Thursday, December 20, 2018

New Normal - Secular Decline with Intermittent Growth

From a big macroeconomic perspective, what the US and developed world have been enjoying for centuries (millennia, really) is secular economic growth with intermittent slowdowns (recessions and occasionally depressions). This has been driven by a surge in population growth, particularly since 1950, and augmented by technology, innovation, inexpensive energy, improved health care (extending life spans by decades), etc..

On each occasion of an economic slowdown (short term business cycles), there has always been growing demand from a growing population (macro population cycle)...so temporarily lower interest rates and deficit spending stimulated the economy, reigniting economic growth.  But as the organic annual population growth decelerated (where it matters, economically speaking), increasingly greater levels of synthetic additive have been introduced to maintain unnaturally high rates of growth.

Since at least 1990, this pattern has increasingly encouraged the formation of cheap credit fueled new capacity in the face of decelerating global demand...the decelerating population growth among potential consumers could only consume the accelerating capacity with continually greater and cheaper credit (thanks to central banks "mis-management" of interest rates).  This has resulted in epic global overcapacity and the accumulation of debt beyond our capabilities to repay just as the macro population cycle (where it matters) turns negative.

What we are moving into is an indefinite period of secular declineWe will see occasional periods of growth before the primary trend of decline again takes over.  This will go on for decades, if not longer, and can well become a self perpetuating downward cycle if we continue on our current path.  To avoid worst case scenarios, it is crucial we understand the difference (also known as; when you are stuck in a hole, stop digging)!

What Has Changed?
By simply looking at the annual population growth of the countries with 90% of the money (income, savings, access to credit) and that, not coincidentally, consume 90% of the global energy (this includes US, Can, EU, Japan, Aus/NZ, China, Brazil, Mexico, Russia...everybody with above $4k yr/per capita income which is about half the worlds population)...annual population growth has fallen by 50% to 22 million since the double peaks in '69 and '88 of 44 million annually.

While the 65+yr/old elderly live decades longer than their predecessors, equally importantly is the decades of negative birth rates have now worked themselves through into a collapse of growth among the 15-64yr/old working age population, or more broadly those aged 0 to 64yrs/old. Among the consumer nations, 0-64yr/old population growth has fallen 88% since the twin peaks of '69 and '88.  Ongoing and growing population declines among the consumer nations working age population (net) will replace growth entirely by about 2021, and all net growth will be among the 65+yr/old population (particularly among the 75+yr/olds).

Detailed where the growth isn't HERE, HERE, HERE, and where the growth is HERE...plus from an energy point of view, HERE.

What Choices Do We Have?
Simply put, the world became so sure that we would perpetually grow that "we" (as in, the royal "we") bet the future on it...but that has turned out to be a very bad bet (bad for all but the "royals").  A bad bet increasingly papered over in ever lower interest rates, higher (and un-repayable) debt, and ever more diluted paper called "money". We select the politicians that tell us the lies we want to hear (whether we believe is another matter) and populism among the democracies will continue to dangerously surge...but the truth is that the "the macro tide has now gone out indefinitely and we are all swimming naked".

The world will almost surely go on and economic and financial systems will ultimately adjust to the reality...but it is up to "us" to determine how painful, messy, and confusing the interim period will be. Although a secular economic and financial decline is imminent, the same does not need be true societally, technologically, spiritually, etc. But we risk ever more  by continually attempting to synthetically grow the economy / financial assets in the face of organically decelerating or even outright declining demand.  This only makes the ultimate and imminent adjustment (aka, depression) ever larger.  Invest accordingly.