Friday, February 26, 2016

Central Banking for Dummies

How to be a central banker?  When core, working age populations grow (accelerating demand)...raise rates.  When core population growth decelerates or turns negative (slowing demand)...lower rates.  Step on the gas or pump the brake...but only if you've a PhD and promise to speak in unintelligible language.  And now, gotta love CB'ers hitting the gas to make credit ever cheaper, substituting debt/leverage for slowing organic growth.

The chart below shows the US of A 20-59yr/old annual change in population vs. federal funds rate.

Oh, and when you want to maintain abnormally high valuations and claim "the economy is well"...simply have the Fed buy "assets" (below) with make believe digital money and make sure these assets are never seen again (aka, permanent national float shrink as the Fed's balance sheet is never going to unwind).
Japan (below) 20-59yr/old annual population change vs. Bank of Japan discount rate.

Japanese central bank asset purchases to GDP (below).  Given the shrinking working age population for Japan, it won't be long until the BoJ will have purchased in excess of 100% of "assets" compared to GDP.  Safe to say these "assets" are essentially being thrown into a black hole never to be seen again with money created from nothing.  What could go wrong?

EU 20-59yr/old annual population change vs. ECB discount rate.

Plus, ECB assets in Euro's.

China (below) 20-59yr/old annual population change vs. China discount rate....take a guess where China's rates will be going next and how long until China catches up on the central bank "asset" purchase program?!?

Correlation or causation, you decide.  If you want to play along at home, pick a country and chart away...just not Germany.  The German's had the good foresight to create the Euro not so coincidentally the same year Germany's core population began shrinking.  So Germany had a Europe wide market for their exports absent a strong deutschmark.

Of course, perpetually stomping on the gas pedal toward lower rates might create just a bit of debt...say about $250 trillion worth.  And all that debt might create more than just a bit of excess capacity absent perpetually lower (negative) rates.  So, central bankers are really more like Nascar drivers...always turning the same direction and just moments away from the next crash.

***All data and future estimates are from OECD.stat, US Census, and the FRED.