Tuesday, October 20, 2015

Economics=Art Of Deception Vs. Demographics=Simple (Yet Ugly) Reality

World Population Growth is Decelerating From the Bottom Up

I'll make what is somehow an objectionable claim among economists...the world is finiteSo a financial and economic system premised on infinite growth and returns was an absurd concept to begin withHowever, the absurdity isn't reached until a finite limit is hit.  Many believed it would be a resource driven limit such as peak oil or peak fresh waterBut, alas, the resource limit the world is hitting is new consumer growth, also known as population growth

The quantity and quality of population growth is primarily what one needs to know to understand changes in global demand and subsequent supplyTo understand a global or national economy, quantity (number of participants or populationplus quality (income, savings, plus leverage or credit) tells the storyThe caveat being that changes in wages and credit for the existing population plus trade balances also play a role in growth

Still, the tiny marginal change in population (in relation to the total population) has impacts magnitudes larger than their numbers suggestPopulation growth is the primary driver for all increases in demand from housing, to cars, to consumer goods, to large infrastructure build-ups to accommodate all these.

Quantity of Growth

Population growth is pretty much the nexus of all GROWTHFunny we hear so little about demographics and yet so much about growth?!?  Consider, the below chart shows the quantity of global population growth (yearly average by decade) from 1850 to 2050 vs. total global population (all population data and estimates are via OECD.stat).  Annual global population growth peaked in the 1980's and by 2050 is set to decelerate back to the same gross growth as per the 1950's despite a population base almost three times larger than that of the 1950's.

Quality of Growth

The chart below shows both total global growth and a breakdown by 0-64yr/olds vs. those in the 65+yr/old categoryGrowth in the 0-64yr/old segments represents true population growth (incoming births over outgoing old...65+) while 65+ growth represents those living longer thanks to improved medicine, nutrition, fewer wars, etc..

However, 65+yr/olds are typically leaving the work force to draw on retirement in developed nations or be supported by their children in most developing nationsEither way, the "QUALITY" of their consumption level and willingness to utilize credit, declines precipitously after 65 and they generally exhibit weak levels of growth in demand.

Likewise, the chart below shows where the growth in the 0-64yr/old global population is happening.  Said otherwise, where the QUALITY of growth resides (quality simply used to mean the ability and resources to consume).  The collective population growth among the wealthier nations of the OECD, plus China, Russia, and Brazil are moving toward zero followed by decades of population decline.   About 90% of the decelerating 0-64yr/old growth is taking place in Africa, India, and the poorest nations on earth.

The chart below outlines the collective OECD members population growth and the make-up between those under 65 and those over 65Deceleration and declines among the younger core population offset by growth of 65+ segments is plainly visible.

In the chart below, the US annual population growth peaked in 1992 when 85% of that growth was under 65yrs/old.  US population growth has fallen by about a third since that peak but the makeup of that growth has reversed itselfNow, 60% of that growth is among the 65+yr/olds living longer and less than 40among greater quantities of 0-64yr/oldsThis trend continues for at least another decade.

So, as the wealthy nations of the world saw decelerating population driven growth and slowing economic growth, they turned to developing markets for additional growthAnd these developing nations looked to grow via utilizing cheap wage driven exports back to the wealthy nationsChief among them, China.

China's annual population growth peaked in 1988 with the addition of 21.5 million Chinese that year90% of that years growth was among the under 65 segmentCompare that with 2015's total annual population growth which fell 60% to 8 million.  The 65+yr/old growth now represents 2/3rds of all Chinese population growth and the growth among the under 65yr/olds has fallen nearly 90% since that 1988 peakThe numbers only get significantly worse (from a growth standpoint) from hereChina's role as an engine of growth is over.

Brazilian demographics looks like Chinese demographics (and China looks an awful lot like Japan).

Indian annual population growth peaked in 1990 and will continue decelerating indefinitely...declining numbers of young being hidden by rising old.

Africa (well represented by Nigeria in the chart below) will be responsible for the vast majority of global population growth now and in the coming decades.  In particular, Africa will produce the vast majority of 0-64yr/old population growthThe same Africa where 1/3 the nations have annual income below that of Haiti and continent wide per capita income under $5000/yr.

In 2015, Africa represents 37% of global population increases but 45% of global 0-64yr/old population growth.

By 2030, the chart below highlights that Africa will represent an est. 55% of global population growth...but far more importantly in 2030Africa will likely represent 90% of all 0-64yr/old population growthA continent without income, savings, access to credit, and dwindling growing nations to purchase their exportsGiven these circumstances, the likely "quality" of African consumption and demand growth will be almost nil and the global impacts of declining demand only accelerating.

