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Wednesday, January 6, 2016

Sources of Growth Examined and Found Entirely Lacking

3 Primary Drivers of Economic Growth---Population Growth, Wage Growth, Credit (private vs. public) Growth...
10,000 BC until now...the primary driver of growth has been that of ever greater populations.  Although a short downturn ensued during the "plague"...the most reliable economic factor has been increasing demand via greater populations.  The consumption of these growing populations was further augmented by rising wages and rising leverage via credit (aka, debt) but the greatest source of greater demand was population growth.  "Markets" and economies can be manipulated or gamed...but underlying population bases and the their slowing consumption appear to be coming to ever greater odds with the not-free market pricing mechanisms currently in place.

Global annual population growth peaked in 1988 at 93 million/yr and has now receded to 80 million/yr.  Since global population growth peaked, global credit (driven by central bank driven rate cuts) has rocketed as a substitute for the decelerating population growth.

The 0-64yr/old population component is broken out below.  It's clear the growth of younger populations are slowing considerably faster than the total population.  The 0-64yr/old annual growth has fallen about 30% from peak and is estimated to decelerate rapidly over the next 35 years (and again, credit/debt is the intended substitute for the decelerating demand).  The growth of the 65+ population is set to outpace the 0-65yr/old within 30yrs.  But the 65+ in developed nations generally are on fixed incomes or living on social programs or the responsibility of their children in developing nations.  They are asset rich and cash poor looking to offload assets, downsize, and find cash flow to survive their later years.  They are credit averse and have declining levels of consumption.

The below chart is worth a second look (minus the 65+ cohort).  The growth of 0-64yr/old population has quite a caveat.  In 2016, almost half the growth in the 0-64yr/old population is due to population growth of Africa...and by 2030 Africa will represent 90+% of net global population growth under 65.  This is worth mentioning as Africa has average incomes about a third that of China or half that of India and has relatively little access to credit.  Growth premised almost entirely on Africa actually isn't really growth from an economic or consumption standpoint.

Finally, the annual growth of the 0-14yr/old global population...the headwaters of population growth are plainly slowing to a trickle and almost entirely in Africa (on a net basis).  When looking at the below chart, it becomes evident the impact of the "one off" lengthening of lifespans on population "growth" vs. ongoing births.  Population growth among the young has fallen almost 2/3rds from it's 1960's peak and is estimated to continue slowing indefinitely.  What is not slowing is the growth of debt...which on a per capita debt per net new child is becoming mind bogglingly astronomical.

Peruse the engines of global growth, China, India, Brazil...



Sources of "growth" crapping out...except Africa.

Total population growth (yoy) peaks out in 1995 and has been decelerating since despite the near doubling of the total population.  Credit and debt have been the accelerating substitute for decelerating population growth.

In the chart below, the missing population growth of the younger 0-24 and 25-64yr/old population segments is circled in the red.  This missing population growth has only begun and will be decades at near stall speed.

No wage growth among developed and slowing among developing is only accelerating the slowdown in consumption and credit growth appears to have entirely run it's course.  An ominous loop of depopulation, depression, and currency devaluation is now very much upon us.  There are limits regarding how far a system can be twisted and manipulated and we are likely at some sort of limit now.  Please, prepare accordingly for a myriad of undesirable likely outcomes.

***All global population data (historical and estimates) are via the OECD and US population data is from the US Census.


  1. Chris - Thanks for your analysis! Any thoughts on individual (student loans, auto, mortgage, and revolving credit), corporate, government, and fed balance sheet expansion as a contributor to GDP. In other words where will the credit expansion come from during the next growth cycle? The last growth cycle was individual credit expansion, with mortgage and revolving credit still below the 2007 peak and student loans and auto debt expanding since then. This growth cycle has seen the Fed balance sheet expand approx 450% and government debt expand approx. 100%.

    It seems we are adding more debt to increase gdp to a lesser degree than in years past. Where is the tipping point where more debt does not materially increase gdp?

    Just some thoughts. As always, thanks for your analysis!

    1. If the above analysis were correct, India and many of the African and Muslim countries would have the highest growth rates. Alas, that isn't the case. Growth in population isn't a sufficient reason for economic growth. It probably isn't even a necessary one (see Japan in the 1960-80 period). While there is no agreement on the details, the most important factors are usually listed as capital, knowledge/education, and entrepreneurship.

    2. Hey Anon - thanks for the comment. You are right, it's not simply population growth. Population and it's growth is the denominator by which factors of consumption are multiplied. So, a population, it's working population and income growth, it's savings, and access and utilization of credit.

      So, although Africa has high population growth, it has low levels of employment, some of the lowest wages in the world, little savings, and little access or utilization of credit.

      Japan in '60-'80 had huge tailwinds including having fewer children. Japan's core population of 25-64yr/olds averaged annual growth of 1 million/yr from 1950 til '81 population growth had fallen in half and continued to decline until turning negative (yoy) in 2004. First, Japan turned to interest rate cuts to incent more debt to maintain consumption levels from the decelerating growth of population.

