The story I'm not hearing... July 31...Debt Ceiling Deal - July 31st of this year, Senate Democrats carried President Trump's budget deal eliminating the debt ceiling through July 31st of 2021. This after a majority of Trump's House Republicans voted against the budget deal but House Democrats overwhelmingly passed it. And thus the debt ceiling was no more. Since July 31st, the Treasury has issued over $1 trillion in net new debt but that is just the start. Trump tweeted there would always be plenty of time to make budget cuts "later".
July 31...Federal Reserve begins series of interest rate cuts - On July 31st, the Federal Reserve begins cutting rates and has cut rates from 2.4% to 1.55% or a 35% reduction on the cost of overnight intra-bank lending, the foundation of credit.
August 21.. Federal Reserve restarts QE - In August, the Fed ceased quantitative tightening (QT) and restarted quantitative easing (QE). The Federal Reserve balance sheet has expanded by over $300 billion in short order, with an $180 billion increase in Treasuries held. The supposed rationale for the QE restart, inadequate excess reserves or liquidity...
Excess Reserves Not Restarted - With all the new QE, hardly any of it has been added to bank excess reserves...just a paltry $16 billion out of the $306 billion in new currency digitally conjured.
Direct Monetization - That is $290 billion in new dollars directly in banks hands...and banks do what banks do, which is leverage those dollars by 5x's to 10x's (or more), resulting in...
Asset Explosion - Using the Wilshire 5000 as a proxy (as it represents all publicly traded US equities), US equities have risen $2.42 trillion over the 4 month period as all the new digitally conjured cash has been passed to large banks for the "assets" they held...or about a 8.5x the quantity of new "not QE" and "not excess reserves".
What does that look like?
In dollar terms over the past four months, US debt up over $1 trillion, Federal Reserve held assets up over $300 billion, Fed held Treasuries up $180 billion, Excess Reserves up only $16 billion, direct monetization of $270 billion...resulting in an increase of $2.4 trillion in the Wilshire 5000 market weighted capitalization (chart below).
In percentage terms in just four months, total US debt is up 4.8%, Federal Reserve held assets up over 8%, Fed held Treasuries up 8.6%, excess reserves up just 1.2%, direct monetization up over 18%, and equities up over 8% (chart below). Not shown is in addition to all this, the Federal Funds rate was also reduced by 35%.
Trump and the Democrats agreed to spend without limits, Trump and the Federal Reserve agreed to QE4 and mainlining the digitally created cash into the economy (errr...financial assets) via direct monetization. Trump tweeted, "Budget deal is phenomenal for our great military, our vets, and Jobs, Jobs, Jobs! Two year deal gets us past the election. Go for it Republicans, there is always plenty of time to CUT!". But the true result has been to massively enrich the few who own the vast majority of all assets which are surging upwards and pass all the debt along to the working stiffs. And once you start pumping digitally counterfeited dollars directly into the markets, you can never stop without a massive asset collapse. Trump, the Fed, and politico's have broken the market and now they own it.
Trump is truly an evil genius...Dem's are truly self serving dolts...and the Fed is truly the best central bank money can buy. Or the Fed is the evil genius, Dem's still self serving dolts, and Trump is the best president money can buy. Either way, Trump, the Democrats, Republicans, and the ultra-wealthy are laughing all the way to the bank. And the vast majority of Americans have been sold into debt slavery.
Since 1981, household assets as a percentage of disposable personal income versus federal funds rate with primary sources of debt detailed below. The breakdown of mortgage debt and surge of federal debt since 2008 are not so hard to see. Plus the Federal Reserve balance sheet is included as those assets will only be increasing from here on out.Below, debt creation by periods, comparing 1960 through 2000, 2000 through 2008, and 2008 through 2019. Relatively stable corporate debt growth (shifting from capex to share buybacks and dividends due to decelerating organic demand growth), collapsing mortgage debt growth, and surging federal debt growth. And collapsing mortgage debt and surging federal debt is only just getting started, because...Mortgage debt won't be rising anytime soon and all debt creation will be up to the federal government. The chart below shows the annual change in young (working age) versus elderly...a surging population of elderly versus huge deceleration of growth among the working age population. Just a reminder in our fractional reserve system where money creation resides with the banks, on average elderly earn and spend half as much as working age persons and "destroy money" via deleveraging while working age persons "create money" via undertaking new loans (debt). The long standing balance of growth among inflationary young overwhelming growth among deflationary elderly is, and will continue to be, broken...as is our economic model of perpetual growth.The current and future situation is one of collapsing credit and collapsing money creation as the growth of deflationary elderly overwhelms inflationary working age growth...and into that entirely predictable situation, steps the Federal government, Federal Reserve, and ludicrous politicians to serve the interests of the few at the expense of the many.
