Friday, September 13, 2019

QE, Monetization; Just Symptoms. What Of The Disease?

This week, the Federal Reserve added another $6 billion to their Treasury holdings and maintained their MBS holdings.
Interestingly, Bank Excess Reserves held at the Federal Reserve continue to tumble, down by $25 billion this week.unmatched by balance sheet reductions.
Since QE ended, Bank Excess Reserves have fallen twice that of combined Fed Treasury and MBS holdings.this difference is direct monetization.
But all of these are just symptoms of a disease that is completely beyond central bankers; declining and decelerating growth among consumer populations that is incurable (but in truth, the disease is not the maturation of the world but our inability to accept it).
An update on the Fed's balance sheet (Treasuries and MBS plus bank excess reserves held at the Federal Reserve.  Charted below from 2008 through this week, are Fed held Treasuries (blue line), Fed held MBS (red line), and Bank Excess Reserves held at the Federal Reserve (green line).  As noted below, since QE ended, bank excess reserves held at the Fed have declined more than double the decline in the Fed's assets.
Federal Reserve held Treasuries (blue line) versus weekly change (black column) since September of 2017.  The deceleration of QT, the pivot, and restart of Treasury purchasing is easy to see.
Federal Reserve held MBS (mortgage backed securities, red line) versus weekly change (black column) since September of 2017.  The Fed has communicated that it will continue selling off MBS while purchasing Treasuries.
Banks excess reserves (green line) versus weekly change (black columns), since 2017.  Will the bank excess reserves held at the Federal Reserve continue declining now that Quantitative Tightening is over?  If so, that would be an ongoing flow of hot money.
At the onset of QE, there was an initial mismatch of growth in the Fed's balance sheet versus bank excess reserves held at the Federal Reserve of about $800 billion. This mismatch remained from '08 to the end of QE in late 2014.  But since the end of QE, the excess reserves have fallen $700+ billion more than the Fed's balance sheet.  These excess reserves have left the Federal Reserve and returned to banks as cash.  If banks still do what banks do, this $700 billion since the end of QE would be levered anywhere from 2x to 10x in either loans or some sort of levered purchasing.  This is effectively $1.4 to $7 trillion in conjured money flowing into the economy and/or (more likely) assets.  The asset melt-up since the end of QE should not be a surprise.
A constant melt-up in asset prices flowing from ongoing monetization entering banks hands.  And if the Fed continues cutting rates (as I suspect they will), the lower IEOR (interest paid on excess reserves) should continue to push the remaining $1.3 trillion excess reserves out of the Fed and into the market.  So, the worse things get, the higher asset prices will go!?!
As long as this continues, it is hard to see how asset prices can do much but push higher...regardless the economy or main street or trade wars or whatever.  But all this is just a symptom of a incurable disease.  To see the disease, we have to look at the macro or macro...
The Disease...A Finite Population of Consumers Versus Economic / Financial System Premised on Infinite Growth
In our current system, the goal is growth. Growth on a quarter over quarter and year over year basis. The absence of growth is recession or depression. And this growth requires ever greater consumption (not just production) and consumption at prices that make the production of these things possible and profitable. The current economic, political, and social systems are dependent on this growth. But what if the basis of this growth has no basis? Or said more simply, the growth of the under 65 year old populations that does nearly all the work and nearly all the consumption are in secular decline.
The 0-65 year old population are the number by which credit and wage gains are multiplied...but when you have a negative numerator, funny things happen. And the decline is only gaining speed as the downward momentum is taking over.
For example, when trying to determine potential growth in consumption (not production, but consumption) the first number is how many more people will there be than the prior year...then how many more are employed, how much more did wages rise than real inflation, how much more debt did they undertake to achieve this consumption?  For decades, centuries, and really millennia, that first number has been a significantly positive digit. But looking at all the charts below, annual under 65 year old population growth has massively decelerated and outright turned to decline among the nations that consume 75% of global energy (and likewise, global exports).
In 2019, global under 65 year old population change is as follows versus each regions total global energy consumption...
  • East Asia -0.2% (-3.5 million)...31% of global consumption
  • Europe / N. America -0.1% (-1.2 million)...43% of global consumption
  • Central / South America +0.6% (+3.7 million)...5% of global consumption
  • Asia (excluding East Asia) +0.9% (+27 million)...17% of global consumption
  • Africa +2.4% (+31 million)...4% of global consumption
