Monday, July 22, 2019

How This Plays Out?!? Deceleration, Interest Rate & Asset Price Distortion, Debt, Deflation, Depopulation, Depression, Default

Some folks have asked how the current population and demographic scenario plays out and the impacts on economics, financials, politics, and the environment.  To give my best two cents, I offer the concept of stock versus flow.  The world is all about growth; month over month, quarter over quarter, and year over year growth. Not stock but flow.  In a world of 7.8 billion persons, from a growth perspective all that matters is the year over year growth of the population, the economy, financial assets.  Obviously, I'm going to focus on the nexus...population growth according to the UN World Population Prospects, 2019 (linked HERE).

From 1950 to 1988, total year over year global population growth accelerated from +48 million/yr up to +93 million/yr (chart below).  But since 1988, total year over year global population growth has been decelerating, now growing "only" +81 million annually in 2019, or 12 million fewer than the peak in 1988. By 2050, the UN estimates that total year over year growth will be somewhere between +48 million/yr (medium variant) to just +10 million/yr (low variant).

But the world is characterized by stark inequalities among the "haves" and "have-nots".  The World Bank is kind enough to categorize the worlds nations into four buckets by the Atlas Gross National Income per capita (geographically detailed HERE and listed HERE).  High income nations range from $84k to $12k per capita, Upper Middle income nations $12k-$4k per capita, Lower Middle income nations $4k to $1k, and Low income nations less than $1k per capita.  To simplify what is taking place, I sweep the high and upper middle income nations 0-65yr/old populations together (blue line below), as these nations represent 90% of the global income, savings, and access to credit.  They consume 90% of the energy and purchase 90% of the global exports.  They drive global economic activity.  Likewise, I sweep the have-nots 0-65yr/old populations together (tan line, below).

The momentous takeaway should be that population growth among the 0-65yr/old global consumers is on the precipice of ending...and the end of growth is the beginning of secular decline.  The lack of an effective transfer of wealth (and demand transfer) from haves to have nots is now a huge issue.

Perhaps it is easier to see the annual change in the two population sets, as annual growth among the consumers peaked in 1969 (blue columns below) and has been decelerating for nearly five decades.  But according to the UN, the growth of global 0-65yr/old consumers will cease in 2023 and declines among the consumers will accelerate, reaching up to -20 million annually by 2053.  As for the non-consumers (tan columns), they have progressed up and through peak growth and are now beginning a secular deceleration of growth.  To highlight which group drives demand, consumption, and inflation...I add the Federal Funds Rate (yellow line).  The FFR clearly tracked the accelerating and then decelerating growth among the consumers...and the case for ZIRP is pretty plain as a collapsing number of consumers versus rising total assets is imminent.

So, as growth among the consumers accelerated from 1950 through 1980, the Fed strangely made capital prohibitively more expensive, thus capping the growth of capacity against fast rising demand, thus stoking inflationary spirals.  Then, as the annual growth in demand began decelerating from 1980 to present, the Fed made capital progressively cheaper stoking overcapacity and deflationary excess.

If the Fed's goal was to manage the economy (and inflation and jobs within that context), the interest rate curve should have been the inverse supporting growth in capacity alongside accelerating growth in demand from 1950 to 1980.  And once demand was waning, higher rates would have been sensible to avoid cheap money fueling the creation of capacity into declelerating demand.  Whether the Fed's (and like central banks) intention was to strangle global economic activity and stoke inflation to control population growth, I have no way of knowing.  But with widely accessible birth control making child birth a conscious determination and costs of living rising well in advance of wages, each asset bubbles pushed fertility rates and population growth down further.

The chart below shows fertility rates from 1950 to 2020 and UN medium and low variants through 2100.  The UN predicts that in 2020, all regions except Africa will have fertility rates below 2.1 or negative fertility rates (ok, Asia is anticipated to turn negative by 2025).  What is surprising is the expectation that North America and Europe fertility rates will rise, particularly as they both continue to collapse to all time lows since 2007.  As for Africa, fertility rates are plummeting and expected to continue doing so...but the ongoing growth that Africa represents is not translating as it very low emigration rates, particularly compared to Central America or South Asia.