Since 2007, marketable federal debt has exploded by $12 trillion while Intragovernmental debt has risen a relatively gentle $2 trillion...all while the Federal Reserve directed Federal Funds Rate has been pushed to zero. And after a short respite from ZIRP, another push to ZIRP is almost surely in process, or even a furtherance, moving into NIRP and the paying of lenders to undertake loans. But why?
From 1965 to 2005, the annual growth of the 70+ year old US population ranged from 100,000 to 300,000 while the growth of the working age population (20 to 70) ranged from 1.3 million to 2.3 million. Obviously, I put the big yellow arrows on the chart below to indicate where the reversal began and that it will only become more acute for another decade or two before the trends may begin to reverse (though primarily the growth of the elderly will decelerate but the collapsing birth rates and decelerating immigration are telling us there will be little to no uptick in growth of the working age population).
Think of it this way, the working age population creates money by undertaking loans (debt) while the elderly destroy money by paying down or paying off loans (deleveraging). So long as there is significantly more growth among working age than elderly, money creation is positive. But obviously now, the poles have reversed and the deleveraging, relatively low consuming, fixed income elderly are the majority of annual population growth. The working age growth is diving and likely to be even lower than the overly optimistic UN estimates shown below (relying heavily on projected rises in fertility rates and higher immigration rates than are currently taking place).
Below, surging annual federal debt as the Federal Funds Rate went from 18% to zero...and Federal debt from $1 trillion to the present $23+ trillion. The deceleration of private debt growth and acceleration in Federal and corporate debt have everything to do with demographics and the reactionary zero interest rate policy...soon to be negative interest rate policy.
Putting the federal debt into perspective
I divide the 20 to 70 year-old US population by the Federal debt since 1950. This represents almost the entirety of the US workforce. In 2019, every American from 20 to 70 years-old is currently responsible for $110,000 in federal debt...up from $6,000 in 1980, $33,000 in 2001, and $49,000 in 2007. However, if all the unfunded liabilities were included, the shape of the curve would be similar but the dollar amounts per capita would increase by 5 to 10 times. Noteworthy, wages have been nowhere close to keeping up with this rising liability. As for rising household wealth (stocks, RE, bonds, etc.) these asset values are illusory and not supported by relative growth in wages (also known as a cheap credit fueled "bubble"...but the debt remains even after the bubble bursts).
Again, putting the debt into perspective but against what the present (Boomers) have saddled onto the future (Millennials and Gen Z). This time, the debt is divided by the 0 to 20 year old US population (below). Every American under 20 years-old is currently liable for $282,000 in federal debt...up from $13,000 in 1980, $73,000 in 2001, and $110,000 in 2007. With government debt (and unfunded liabilities) skyrocketing and the under 20 year-old population continuing to decline as fertility rates hit record lows...a parabolic move is underway as ever more debt is piled up against ever fewer young.
What about the idea of outgrowing the debt?
First, federal debt spending is counted as part of GDP growth but there is no subtraction for when the debt is to be repaid or serviced in perpetuity. Anyway, in an attempt to see actual GDP growth absent federal deficit spending, below is quarterly GDP growth (green columns) versus quarterly federal debt growth (red columns) and what remains once you back out the new federal debt from the GDP growth (yellow columns) through 2019. To finish 2019, I use the Atlanta Fed GDPNow estimate of 0.4% for Q4 as well as an estimate that the Treasury will "only" add another $150 billion net new debt by year end, finishing at $23.2 trillion. I say "only" because the Treasury has issued over $1 trillion in net new debt since August 1st and the deluge shows no signs of slowing.
If we track the real growth of GDP minus the boost of federal debt (which must be repaid or serviced ad infinitum), we get the chart below. Simply put, organic US economic activity is declining and it is only ever greater unrepayable and ultimately unserviceable federal deficit spending providing the appearance of growth.
One of the primary drivers of this growing deficit spending is charted below. The annual surplus of tax revenue among Social Security and the like (OASDI) and Medicare / Medicaid (HI) peaked in 2000, turned negative in 2009...and is set to most likely follow the Treasuries worst case red line scenario. What was an annual surplus of up to $165 billion, which was mandated by law to buy US Treasury debt, will be well over a deficit of $100 billion in 2019 and surge to an annual deficit of $300 to $600 billion by 2030. This means what was a buyer of nearly half of US debt until 2007 has turned into a massive fiscal hemorrhage requiring significantly more Treasury issuance just to make up for the funding shortfall.
