09/secular-sea-change-depopulation-viewed.html).
FRANCE - 66 million, PPP = $40.4k
French oil consumption and core growth peaked prior to 1980...but most recently French oil consumption peaked in '01 and began its 15% ongoing fall. Debt rose from a modest 58% to today's 95%...and worst of all for France, its core population flat-lines from here solely due to ongoing low skill and education immigrants offsetting falling native core populations.
SPAIN - 47 million; PPP = $33.7k
Spain was a late bubble bloomer with peaking core growth in 2005 and peak oil consumption in '07. The 25% fall in oil consumption in such a short time is likely indicative of the depths of economic reality in Spain...reinforced by the rise in Spain's Debt to GDP from 36% to todays 98%. Spain faces significant ongoing core population declines and truly has no hope to outgrow its problems.
ITALY - 60 million; PPP = $35.5k
Italy, like France, likely saw peak oil consumption and peak core growth prior to 1980. The most recent peak oil consumption of 1995 and 35% consumption reduction since coincides with intermittent periods of core population shrinkage and growth before shrinkage likely finally takes over about 2020. Italy, like Spain, has leaned on debt to bridge the demand gap (now a chasm) and is beyond any hope to outgrow its gargantuan debt load.
US - 321 million; PPP = $54.6k
In 1998 the core population growth (YoY) in the US peaked at about 2.6m annually and growth began slowing. By 2005, oil consumption peaked at 21mbpd and has fallen 9% since. 2015 saw core growth down to 800k and by 2025, core growth is estimated to be nearly flat...down about 95% from the peak growth of '98. However, all US population rebounds or stabilization are dependent on immigration, which is dependent on uncertain US low skill job growth and continued lax immigration policies, among others.
CHINA - 1.36 billion; PPP = $12.9k
Economists are shocked, yes shocked, at the slowing economic activity in China. However, one glance at the chart below explains it ever so simply. Core growth turns outright negative in '16 and debt has been substituted for missing consumer growth. But the housing driven credit bubble has popped and combined with shrinking numbers of core consumers...China likely faces outright contractions (aka, recession or depression) including declining oil consumption for decades. China is also likely to turn to the debt creation power of the state to temporarily slow the declines.
INDIA - 1.25 billion; PPP = $5.9k
Peak core growth already came and went for India (2005 was the big year) and now declining core growth from here until about 2050...when the core turns to outright annual declines. If India follows the pattern, declining oil consumption and peak consumption is likely this decade....along with a sharp turn upwards in credit and debt. How this will play out as India has nothing but global headwinds as it attempts to deal with its slowing growth is anybody's guess. BTW - Brazil, like India, saw peak core growth in 1999 and the core population will begin declining before 2030. Everything said about India is true for Brazil as well, only sooner.
AFRICA - 1.15 billion; PPP = $4.4k
As of 2015 Africa, India, and China represent 52% of earth's population, however, they represent 65% of global population growth. Of note, Africa's present annual population growth is double that of India and quadruple that of China. Nearly all African net population growth is under 65yrs/old (a trend that will only accelerate) vs. significant portions of Indian and majority portion of Chinese net population growth in the 65+yr/old segment.
Africa's 5.1 births per female are more than double the global average of 2.7...led by Uganda's 7 births per female, 50% of the population under 15yrs/old in a nation with an average income of $2000/yr and a life expectancy of 51yrs! Likewise Africa's largest population, Nigeria's 185 million, is experiencing explosive population growth that is almost surely a curse for a nation growing in excess of 5 million annually with 45% of the population under 15yrs/old in a nation with an average life span of 50yrs. Sub-Saharan Africa is truly the "anti-Japan" where instead of too few adults to care for the old...there are too few adults to take care for all the young and too little money to feed them all.