Why the focus on under 65 year-olds?  Income, spending, and labor force participation are a bell curve. Household income and expenditures more than double from early adulthood to peak earning, spending, labor force participation from age 45 to 54 years-old. From there, everything falls off and by age 75+, income and spending are nearly back to early adulthood levels but labor force participation falls to just 8%. The chart below details this in the US, and although the dollar amounts and participation rates vary, the dynamics are similar globally.  (BTW - easiest to think of the 55 to 64 year-olds as the go-go retirement years, the 65-74 year-olds as the slow-go retirement years, and the 75+ year-olds entering the no-go retirement years...with commensurate spending).
East Asia
East Asia (China, Japan, S+N Korea, Taiwan, Mongolia) has a total population of 1.67 billion and consumes about 31% of total global energy. In 2016, the under 65 year old population began declining and will decline by 0.2% in 2019. Through 2050, the East Asia under 65 year old population will continue shrinking by as much as 0.8% annually and is projected to decline by 280 million (almost a 20% decline in under 65 year-olds over the next three decades).  Meanwhile 65+ year old growth (a net liability and responsibility of the under 65 year old population) will continue growing through 2050 and is projected to increase by 225 million (a 105% increase).
East Asia 65+ elderly population is anticipated to grow by 225 million through 2050, but nearly 170 million of that growth is anticipated to be among the 75+ population.  Chart below is annual change (in millions) of "young-old" versus "old-old".
Europe / N. America
Asia's primary customers for their exports are Europe and N. America with a combined population of 1.1 billion (consuming 43% of global energy). The combined Europe / N. America under 65 year old population began declining in 2014 and will decline 0.1% in 2019 while the 65+ year old population will grow 0.4%. Europe / N. America's population trends will mirror East Asia's with persistent shrinkage of the under 65 year old population through 2050 (almost a decline of 75 million over the next three decades...and that assumes continued migrant inflows) versus persistent growth of the 65+ year old population (nearly 100 million more by 2050).
However, of the annual elderly population growth among Europe / N. America, over 75 million will be 75+ versus "just" 20 million more 65 to 75 year-olds.  Population growth among the "no-go" (low consumption) older retirees will be the dominant feature among the consumer nations of the world through 2050.
Central / South America (plus Caribbean)
As for the 670 million who inhabit the remainder of the Western hemisphere (who consume 5% of global energy), growth of the under 65 year old population is rapidly decelerating and anticipated to end before 2040. Growth of the 65+ year-olds is anticipated to mildly accelerate.
Asia (excluding East Asia)
As for the nearly 3 billion inhabiting the remainder of Asia who consume 17% of global energy (excluding East Asia), the annual under 65 year-old population growth has decelerated from a 2.4% annual peak in 1982 to 0.9% in 2019. Annual under 65 year old growth is anticipated to turn negative prior to 2050 and 65+ year old annual growth to gently move higher.
Africa with a population of 1.3 billion consumes just 4% of total global energy (and likewise global exports). Because Africa is so relatively poor, consumes relatively so little, and provides relatively few migrants outside of Africa...the population growth there is non-consequential from a global economic standpoint. Economically speaking; the world impacts Africa, Africa doesn't impact the world.
When population growth among the consumer nations has turned to population decline, the consumers of 75% of total global energy (and likewise global exports) are turning to ZIRP, NIRP, and unrepayable debt loads to maintain an unreal, synthetically achieved rate of growth.  As population growth (and organic demand growth) is either declining or decelerating everywhere, why would economic activity be expected to rise?  Alas, the weaker the basis of economic activity, the greater the impetus to push interest rates into negative territory with the intent of mispricing bonds and asset prices in general.  Bad is the new good and we will only get worse so asset prices will only get better...until bad is really bad.
All population data via UN World Population Prospects 2019 and Fed Treasury Holdings via St. Louis FRED.


  1. I like you Chris but like so many you are the "shocked" American who is trying to understand the world and figuring's corrupt top to bottom.
    Everybody else has known this since the beginning of time, except for Americans. You thought you had a perfected utopia, and are finding out that's not true...they are interested in enriching themselves to the tune of quadrillions of dollars, even if it means using up all the resources and screwing every generation from here until we go extinct.
    Now are you understanding why the Nazis and Communists did what they did? I'm not saying they were right, but at some level they took a look at the same things you were, and said, screw this, we are putting an end to this system using any means necessary.

    But...can't talk about that, can we. No, America is good and great, the world leader of honest global capitalism. We are good, rich superheroes, Bruce Wayne. We just need different people in the Fed, a different President, etc.? Then everything will get better?

    1. @Anon - you are probably right, some mysteries are likely better off unsolved. Still, if we don't know where we are, how could we ever hope to find our way out?

  2. Once again a great research piece. Thank you. I pass your blog along to a few friends who understand the relevancy. ~Greg


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