Direct monetization of the debt
In 2009, the Federal Reserve undertook the large scale purchasing of Treasuries and Mortgage Backed Securities. But simultaneously, the Fed encouraged (or mandated...I'm really not sure which) that most of the money digitally conjured to buy these assets would be deposited at the Federal Reserve. This would keep the new money "inert" and not allow the fresh digital dollars, where assets had been, to be levered into the economy or markets...also known as "direct monetization". As the chart below details, the growth of the Fed's balance sheet (in blue) was generally matched by growth of bank excess reserves (red line) through the end of QE. The differential or "direct monetization", shown in yellow, was somewhat stable during this period.
But very importantly, since QE ended in Q3 2014, excess reserves have been consistently declining faster than the Fed's balance sheet...with the outcome of rising direct monetization. Since QE ended, nearly a trillion freshly conjured dollars have subsequently been levered by 5x's or 10x's (or who knows how many times) boosting asset prices.
As for the impact of monetization on assets, I show monetization versus the Wilshire 5000, representing all publicly traded US equities (below).
The most recent about face by the Fed to begin QE4 (or "not-QE", as the Fed has termed it this time) has not been matched by rising bank excess reserves. In fact, if the Fed is to attempt to avoid "direct monetization", as they have claimed they would never do this, the Fed has a huge problem. As the Fed is cutting interest rates to incent economic (financial?) activity, the same action is disincentivizing banks from holding excess reserves, as the billions in interest for making no loans and taking no risks are going away.
Now, if the Fed's goal is to monetize the debt, the continued growth in the Fed's balance sheet, continued cuts in the Federal Funds rate (shadowed by cuts in Interest on Excess Reserves) will drive ever more of the freshly conjured digital dollars into the "market" with who knows how much leverage. Ever fewer assets with ever more dollars chasing the remaining assets, the final "big squeeze". Again, the Fed said they would never do this...but as infamous modern central bankers have said, "when it becomes serious, you have to lie". I expect there will be few winners and many losers as this final "big squeeze" plays out. But I do suppose the few, private, and undisclosed owners of the Fed will somehow be among the winners.
For a dozen plus years, the Census has incorrectly believed and projected that total US births were on the cusp of an upturn. The chart below shows actual total births and Census projections since '00 through the most recent Census projection in 2017. Each projection was lower than the last but still far too high. Since 2007, there have been 5.5 million fewer births than the '00 and '08 Census projected. And this delta in projected growth versus rapidly diving births and fertility rates is only continuing to widen, as detailed through Q1 of 2019 at CDC Fertility Data.
Social Security essentially gets its projections from the Census and makes forward based assumptions on the median Census projection. In this case, the chart below shows actual US fertility rates since 1950 and Census projections (solid lines) versus UN projections (dashed lines). According to Social Security projections (solid lines), fertility rates at present 1.72 (and still falling) are not possible and only higher fertility rates are to come. Either fertility rates will rise to 2.2, 2, or 1.8...but the current reality and/or further decline is simply inconceivable. Meanwhile, the situation isn't so inconceivable for the UN Population Projections (dashed lines) which offer a wide range of possibility from a low of 1.3, to high of 2.3, with a long term base case of 1.8.
And here is the decade plus of discrepancy between actual 0 to 20 year-old US population. Census (Social Security, solid lines) versus United Nations projections (dashed lines). Again, the Census nor SS can conceive of what has been happening for the last decade nor can the Census and therefor Social Security project anything but growth. In fact, the Social Security low growth projection is even slightly higher than the UN medium (baseline) projection?!? And the UN baseline is too high...which means the reality for Social Security is significantly worse than their most "bearish" scenario and miles away from their current baseline scenario.
But it isn't just the absence of population growth, it is how this translates to the lack of fuel for further employment growth. Rather than use the BLS unemployment data, I simply divide the populations that make up the work force by the quantity of those employed among each age group (chart below)...and this reveals we are at historical levels of full employment. In fact, only once (briefly in 2000) has the largest and most important group (25-54 year-olds) ever had a higher portion employed. The 55-64 year-olds have never had such a high portion employed...and even the 15-24 year-olds have recovered much of the losses they suffered in the '09 great financial crisis (but even beyond X-Box, there are structural reasons this group is unlikely to see significantly higher employment %'s...detailed HERE).
Given we have full employment, the problem is we have precious little growth among the working age population over the next decades. As the chart below details, the population growth over the next two decades shifts to the oldest among us with hardly any labor force participation among them. The growth among 70-80 year-olds and 80+ year-olds will dominate. And yes, the charted data is inclusive of both actual and the projected continuation of significant immigration (absent that, the working age declines are far more severe but the elder growth essentially unchanged).
