Tuesday, November 10, 2015

Interest Rate Cycles In Review - Are We Ready For The Next Installment?

  • Since the 1981 peak Federal Funds Rate, the Fed has concluded 5 interest rate cycles...and now is contemplating rate hikes to complete the 6th cycle.
  • Rate cycles have seen progressively lower rates, longer durations at minimum rates, and greater debt incurred per cycle.
  • However, the lower rates for longer and greater debt are creating fewer jobs at greater cost than previous cycles.
Apparently, the Fed has determined their policies of zero interest rate policy, QE, and a hoard of accommodative acronyms have succeeded and rate hikes are likely to be deemed appropriate come this December. But before the Fed pulls the trigger, let's put the latest cycle in context by comparing it to previous interest rate cycles since 1981, comparing the following:
  • IR's (Interest Rates) and Durations at minimum IR's
  • Federal Debt
  • Full Time jobs
  • Population growth
  • Federal Tax Receipts
Folks are welcome to believe what they will and make their own determinations regarding the Fed's policies and their effectiveness. Hopefully the following data will spark some conversation regarding if higher interest rates to slow economic activity are "appropriate" at this time or if the Fed has another agenda?


Since 1981, the Federal Reserve has dropped the federal funds rate from 19% to zero which has incented an equal and opposite creation of US federal government debt (below).

Not surprising that a 99.5% drop in the cost of credit since 1981 has resulted in a 1,200% increased utilization of that cheapening credit in America (below). However, the 1800% increase in debt among the federal government leads the way (above).

The below chart highlights the growth of debt among households, financial, and non-financial plus the federal government. All rose until '07...but the response by the different sources to ZIRP since has been wholly different.

Since 2008, with the implementation of ZIRP, 96% of all new US credit and debt has been thanks to the federal governments takeover of the student loan and car loan markets, mortgage backed securities, and federal deficit spending (below).


In short, credit and leverage are being substituted as the US and world population growth is decelerating...population growth has shifted almost entirely to the retirees among the wealthy nations and young among poor nations with minimal earnings, savings, and/or little to no access to credit.
First, the OECD nations ran short on growth among the young replaced by growth among retirees...

And then the developed nations turned to Asia for growth, particularly China...but China (like Japan, S. Korea, Taiwan, and most of developed Asia) has run into declining core populations and resultant declining demand.

And the 2 charts below, China's 0-64yr/old population growth is over, its housing driven credit bubble (which maintained demand during the deceleration) has popped, exports flat to declining.

Impetus for GDP and earnings growth is extinguished. All that's left for China is government debt and QE, like its developed nation role models.


And India...

And now the world...

The chart below shows the growth of the 0-64yr/old population globally...33 OECD nations plus China, Russia, and Brazil vs. the rest of the world.

The chart below shows the slowing growth of the 15-64yr/old population and the rise of debt to maintain demand despite the decelerating population growth. Note the decline in US oil consumption since '05 coinciding with decelerating population growth and the debt ramping since (I have noted the same impact across most developed nations... seekingalpha.com/article/3590996-economics-the-art-of-deception-vs-demographics-the-simple-yet-ugly-reality...and now coming to developing nations). Note, at least another decade of core population deceleration is coming (and that's assuming continued strong immigration and lax immigration policies...otherwise, significantly lower core population growth and/or outright contraction is possible).

And below the 25-54yr/old population and jobs among that segment. The flattening core population coupled with the far larger employment declines in this segment is being offset by rate cuts and large credit increases.


Below, all 6 interest rate cycles since the 1981 interest rate peak...we are currently waiting for the Fed to hike rates to complete the 6th cycle.
Each cycle has seen successively lower average rates, decelerating full time job creation, and accelerating debt growth.

Duration (in quarters) of minimum interest rates per interest rate cycle prior to rate hikes.

Below, interest rate duration at minimum rates and debt accumulation per IR cycles.

Longer durations at minimum IR's are leading to more debt but not more full time job growth. Full time jobs vs. federal debt growth per interest rate cycle below.

Below, interest rate cycles comparing duration at lowest rates prior to rate hikes, full time job growth, and federal debt growth during IR cycle.

Interest rate cycles comparing full time jobs growth, population growth, and federal debt growth. Interest rate cuts and debt are being substituted for declining job creation, inadequate to keep up with population growth in the past two interest rate cycles.

Federal tax receipts growth per IR cycle vs. full time jobs growth. A chasm is growing between rising receipts and slowing jobs growth. Rising tax receipts seem to have more to do with asset appreciation than sustainable income growth.

Annual federal tax receipts compared to full time jobs. Each peak in new federal tax receipts heralded an impending economic slowdown...'00, '05, and '13 prominently standout.


Young vs. old...full-time jobs from '00-'07 vs. '08-'15. Since '00, '16-54yr/olds have seen declining full time jobs. All job gains are among the 55+yr/olds.


Core Population Growth Decelerating, Rising Rates, and Peak Debt?

The chart below highlights the slowing core population growth, 0% federal funds rates, and ramping debt in place of organic growth over the past decade. Assuming further decelerating core population growth coupled with rising rates...there is little there to suggest accelerating economic growth and far more likely recession.

Are we ready for another round of Federal Reserve hikes almost surely to be quickly followed by more cuts...almost sure to take us to negative interest rates? And the rate cuts aren't likely to create net new jobs. Perhaps we should discuss who further rate cuts do serve and at who's expense.