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Sunday, January 31, 2016

The Fed's Faulty FFR Hikes, FT Jobs, & Debt + China and Oil

The US and world economy is all about GROWTH.  Growth in consumption driven by growth in population, growth in wages, and growth in credit.  This shouldn't come as a surprise to the Fed.  Yet, a quick study of the sources of growth show them all waning in the face of Federal Reserve rate hikes and QE abatement.  Curious stuff.  Could the Fed be that blind, that stupid, or working under false pretense?  This question I cannot answer but someday soon the Fed's hand will be forced and we'll know the truth.

Let's Review:
The chart below shows federal funds rates (by quarter) since 1972.  Noteworthy is that the interest rate cycles are producing fewer full time jobs and much greater Federal debt (thanks to the incentive of lower rates).  Columns in red indicate rising interest rate periods and blue represents falling rates.  Every successive period has resulted in slower full time job growth and greater debt to achieve this...all set against an ever larger total population.

The current period results are inverted from the '72 to '81 period...and not for the better.  The full time job and federal debt, per period, and quarterly averages over each successive period.

The chart below shows what those periods looked like in net new full time job creation vs. federal debt incurred during each period.

And the chart below simply divides the two figures above...the cost per new full time job by federal debt incurred over different periods.  Full time jobs at nearly $8 million per!?!

The below chart highlights the year over year growth in the 15-64yr/old US population.  The Federal Reserves interest rate policy and the US annual budget deficits seem to be primarily driven by the rising and falling demand and consumption of this changing population.

The initial population growth surge peaked in 1979 (after a decade with nearly 2.5 million more adults per year).  More home buyers, more consumers, more buyers of everything.  Population growth began falling in '80 and interest rates falling in '81 along with rising deficit spending.  By 1989, population growth had fallen in excess of 60%. 

But a secondary and final population surge was just beginning.  Interest rates rose and deficit spending declined in response to the surge in new consumers.  By 1998 the US core population growth began decelerating but slowly until 2008, the slowdown in population growth became began it's rapid deceleration and interest rate cuts and deficit spending skyrocketed.

And now, US core population growth has slowed from peak growth by 73% and by 2025 will be down nearly 100% or potentially turn outright negative. 

I have no idea why the Fed has begun raising interest rates into little or no population growth and while simultaneously Congress is running relatively significantly smaller deficits...Fewer consumers (buyers) every year and rapidly growing sellers (65+yr/olds).

The chart below outlines the total population growth (the black line) and breaks it down by the stacked age group columns in five year increments.  Green represents 0-24yr/olds, blue 25-64yr/olds, and the gap shown (red circle) is where the majority of US population growth comes from over the next two decades, the 65+yr/old segment.

Oil Consumption?

For those curious to see how these demographic shifts have impacted demand for things like, say, oil...take a look at the chart below.  The US (as of Q1, '15) has fallen back to '98 levels of consumption while the remainder of the OECD is back to '92 levels.

The chart below is global oil consumption by source.  OECD (organization for economic development...aka, richest nations of the world), CIA (China, India, Africa), & the RoW (rest of the world).
The OECD still consumes the majority of global oil although declining for over a decade now. 

The bulk of oil consumption growth globally has been China, India, Africa (chart below)...But among CIA, it's really been all about China's massive growth in consumption of oil thanks to sheer size and outrageous credit growth.

And my guess is 2016 will see the start of a new secular trend, the outright declining consumption of oil in China...just like the US, Japan, and the EU.  All of this has everything to do with China's annual population growth, highlighted in the chart below (total growth in the columns, and the lines representing the 0-64yr/old population (green) and the blue line the 65+yr/old population).

China's population growth among it's 0-64yr/old population has decelerated 95% and turns outright negative next year.  And every year thereafter, China...just like Japan, will have fewer buyers, fewer consumers, and a ballooning number of older "economic liabilities".  But China has already played the credit card and built-out massive overcapacity and has the non-performing loans coming in to prove it.

China has been the driver for rising oil consumption, steel, concrete, sneakers, food, etc. etc.  China has been the worlds engine of growth for the last 10-15yrs...and that engine will grow no more.  China's declining population will offset rising credit and overpower dreams of millions of Chinese rising to middle class consumer status.  The rising wages and rising consumption is a silly pipe dream built, like much of the worlds economy, on bad assumptions.

Lastly, for those who don't understand what is taking place - the chart below shows the combined, 0-64yr/old population growth of the 34 members of the OECD, China, Brazil, and Russia.  The annual growth of these nations "young" has already fallen 94% from it's '03 growth of 26 million annually to it's present growth rate of 1 million/yr.  And it only goes down from here turning negative, every year, for decades.  These nations populations representing those with income, savings, and credit to push global consumption begin shrinking next year.  And that is why negative interest rates to incent unprecedented levels of debt are in the offing.  This is the last card to be played as there are fewer buyers and more sellers every year from least for decades.  Never were the words "caveat emptor" more appropriate.


  1. Chris,

    I recently found your site and enjoy the good analysis. The Federal Reserve much like the government are running a confidence game. They are fully aware of what they are doing. The FED is enabling the the continued crony capitalist looting of the economy. Unfortunately they are not going to continue to mask with debt the reality. If you add into the equation the social trends like the aging of the populations there is going to be a heck of a hangover.

  2. More Millienials entering the workforce than Boomers leaving it. Boomers cashing out all that money and transferring it to Gen Xers who spend it, save it, invest it.

    Chinese oil consumption not going down.

    Based on those miscalculations alone, I can't buy in to this thesis.

    1. This comment has been removed by the author.

    2. L,D, & the V,

      thanks for reading and thanks for the thoughts. I didn't say Millenials are smaller than boomers (they are not)...what I'm showing is a slowing of total population growth which was as high as 1.8% annually in late 1950's (1.5% of this, the vast majority, was under 65yrs/old (new births/immigrants vs. those living longer)). Now in 2016, annual population growth is down to 0.8% but only 0.3% among under 65yr/olds. The other 0.5% is 65+yr/olds living longer. Total population growth has fallen 60% but particularly slowing growth among young is slowing the growth of consumption.

      Another way to look at this would be the # of 25-54yr/old employees in the US (most of millennials in this segment). Since '00-->'15, this segment has net lost 1.2 million full time jobs (fewer working adults over a 15yr period). Over the same time frame, 55+yr/olds have gained 11 million full time jobs. So, the older Americans have not retired and the young who are supposed to be building wealth, provide the tax base, and be the buyers of the old adults (who are a strange mix of a majority heavily dependent of SS and a minority asset rich and cash poor)...well, we have a problem as the needy SS and medicare majority recipients are ramping while the wealthier minority sellers are ballooning while buyers are shrinking.

      I'll post an article charting all this and more out soon.


  3. Population is the 800 lb gorilla in the room. If pop growth is declining, the consumer economy is dead, which means the credit system needs to change. It can't run in its current form if consumerism dries up.
    Saw on ZH yesterday that someone posted a comment saying "in a consumer economy, producers are punished". That is totally true, as the consumer economy relies soley on trying to get $$ into the consumers hands to spend. It will be the reason our country fails.


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