And dividing the age groups by their participation rates gives us a clear idea of the potential fuel available for employment growth (aka, new home buyers, new car buyers, those likely to undertake loans, etc.). For the coming two decades, I even likely over-estimate the 70-80 year-olds at 12% LFP and 5% LFP among 80+ year-olds versus a consistent 75% for 20-70 year-olds. This means over the coming twenty years, the US is only capable of about 1/3rd the employment growth it was consistently capable of from 1960 through 2020.
Thanks to the 2019 OASDI Trustees Report, the Social Security situation is fairly plain. The chart below shows the OASDI annual deficit plus low, medium, and high cost projections. What I have detailed from this point forward is that given the unrealistic population growth projections and resultant unrealistic employment growth expectations, the worse case "high cost" estimate may be too optimistic. This will mean the Social Security so-called "trust fund" of $2.9 trillion will be burned through prior to 2035 and the politically charged issue of automatic "pay-as-you-go" 20% to 40% declines in benefits will be thrust upon the nation sooner rather than later. For instance, of the 60+ million SS beneficiaries, the average beneficiary in 2019 pulls in $1461 monthly, and would be looking at an automatic $400 to $600 reduction in monthly benefits once the "trust fund" is depleted. The worst-case OASDI cumulative scenario adds an additional $5 trillion in deficit spending through 2050 over the medium projection.
And just to round out the picture, the chart below details the combined OASDI and HI (Hospital Insurance) deficits. Again, the redline worst case "high cost" projection is likely too optimistic. Annual deficits absent population growth among the young and working and resultant minimal further employment growth...and the inevitable explosion of elderly...means a worse than "worse case" should be the base case. And the combined worst case OASDI + HI cumulative projection adds another $12+ trillion to the projected debt pile above and beyond the medium projection.
Two final charts, below, detailing the annual change in the 20-40 year-old US childbearing population versus 70+ elderly and the movement of the Federal Funds Rate, plus the impact of the federal funds rate on incentivizing debt.
Below, annual population change (million persons) of the 20 to 40 year old US population versus annual change in 70+ year old US population, Federal Funds Rate (%), and public versus Intragovernmental debt outstanding (trillion $'s).
Below, annual population change (% of total population) of the childbearing versus elderly, Federal Funds Rate (%), and public versus Intragovernmental debt outstanding (trillion $'s).
Of course this doesn't show unfunded liabilities, corporate debt, student debt, auto loans, credit card debt...but the Federal debt gives a nice example of the impact of ZIRP on the undertaking of new debt when the money is essentially "free" (particularly for the Federal Government and Corporations...and when served to our young adults as predatory non-dischargeable lending to minors or "student loans").
Why is it important to break out the public vs. IG (Intragovernmental) debt? IG trust fund surplus' are mandated by law to buy US Treasury debt while Primary Dealers (a select # of the largest banks) are likewise mandated to bid on government debt which they then typically resell to the public and foreigners. As you can see, IG purchasing is slowing while nearly all the debt is now being resold to the public / foreigners / and Federal Reserve. This trend will accelerate rapidly over the coming decades. The surge in 70+ year-olds collecting their Social Security benefits and the minimal growth among new taxpayers will result in public debt soaring while the theoretical IG trust fund is depleted.
Perhaps a "come to Jesus" moment is likely sooner than later.
Chart below shows the Federal Reserve holdings of Treasuries, a weekly change (black columns) and total holdings (red line) during QE1, QE2, Operation Twist, QE3, QT, and "Not QE". Got it?!? This current "Not QE" explosion in QE is like some kind of old time vaudeville act (like the old Abbott and Costello bit, "who's on first, what's on second, I don't know's on third").
But looking more widely, the chart below shows the total Federal Reserve balance sheet (blue shaded area), bank excess reserves (red line), and the delta between the Fed's balance sheet and excess reserves...also known as direct monetization. As the Fed restarted "not QE" but did not go through the façade of attempting to stock the new money away as "excess reserves", this new money is flowing straight into assets, like monetary heroine.
Below, a close up of the components above solely in 2019 (through November 6th). Balance sheet soaring once again since the Fed's sudden pivot, excess reserves continue falling...and the difference in freshly digitized cash in the hands of banks and the like...ready to be levered up.
So, monetization (yellow line) versus the Wilshire 5000 (green line) from 2014 through last week. For those not familiar, the Wilshire 5000 total market index, is a market-capitalization weighted index of the market value of all US stocks actively traded in the US.