So, with tanking fertility rates and a declining childbearing population among the consumer nations ever since 2007, the confidence level is very high that growth isn't coming back any decade soon.  The chart below shows the annual change in the childbearing populations of consumers (blue columns) and non-consumers (tan columns).  This is a process of depopulation among the consumer nations that is already in the advanced stages.  Again, I include the Federal Funds Rate, as it is nearly a 1:1 match with the annual change of the consumer nations childbearing population, and the changing demand they represent.  The implication is that population growth leads (changing demand) and the Federal Funds rate ongoing rate policy shouldn't be hard to cipher.

What happens now?  A declining global workforce among the consumer nations (aka, declining potential consumers) versus the overcapacity of real goods, services, and assets (real estate, stocks, bonds, commodities).  This is a deflationary spiral only exacerbated by low rates incenting even more capacity creation thanks to ZIRP or more likely NIRP (paying debtors to take out further loans).  The cheap money is also fueling innovation, automation, robots, and autonomous vehicles, etc. (all good things, in a vacuum) that are all further exacerbating the deflationary spiral via ever greater capacity absent creating like demand.  Global commodity demand is likely to likewise collapse far sooner than anticipated and large overcapacities will likely stymy further "green" efforts.

This cheap money is rewarding asset holders more than wage earners (particularly asset-lite or asset-less young adults who comprise the childbearing population). These policies of inflating asset prices are rewarding elderly and institutions who own the bulk of assets over the young adults who are being penalized with record rents, home prices, insurance, medical costs, day care costs, and student loans, etc..  All this is further delaying marriage and family formation and only pushing fertility rates toward the low variant.  The global population is set to peak far sooner and more dramatically than the UN's current 2100'ish date.

All the D's are now in play; in the rearview mirror are the deceleration of population growth and concomitant decelerating economic growth, interest rate distortions to provide false signals to the market resulting in excessive personal, corporate, and federal debt.  The interest rate distortions have and continue to push asset price distortions.  Currently deflation is sweeping the globe, leading to upcoming outright depopulation, depression, and ultimately corporate and/or national currency defaults.  A debt and leverage based monetary system premised on continually stealing demand from an ever greater future is simply broken now.  The Ponzi is now clearly visible (how can perpetually ever more debt, upwards of $250 trillion, be repaid or even serviced by ever fewer persons of means?) but central banks are sworn to see this to it's broken end.  A terrible daisy chain of events has long been underway and although we still have better options, at every fork we seem to take the wrong turn.  In the not too distant tumult, those least responsible and those who played by the rules will likely disproportionately suffer the consequences as the bedrock on which they have built their homes, retirements, and dreams crumbles away.


  1. Deflation against 10 massive years of easy money debt creation means a very low stock market. GOLD should do well.

    1. Theoretically, gold and silver make at the sense in the buying insurance for a fire you know will happen.

      But in reality, I can't explain the price of gold or silver. I fully believe they are rigged but no proof as to this nor do I know the strength or fragility of these actions. I don't know if precious metals will be allowed to be an outlet valve for those looking to protect their purchasing power. I'm not saying don't own them...they are essentially a measuring stick against the creation of fiat currencies but they aren't exactly functioning at present and I don't know the durability/longevity of this. Price suppression will almost surely eventually fail, but no idea when or how.

  2. The pro-growth view: shouldn't emerging markets continue to catch up with developed countries due to the large difference in per capita income? I think this catch up process will continue well into the future, maybe up to 2100, therefore leading to relatively large gdp growth rates in emerging markets.

    And yes, you can have high GDP growth rate even under conditions of aging and declining population, see for example Eastern Europe, where they have pretty good growth rates, even though their populations are declining and older that that of the US.

    Why is that? Because there is catch up effect, which is conteracting the demographic effect. The catch up effect exists only in developing countries, thus you will get higher growth rates there.

