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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.

9 comments:

  1. Thanks, Chris....Japan Lost Nearly a Million People in 5 Years, Census Says - NYTimes.com - www.nytimes.com
    http://www.nytimes.com/2016/02/27/world/asia/japan-confirms-a-decline-in-population.html

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    1. Funny that the NY Times would report a headline so tame compared to the real story around Japan.

      Japan's <5yr/old population peaked in 1951 and has fallen 58.5% since...consistently declining (yoy) for 65+yrs and projected to continue going down indefinitely. Since 1951, Japan's total population has risen 50%. So consider, in a nation with net emigration, that the headwaters of population have been shrinking every year for 65yrs. Of course this dearth of young was hidden by the twins of baby boom and significant lengthening of the populations lives vs. previous generations. However, the boom is going bust and longer lives is an extension of population, not truly population growth.

      So a 50%+ drop in consumption working it's way up through the economy is well under way and the worlds second largest total debtor nation is economically doomed. There is really no question on this point as half the home buyers, car buyers, half the tax payers, etc. cannot service the debt and maintain the present economy. A total reset of unknown nature and kind is just a matter of time. Tick tick tick and that should be news.

      So Japan's collapse

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  2. Also, what happened with your submissions to Seeking Alpha? I see your comments on Zerohedge from time to time but that site doesn't quite appeal to me. Keep analyzing please! Thanks, AJ

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    1. I honestly tired of SA...the vast majority of commenters (readers?) want to know is why the world can grow forever and how they can steal another 5 or 10yrs of intergenerational wealth. The retiring are so desperate to make ends meet that they (as a group) are unwilling to look themselves in the mirror and see themselves for what they are. They are rooting for (or at a minimum, not objecting to) the extension of bad policy and destructive governmental and CB actions to maintain their 10, 20, or 30yr horizons. As a group, they seem willing to support the perpetuation of a Ponzi as the Ponzi serves them and their interests...and they are unwilling to acknowledge the theft from their children's and grandchildren's futures.

      I don't offer stock tips or get rich quick (or slow) ideas. I simply offer macro research and my thoughts about that topic. Probably partly why my research doesn't seem to be read or reposted (poor grammar & 6th grade equivalent writing style likely don't help). So net net, I think I'm ok with just writing for me and ok with the idea this is just a public diary of economic topics.

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    2. You are gaining traction. Keep up the good work.

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  3. Chris, Your articles often get linked to by BOOM Finance and Economics www.boomfinanceandeconomics.com/ WHY? Because your work is excellent

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  4. Thank you for the analysis Chris. A couple of links you may like...

    http://www.yardeni.com/pub/peacockfedecbassets.pdf
    http://www.yardeni.com/Pub/buybackdiv.pdf

    More QE to boost further corporate debt expansion (up over 60% since 2008) and boost buybacks/dividends?

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  5. https://research.stlouisfed.org/fred2/series/BASE (St. Louis Adjusted Monetary Base)

    https://research.stlouisfed.org/fred2/series/EXCSRESNS (excess reserves of depository institutions) - A fed paper from 2013 had 40% of these being foreign...So 40% of approx. $2.4T earning 0.5% in risk free return held at the Fed. How high can they go before congressional/populist push back? Not very high...

    https://research.stlouisfed.org/fred2/series/RREPT (reverse repos all maturities) - This appears to have some interesting issues surrounding quarter end/year end valuations and overnight financing in international markets.

    https://research.stlouisfed.org/fred2/series/TREAST (UST held by the Fed) - - setting a max for ON RRP market

    ON RRP on the bottom end to IOER on the top end to set the range for the FFR. ON RRP < FFR < IOER at least theoretically. Check out 12/31/15 and see where the FFR < ON RRP < IOER. New tools have NOT been 100% in holding the FFR range.

    This will also limit the amount of rate hikes the Fed can undertake.

    Just some things to think about. Thanks for your effort and analysis. Much appreciated!

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  6. Yes, Chris thanks for the articles. Very much appreciated.

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