And fascinatingly, since the beginning of 2018, the Wilshire 5000 and direct monetization are becoming more attuned to one another. And in mock shock, the new record close in the Wilshire just happens to be accompanied by a new record in direct monetization!?! Almost as if the addition of $320 billion in fresh digital cash since mid August Fed U-turn had something to do with the $2.2 trillion rise in US equities over the same period (a leverage ratio of about 7x). Hmmm.
Then Fed head Bernanke was so adamant that this "direct monetization" was something the Fed would never do (clip HERE). Ben said all the fresh digital cash would sit in the Federal Reserve as excess reserves and once the crisis was over, the Fed would reverse and the monetization would be avoided. How the times change. So, what should Americas new mantra be? By hook or by crook, or maybe more apropos, fake it 'til you make it?!? But for those curious in the why, I offer the following article outlining the simple changes in Demographics that are pushing such radical actions.
The demographic situation the world faces is unprecedented and unparalleled in modern history. All the deaths of the past few centuries warfare were blips on the radar compared to what is taking place now. Given the infinite growth economic model, the situation is beyond repair and no repair will be attempted. The only goal is extension of the current model with its clear winners and losers.
To make my point, I roughly split the global population into equal halves. The half of the world inhabiting consumer nations versus the other half in non-consumer nations (previously detailed HERE). Consumer nations have per capita gross national incomes above $4,000 annually or an average of $16,000. Non-consumer nations have gross national incomes below $4,000 annually or average incomes of $1,600 per capita. Given the groups are 3.9 billion (consumers) and 3.8 billion (non-consumers) and the poor have incomes 1/10th that of consumer nations...the fact that the consumer nations consume 85% to 90% of global energy and exports shouldn't be a surprise. Consumer nations have nearly all the income, savings, and access to credit. From an economic standpoint, the non-consumer nations dominate and the non-consumer nations may as well be on Mars.
Two quick charts and then some themes...
Chart below are consumer nations annual change in 0 to 65 year-olds versus annual change in 65+ year-olds, plus the Federal Funds Rate. Under 65 year-old population growth will cease by 2023 (if not sooner) and turn to large declines indefinitely thereafter. The annual growth of 65+ year-olds has has been accelerating since 2008 and won't hit peak growth until around 2035.
Chart below are non-consumer nations annual change in under 65 versus 65+, and Federal Funds Rate. Under 65 year-old annual population growth has ceased increasing and is in the process of rolling over to growth of "just" 35 million by 2050. Non-consumer 65+ year-old population growth is rising and estimated to continue accelerating through 2050.
What is the point(s) -
Under 65 year-olds in consumer nations have a high rate of credit consumption. 65+ year-olds are relatively credit averse and more likely to pay down or pay off existing loans than to undertake new loans. Those elderly that do undertake new debt do so at relatively low levels. Simply put, in our fractional reserve banking system, the bulk of "money" in the economy is lent into existence by a rising quantity of loans. But the data is clear that those who undertake new loans (create new money) will be in indefinite decline, while roughly equally and oppositely, those that pay down or pay off existing loans (destroy existing money) will take their place.
During the current cycle, corporate debt, student loans, and vehicle loans have done much of the heavy lifting in new debt creation. However, all three sources of new debt are already "over-utilized" and only new vehicles (plus credit card debt) is likely to grow among the elderly. Where will further debt ("money supply" growth) come from as that the quantity of potential working age persons to undertake new credit, and thus organically grow the "money supply" (let alone consumption), has decelerated by over 90% and is set to begin declining very soon?
To paint the picture a little clearer, the two charts below show corporate debt and student loan debt versus the primary populations that consume that debt (US 25 to 54 year-olds and US 15 to 24 year-olds, respectively). The substitution of surging debt versus flat to falling populations isn't hard to make out.
Thus, there are two options to continue growing debt (aka, "money"). Either encourage the continually fewer working age persons among consumer nations to take out ever more debt (via perversely paying borrowers with NIRP or similar to undertake new loans) and/or central banks conjure it from nowhere. ZIRP, NIRP, QE, LTRO, and acronyms yet to be invented will all have the express purpose to destroy assets (purchasing bonds, stocks, etc. that are never to return to the market) and replace them with newly printed "money" which will chase the remaining assets higher. This monetization is to avoid a free-market from pricing assets based upon a declining quantity of buyers and fast increasing quantity of sellers.
It is the progressive and degenerative fundamental weakness (slowing population growth and outright population declines among consumers) that is the premise for ever greater market interference that drives the observed economic and financial market "strength". Of course, the policy of centrally directing asset appreciation has clear winners (a declining quantity of institutions, asset holders, federal governments) and losers (a fast growing quantity of young, poor, working class, and those with few or no assets).
Population data via UN World Population Prospects 2019