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Thursday, May 26, 2016

US Popualtion Growth & Fed Funds Rates Correlated...Until Now!?!

Market watchers, economists, and a few geeks (present), are well versed in "Fed speak".  This is a language and terminology meant to make something quite simple and turn it into something indecipherable.  This jargon is truly gibberish of formulaic models and mathematical equations that keeps the layman from joining in on what is truly a very simple discussion.  Let's make it easy...

The chart below shows four variables:
  • 20-64yr/old annual growth in the US population (including all legal and illegal permanent residents)
  • The Federal Funds Rate (FFR %)...this is the rate at which the Fed loans money to the largest banks and is the underlying basis for all interest rates paid from a mortgage, a credit card, etc.
  • US Federal deficit...the annual dollar amount spent above and beyond US tax collections (the corresponding US Treasury bonds are issued to pay for this deficit spending).
  • US GDP...the total dollar amount of all business transactions made within the nation annually.
The chart below shows the growth in the accelerating adult population growth creating upward demand up to its peak in 1979.  The FFR % rose in unison until peaking in 1981...and since population growth has been decelerating, the FFR % has been cut even faster.  This lower interest rate has allowed Congress to run significantly larger deficits without the higher interest costs many assumed would occur.  The declining interest costs encouraged the consumer, the corporate, and government to maintain and accelerate spending despite the slowing population growth.  This substitution of debt for decelerating population growth also allowed the US to run a significantly (& artificially) higher GDP than otherwise possible...thanks to credit fueled excess spending.



The chart below outlines the annual change in the adult population (20-64yr/olds) but this time in % terms.  The correlation of the Fed's interest rate policy to the rise and fall in adult population should be fairly obvious.  It was the interest rate policy which allowed massive federal deficit spending in '08 absent the rising interest service costs on that debt.  But an intrepid chart reader would note the continued upcoming deceleration in population growth over the next decade and wonder how decelerating demand coupled with the already rising rates (rising personal, corporate, and federal debt service costs) would merit further higher rates?  Historically and logically this is quite contrary if the goal is to maintain employment, jobs, and resultant GDP growth?

Now, the Federal Reserve suggests interest rate hikes into the slowest population growth (lowest growth in demand) in a century???  Below, adult population growth vs. Federal Funds Rate % (both are smoothed out over a 4 period average to show their correlation more clearly).  Honestly, I haven't a clue what the Fed is talking about.  The situation regarding global growth is even worse, outlined...HERE.  Interest rate hikes would only further strengthen the dollar, further undercutting US exports, further exposing the miniscule growth in demand?
The Federal Reserve and its policies have taken what was to be a difficult transition from high to low population growth and turned it into an almost sure catastrophe.  By cloaking their calculations and logic in jargon and mathematical equations beyond a PhD's decipher, they have robbed billions of persons opportunity and savings in the present and future.  This was seemingly all to make sure the present was far better than it should have been (particularly for a few) without a care for the future.  And these central bankers are still at the controls despite showing gross negligence.


The implications of their interest rate mismanagement and the resultant unmanageable debt loads are now upon us...and the "workout" is truly a Gordian knot beyond comprehension.

Just two questions...
  1. Do we believe in and will we ever allow a free market to work out the issues we face (painful as this will be...particularly absent further central bank interference...aka, interest rate morphine)?
  2. Can a central bank which has already shown itself to be a great contributor to the problem now be part of the solution...or will the Fed only continue to retard any eventual restricting and recovery?

3 comments:

  1. Be careful what you ask for. I'm sure you are in the 99.9% lifestyle compared to the world. Why? What allows this privilege? The poor in the United States still have access to food, clean water, shelter, gas, electric, cable, TV, Internet, books, education, health care, transportation, and many other things. What allows for this? Is it wise to want to end this?

    ReplyDelete
  2. You wrote:
    "The Federal Funds Rate (FFR %)...this is the rate at which the Fed loans money to the largest banks and is the underlying basis for all interest rates paid from a mortgage, a credit card, etc."

    My comment:
    The Fed Funds Rate has no correlation with credit card interest rates.

    The FFR has no direct relationship with mortgage rates.

    Mortgage rates are set by supply and demand, both of which are affected by the actual inflation rate and inflationary expectations.

    The Federal Reserve Bank may be able to drive mortgage rates lower than they would otherwise have been, by purchasing mortgage backed bonds with "money" created out of thin air.

    They have stopped doing that.





    You wrote:
    "US GDP...the total dollar amount of all business transactions made within the nation annually."

    My comment:
    Real GDP is the annual production of new goods and services, measured by looking at "final sales", and changes in inventories.

    Many business transactions are not included, such as sales of existing homes.

    Production of "raw" goods and intermediate goods are real business transactions, but may be invisible because they are 'buried' within "final sales" data.






    You wrote:
    "The FFR % rose in unison until peaking in 1981...and since population growth has been decelerating, the FFR % has been cut even faster."

    My comment:
    The FFR rose because the inflation rate was rising.
    The FFR then fell because the inflation rate was falling.
    The FFR has nothing to do with population growth.
    Nor does population growth have anything to do with the inflation rate.






    You wrote:
    "The declining interest costs encouraged the consumer, the corporate, and government to maintain and accelerate spending despite the slowing population growth."

    My comment:
    Consumers:
    There is no evidence consumers increased spending on goods and services, and cut their savings rate, because of low interest rates.

    Corporations:
    There is no evidence corporations increased spending on capital investments. They did increase borrowing because of low interest rates, but most often used the money to buy back their shares.

    Capital investments, the root cause of economic growth, have been unusually weak, in spite of all the corporate borrowing.

    US Government
    There is no evidence the US government increased spending because of low interest rates. In fact, the government spending growth rate declined significantly in the past five years.






    You wrote:
    "This substitution of debt for decelerating population growth also allowed the US to run a significantly (& artificially) higher GDP than otherwise possible...thanks to credit fueled excess spending. "

    My comment:
    US Real GDP growth, averaging only 2% since 1999, was the slowest growth since the Great Depression.

    With such slow growth, there's no evidence the expansion of debt as a percentage of GDP has increased the economic growth rate.

    Slower population growth does affect economic growth, to the extent that it affects the size of the labor force.

    The primary cause of slower US economic growth since the 1980s is slower productivity growth -- slower population growth is a minor cause.

    ReplyDelete
  3. compare smoothed growth in current dollars and % change in 20-64 yr olds and long treasuries and the overlap is compelling (see Dick Hokenson charts)!

    ReplyDelete

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