      But population and it's makeup, employment, income, and credit (driven by interest rates) tell the story. Now Japan has fewer buyers for everything every year...fewer home buyers, fewer consumers for food, fewer people to utilize credit. This is why the BoJ has resorted to outright money printing and purchasing of the Nikkei...because their are more old trying to sell to fewer young and the tipping point has been crossed.

  2. Good information! Related to something I've been thinking about recently. Some say 60% to 75% of the US economy is driven by consumer spending. Some have said the baby boomers have been having their effect on the economy through their lives: As the baby boomers aged, what they consumed affected different sectors of the economy. Now, being a tail end of a baby boom generation, for myself, and people older than myself, we have become, as we near and enter retirement much less "consumptive" We drive less-- less need of a auto purchase. If we buy another house, it's likely to be smaller. In short, we just don't buy as much 'stuff' as we did when we were younger. With the slow up of 'consumption' by a large segment of the population, seems like that would have a lowering of earnings across different markets. On the upside, healthcare and pharmaceuticals are the things baby boomers will be consuming more now-- perhaps those sectors will be good bets to be invested in.

    1. Dan - thanks for reading and good points. Older 65+ crowd (which I hope to join in a couple of decades :) ) is asset rich, cash (and cash flow) poor. Their great expenses in life are behind them (children, education, homes, etc.), have fixed incomes against fast rising costs, and are credit averse. But this is true not just in US, this is a worldwide phenomenon just like WWII and the subsequent baby boom was.

      What I don't think conventional wisdom understood was how much birthrates and population of this boom would go bust. It's an entirely inverted pyramid with the base shrinking and top mushrooming.

      The world has likely already passed into a no growth phase absent the role of massive credit creation permitted by interest rates at zero...or going negative. All the debt that was taken on with the premise it would always be more easily repaid in the future now is simply a horrific set of assumptions. A new economic model based on little, no, or even negative growth is what is necessary after the "reset" when all bad debt is recognized as such. We are truly in entirely uncharted waters with entirely unknowable implications.

  3. > An ominous loop of depopulation, depression, and currency devaluation is now very much upon us.

    All these signs point to an strong inflationary forces, correct?

    Because worthless currencies means imports are more expensive and exports are more competitive, but global demand for goods is falling. So, more money on less goods and services, with less people who can afford them....

  4. Mankind is transitioning from the industrial age to the post industrial age. All our belief systems are tied to the industrial age. We believe that bits of paper with numbers on are money. We believe in the power of our governments and we believe in atoms.

    In the post industrial society we will believe that bits of paper with numbers on are not money. We will believe that we are powerful. We will believe in a oneness of energy rather than individual atoms.

    So, you begin to see the difficulties involved. This will take several generations rather than 2 - 3 years.

    Should your brain and ego be flexible enough to consider this view, you can predict how we transition. The major changes will be a financial event destroying belief in bits of paper with numbers on. A government event destroying people's belief in the power of governments. Of course these two events are one and the same. Any man that survives such a major societal collapse will believe in himself and only recognise his own power and authority. Thus society rebuilds itself from the ground up. From man to couple to family to immediate neighbours to local community to area to country to planet. Mankind recognises its own value and we realise that we are all human beings. This oneness and together mentality pushes out beliefs in protons, neutrons and electrons and we easily accept a belief in vibrational energy fields and the interconnectedness of things rather than the granular theory popular for the last several centuries.

    Bit heavy going I know. Sorry.

    Let me break it down for you. Banks don't have any money. Governments don't have any power. Atomic theory is just a theory. Unfortunately for me, you lot are generally unable to think flexibly enough to grasp the fact that there isn't enough productive work to go round thus proving that we no longer live in an industrial society. Therefore, we are in the post industrial world now.

    Forcing our children to live in a post industrial world obeying industrial world rules is abhorrent. No wonder so many need drugs.

    Finally, don't fear the future. Remember this, I know that I have more wealth than your banks. I know I have more power than your governments. Bits of paper with numbers on have no value to me. More importantly, I am comfortable with and within myself. I am currently drinking ardbeg 10 year old, which I do value, watching my partner enjoy a ps4 game with my cat sleeping on my lap. For balance, I must state that my doctor believes me to be mentally ill. From his perspective, I am. From my perspective he is deluded beyond belief. However, he can believe whatever he wants. As can all of you. It is just a shame you all believe such a bunch of hooey.

    Anyway, I doubt this rather short rant will dislodge any of you from your current belief system. Despite the fact that you know bits of paper with numbers on are not money, it's just that everyone else does. Well, what everyone believes can and does change.

    As always, take care and have fun.

  5. The problem with such a regression is that in a time of crisis, people tend to revert to what has worked in the past, i.e. religion, precious metals, culturalism, native languages, etc. The idea that we will all burst through into an age of peace and harmony is definitely not supported historically. It is entirely possible that people will recognize the failure of democracy and multiculturalism and seek out powerful populist, cultural leaders and there could easily be turf wars and pockets of the worst kind of retribution.


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