    See Bulgaria for example and its massive population decline that is going on for 20 years. Yes the country is having higher gdp growth rate than the US. What is responsible for this? The catch up effect. Also called GDP convergence effect.

    What does this mean? It means that you can have decent growth rate even in China later in the century, under conditions of declining and aging population, due to the GDP convergence effect.

    If you look at the various SSP scenarios for GDP growth up to 2100, all of them universally point to higher per capita growth rate in developing countries compared to developed countries. And they take into account demographics.

    1. @Passer by
      I like what you are saying and hope you are right. I don't think so but agree that would be preferable for all.

      However, as you can guess, I don't believe the math supports this viewpoint. For the half of the world that does the 90% of consumption and economic has been almost 4 decades now of utilizing declining interest rate policy to promote ever greater abnormally high amounts of debt to maintain a falsely high rate of economic activity. But only now does the real depopulation surge among these consumer nations begin...and all that is left to fight it is a couple of rate cuts, QE, NIRP, and the ongoing fraud in the government bond markets (including at the front and center, the Treasury market).

      So, as the group representing the 90% is secularly ever more reliant on federal debt and schemes to remove that debt from the only worsens the inequalities and creates a shrinking class of winners (asset holders) over the majority of wage earners and non-asset holders (particularly among the childbearing populations). Ever more debt versus ever fewer young capable of repaying or servicing this debt is its own spiral...and the proposed cures only make the patient sicker.

  3. I recently looked at 20-year price charts for oil, natgas and Exxon as a proxy for same.

    All three are carving out massive multi-year head and shoulders formations (considered among the most reliable chart patterns.

    They suggest that on a 5-10 year timeframe both oil and exxon will be trading in the 30s, roughly half of where they are now.

    This would be consistent with the presented thesis.

    1. Hey RSD -
      interesting, given that prices are set at the margin, a small decline in demand or leverage (for example, 3%) can have a huge impact on prices (50% to 90%). Of it's own accord, I think this would be the natural state of things to see non-linear resets. However, this is pretty well understood by those in charge and I expect they will have their work cut out for them to manage the flow of energy and commodities versus what I expect will be declining demand (both thanks to innovation and population changes). Honestly, it is beyond me how they will manage this but I think they intend to attempt to do so.

  4. Chris, do you think this plays out with the currencies trashing themselves through hyperinflation?
    I expect every debt and obligation to be paid and they'll just print it.

    Do you see things differently?


    1. Hey Rob - yes and no. I fully expect QE was just the start of what will be business as usual removing excess assets to maintain asset prices (T's, corporate bonds, stocks, and RE). However, the big question is whether hyperinflation is in the cards? The population/demographic data I'm showing coupled with innovation, automation, autonomous, and AI are massive deflationary agents. So there is potential for a semblance of balance with CB's creating money on one side via NIRP/QE/etc. and the forces at play on the opposite side destroying money (fewer consumers, little to no real wage growth, declining leverage for normal people who can't get their hands on NIRP rates but far higher credit card or bank rates).

  5. Hi Chris, first to note - during the couple of years I periodically read some of your articles. Thanks for your articles, I like your style and the level of details you provide!

    Now, regarding the messages transmitted in several diferent posts....

    In the chart above you compare 0-65 from Hi and Low countries. At the current point it time it could be assumed that they are relativily similar in size, around 50% each.
    I have several comments/points to mention here:

    1) We know that the inequality in recent decades is increasing nationally, especially in western countries, while globaly we actually observed the reduction of inequality. Here some numbers: China since 1990s transfered some 150 milion households from poverty to the middle class. In the last decade, the participation of middle class from South Pacific region in the world distribution stepped up from 30% to 50%
    The method you applied hence considers the countries, which exhibit various sizes and dynamics of middle class, and the final numbers represented in the first graph actually might not correctly reflect the world distribution of consumers.