Population Growth Ends...Oil Consumption Peaks and Declines

When the 15-64yr/old core population growth peaks, stalls, and or outright declines, oil consumption falls (despite overall populations continuing to grow).  This triggers central bank interest rate cutsto incent increases in credit and debt in an attempt to maintain consumption, leveraging up the system among flattening or declining populations. However, if we look at oil consumption in the below charts as a proxy for economic growth...it ain't working now and it really isn't going to work given what's upcoming.

FYI - The charts below show annual changes to the core population, total oil consumption, and total debt.

I could go on and on with developed nations following this pattern...but all that really matters is China. China was the last great engine of growth. China followed the developing to developed pattern with slowing core population masked by the greatest credit / debt increase in history but the credit binge has gone bust. So, a declining core population, a housing driven credit bust, and slowing global export markets are why Chinese peak oil consumption is very likely in 2015 or 2016 and China (like Japan) will no longer see organic growth or increasing consumption of much of anything.

Fed Made the Inevitable Transition into a Catastrophe

I have gone a fair ways to outline that population growth was a limited feature that is now coming to an end.  Central banks models premised on the fallacy that this is a cyclical downturn rather than the structural revolution from high population to low/no population growth, are entirely mismanaging fiscal and economic policy.

The chart below makes it plain that US federal deficit spending (and periods of slowing economic growth) has been used to offset what are simply periods of slow core population growth.

And worst of all, the Federal Reserve is simply hiking and lowering the Federal Funds Rate to incentivize this credit and debt in lieu of core population growth (chart below).  However, the US core population will be at it's slowest growth since well before WWII (and this assumes continued lax US immigration policies) and the globe (x-Africa) will be slowing even more dramaticallyLarger federal deficits and lowering of interest rates have been the only answer (now coupled with QE) the Fed has known to this natural slowing of the population.

And US (and global) employment will continue to slow due to this slowing demand coupled with innovation, technology, outsourcing, etc. etcThe chart below shows the peak to peak population, full time, and manufacturing jobs since 1970It's plain to see jobs creation capable of facilitating family formation (full time, manufacturing, etc.) are slowing in relation to population growthIn short, a world needing ever more consumers is consistently creating good fewer jobs (not to mention little to no wage growth).  How those without good jobs can consume is our modern day conundrum.

And just because I tire of the false argument that declining jobs are due to boomers retiringThe chart below highlights although there have been no net full time job gains since 2007, the 55+yr/olds have taken over 4 million full time jobs at the expense of 4 million jobs lost among 16-54yr/oldsThe old are experienced and continuing to work to maintain their benefits to augment their insufficient retirement funds and COLA-less SS benefitsThe core generation is being left to chose from part time and service industry positions that will never allow them to be strong enough to support economic growth, fund the tax base and unfunded liabilities, or family creation.


Slowing population growth, particularly among the under 65 crowd, is the malady that afflicts the economic and financial world and is the reason central banks are now doing back-flips to sustain the unsustainable system they createdHowevernow debt is maxed out and massive Fed interest rate created overcapacity's are resulting in deflationary and depressionary economic activity meaning a self reinforcing negative cycle is underway of which the depth, duration, and collateral damage are simply unknowable

Typically a recession or depression would rebalance supply with demand but this has always been amid population growth and the rising demands of this new, larger populaceIn this case demand is likely to continue falling indefinitely with falling populationsThis means supply will need to consistently shrink until some equilibrium is foundQuite a pickle the Fed and central banks have driven us into

The Fed could never have avoided the population slowdown but it clearly should have never goosed post WWII decades that were already aided by secular demographic tailwindsIn fact, the Fed's actions should have been entirely opposite slowing growth with rate hikes to have all tools available to us nowThis would have avoided the overleveraged induced overcapacity reality we faceInsteadthe Fed has left us not only without options for the demographic headwinds we face, but the bills for the Fed's prior ineptitude are now due when we can least pay them.

This is why Negative Interest Rate Policies or NIRP are almost a sure bet in the US and worldwideCorporations and banks who now get ZIRP will be paid to take money and buy up their own stock as well as US treasuries.  Simply put, we are now in a world with more sellers than buyers who are asset rich and cash poor, so central bankers have determined they will pay the largest entities to maintain the bid and ensure asset prices continue risingMortgage rates will fall to new all time lowsSavers and investors will be locked into their positions by the reality (not fear) that selling and moving to cash will result in sure losses as rates only go NIRP'ierOf course, this will almost certainly result in the greatest financial "bull market" ever coinciding with economic depression.

Of course, this is a Potemkin world or maybe more simply a global, central bank run Ponzi where new customers are running short and will soon run dry.  Central banks are representing the greatest and wealthiest among us and are "all in" on the perpetuation of this PonziUnfortunately, new and entirely worse policies (for the vast majority of the world) will likely follow NIRP unless fundamental and foundational changes are made.