Probably worth contemplating the relative impact of the ongoing changing source of population growth from higher income to lower income nations...to Africa. On any given day, Africa includes about 57 countries (give or take a few) and range in PPP (Purchasing Power Parity) from small, well to do nations like Equatorial Guinea at approx. $32k/yr, all the way down to population giants like Congo, Burundi, Malawi, Central African Republic, Somalia, Liberia all with PPP's under a $1000/yr. So, if you put it all together and weight it evenly...the average African income comes out to about $4,423/yr. To put this PPP in perspective, this is less than 2/3rds that of the average Indian, about 1/3rd the average Chinese, or less than 1/12th the average American. 20 of Africa's 57 nations (representing 216 million Africans) have lower Purchasing Power Parity than that of Haiti ($1,750/yr)!!! Only 16 African nations (representing 276 million persons) have PPP's greater than India's $5.9k/yr. Africa's engine of population growth, Nigeria and it's 5.2 million/yr growth have a PPP equal to that of India's $6k/yr PPP! Unfortunately for Africa, it is not the answer to revive slowing global consumption.
Higher income population growth is fading away being replaced by very low income population growth (charts below). This is no coincidence that the global economy is slowing down...the only people "surprised" are those paid to be surprised and claim no one could have foreseen this.
Growth trends are as follows...Africa rising, India fading, China turning outright negative to join most advanced economies...and the implications should be plainly understood..."except by those whose salaries depend on them not knowing".
1- Once nations go through core peak population growth (YoY), subsequently or concurrently, they exhibit declining oil consumption suggesting slowing economic activity. Central banks utilize lower interest rate policies to encourage higher credit consumption and leverage. The ramping debt is substituted for declining organic growth and weakening consumption.
2- As wealthy (with greater income, savings, credit availability), high consumption nations core populations growth peaks, slows, and/or flattens / declines; those replacing them are from two inferior consumption sources...1) the old (65+) from high consumption nations (generally living on fixed incomes and consuming significantly less in retirement) and 2) relatively poor of India, Africa, Brazil, etc. These high quantity but low quality replacements (extremely low earnings, savings, little to no credit) are unable to make up for the lost consumption of shrinking advanced core populations. Global overcapacity and waning commodity consumption are easily predictable and likely to persist for decades alongside the declining cores and weakening 3rd world replacements. Global peak oil consumption is likely imminent.
3- The massive debts and obligations incurred (due to central bank interest rate mismanagement) to stimulate consumption in nearly all advanced and developing nations will never be repaid and the obligations monetized until??? Secular shrinking core populations will never be capable of repaying or servicing the soaring debt loads. Massive defaults are a near certainty.
4- The EU, Japan, and China as engines of global growth are finished due to secular declining core and young populations (and burst credit bubbles). This group will be net consumption negatives for decades.
5- The US may provide some limited growth (entirely dependent on immigration) and India (plus Brazil) have already begun the long process of declining core growth and with or without a significant rise in credit/debt, peak oil consumption is imminent.
6- Africa is likely too poor, too young, and too late to effectively join the global economy and provide significant consumption growth.
7- The implications of declining global demand goes far beyond oil or commodities but also to real estate, the core of the debt held by banks and the cornerstone of most citizens assets. Declining numbers of buyers and declining demand for housing and commercial real estate is likely the true root of the Fed's and most central bank actions. The Fed is a private corporation (not a portion of the Federal government) and it's owners are the largest banks in the world. The Fed taking every action at the behest of it's ownership, banks, to prop up the valuations of their collateral shouldn't come as a surprise.
8- Central bank actions have taken what was always going to be a difficult transition from economies premised on population and credit growth to a more sustainable model and made it a looming disaster. Central bank actions goosed the good times and left absolutely nothing to deal with the hard times to come. Their leadership has been horrendous and their continued leadership is almost certain to induce catastrophic outcomes.
9- A change in leadership is needed if a positive, sustainable future is the goal. Not simply a new president or party...but an entirely new dialogue and a paradigm shift. Information, like what I and many others are presenting, must be disseminated to portray the reality we face. I fully believe "we the people" of the US (and world) have faced worse situations than this. We can do the hard things necessary to get there if offered factual information and a path to make the shared, painful short term changes that will lead to a brighter future for our children.