    2) Would someone ih 1950s think that China would become the first or second world economic power by cca 2020? Making predictions now in 2020 for 2100 is similarly unreliable. In my opinion, while these numbers are caling for significant concerns, there are still 2-3 decades or more left to introduce the policies that might improve the things... should the zombified people care to ask for change.

    3) Regarding asset prices etc.. technology development, AI, automation etc may affect the prices deflationary, but not uniformly across all assets/articles. Looking at last 30-50 years we can also observe how the prices of different classes of products and services developed - some got cheaper, some more expensive... and this development is not uniform across the states and the continents. So in this sense, could the depreciation in (some) prices be considered as an analogous of growth? If price deflation is faster than wage stagnation/degrowth, then in effect purchase power still could be considered as rising, right? How we then relate GDP as a measure to that? If we implement some automation which reduces prices, it might affect GDP by lowering official numbers, as the costs/prices decrease.. but in practice, it brings the benefit to the people. Hence, is GDP good measure to describe growth?

  6. (continuation)

    4) One further issue in this case is the debt.. for instance Austria recently sold its 100-years bonds with coupon of some 1.2%. While seeming absurd now, maybe these 1.2% matched with long-term deflationary movements in prices would actually represent a solid yield in 100 years? I recently watched one video of Stephanie Kelton on MMT (which is not so "modern" as the idea exists since 100 years). In this video she very interestingly demonstrated how all this debt and treasuries etc could be addressed by MMT.. simply by issuing the money. I do not know how this could in practice work but she was not seeming worried about debt at all.

    5) Regarding world population and middle class growth, currently there are many Chinese-led initiatives implemented worldwide. Some authors mention Africa is a "future China" of the world, as China has many activities and investments there.
    Do you think that some couple of hundred of millions of people in Africa could become new consumers (middle class) tomorrow, similarly as China did in last decade?
    In global terms, we actually might expect the slight increase of global consumers. The issue is that this increase will be mostly driven in Asia and Africa, and Western Europe and North America are problably to expect further decline and decrease. So I see this decline more as an issue of western nations than a global issue. The transfer of power and innovation is currently flowing from the west to the east, and this could, together with the demographic issues you write on, have devastating effect on western economies. Those other countris on the other and have, amid negative demographic tendencies being present there as well, higher potential to increase consumer class, and hence impact growth.

    6) Speaking about technological developments, 15 years ago not many people would believe that companies like Facebook or Amazon would reach current valuations. Facebook basically created a new market and a big chunk of consumers worldwide by monetizing the attention and free time of its users to "produce" "something", which is at the end a form of consumerism and a market worth billions.
    Depending on the development of future policies and the development of degree of work-life balance in the furture, it might not be impossible to imagine scenarios where we have decreasing prices (due to automation), decreasing work (due to automation) and increasing free time (again automation), which can furhter lead to increase of consumerism. These are only general thoughts.. ofcourse many things depend on will the future society look more like middle-age feudal or will take some other direction...

    I actually provided many comments and understand if you do not have time to answer but maybe you could address some of the mentioned points/topics in some of your future articles.

    1. Hey Bojan,

      the overriding point I'm making is demand at prices that make production worthwhile is set to only continue declining. Automation, autonomous/robotization all create greater output and further reduce consumptive capacity.

  7. There are many variables that this article does not account for.
    1. Automation; a reduced population is preferred to keep wages higher.
    2. New resources that reduce the cost of living;
    3. Conservation; Who needs growth when conservation can give the same or better benefits
    4. New laws to decentralise power and break up monopolies. This increases employment to do smaller pieces of current jobs. Especially accounting jobs.
    5. New Tech that revolutionizes current money, work, & investment. Bitcoin?
    Mr. Hamilton we are trained monkeys in an invisible cage. We have to think outside the box which modern economic education has created.

    1. I prefer to think of myself as an untrained monkey in a visible cage...

      I believe I've gone into most of these in previous articles but the point still stands, that demand (at prices that make production profitable) will only continue to decline. Most the points you make only push demand lower against rising capacity.