My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “I was taught to strive not because there were any guarantees of success but because the act of striving is in itself the only way to keep faith with life.” – Madeleine Albright
This week we will look at demographics and how these affect economic growth. Populations in the developed world are aging and this will continue to reduce GDP going forward. Chris Hamilton runs a website which captures all the projections for the global GDP slowdown. This short article summarises what is happening now and how GDP cannot recover in the coming years: https://econimica.blogspot.com/2019/08/ever-fewer-wealthy-ever-more-poor.html
And here is a short article that shows how GDP is not all that it is cracked up to be:
http://thegreatrecession.info/blog/gdp-aint-what-it-used-to-be/
Here is the link to last week: Issue 65
Now that Brexit will not be coming to a final conclusion yet, I will continue to provide weekly updates as events progress:
Brexit Update – 23rd August 2019
The Brexit deadline remains 31st October 2019 and stays in place unless Boris can get Parliament to agree a new exit plan.
Jeremy Corbyn has said that he will table a motion of no confidence when Parliament returns in early September which, if successful, will cause a general election. Boris will fight to ensure that this takes place after a no-deal Brexit has happened on 31st October.
We are now to witness an almighty battle between the Leavers and Remainers and it is anyone’s guess as to what the outcome will be. Let battle commence. This article explains it all and the likely outcome: https://moneymaven.io/mishtalk/economics/checkmate-corbyn-s-please-make-me-temporary-pm-scheme-fails-already-TMsQPd1eaki2irH4MhEyGw/
Parliament will be in recess now until September. Details of Parliament’s deliberations can be found here:
CHAPTER 12
The End of Growth
“It has been more profitable for us to bind together in the wrong direction than to be alone in the right one.” Nassim Nicholas Taleb: ‘The Black Swan: The Impact of the Highly Improbable’
“It’s tough to make predictions, especially about the future.” – Yogi Berra
Interest Rates are a brake on growth.
Interest rates are a function of three primary factors: economic growth, wage growth, and inflation. This can be made clearer by combining inflation, wages, and economic growth into a single composite for comparison purposes to the level of the 10-year US Treasury rate. The level of interest rates is directly tied to the strength of economic growth and inflation.
Since wage growth is what allows individuals to consume, which makes up roughly 70% of economic growth, the level of demand for borrowing is directly tied to the demand from consumption.
As demand increases, businesses then demand credit for increases in capital expenditures for production. The interest rates on loans are driven by demand from borrowers. Currently, the level of demand is consistent with the low interest rates currently being charged.
Borrowing cost (interest) is directly tied to the underlying economic factors that drive the desire for credit and since bonds have a finite value at maturity, there is little chance of an overvaluation in the “price paid” for a bond as compared to its future “finite value” at maturity.
The U.S.A. is no longer the manufacturing epicentre of the world. Labour and capital seeks the lowest cost providers so that inflation is effectively exported from America and deflation is imported. Technology and productivity gains ultimately suppress labour costs and wage growth rates over time and debt continues to arrogate capital from productive investments and savings.
To compensate for this, workers have taken on more consumer debt to maintain their aspirational lifestyles and look to the net outgoings each month rather than the total debt they are incurring. I am sure you are aware of mortgage rates being quoted as ‘repayment amount per month’ rather than total mortgage amount to be repaid over the whole period which would make most people feel very uncomfortable. The same is true of all large item purchases such as vehicles and computers.
The catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we have seen prior to 1980, are simply not available today. This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now caught in a *“liquidity trap” along with the bulk of developed countries. According to Wikipedia a liquidity trap is defined as follows:
*“A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.”
Population statistics
Another limitation to growth is that of population statistics (demographics). It is generally held that the earth’s populations are growing at a rapid pace and this is true but only for some countries. Industrialised western populations are in fact aging rapidly, there being insufficient replacement births and immigration to counter the trend.
Demographics seriously impacts future economic growth
The world’s working population ceased growing in about 1988 and since that time the world is only growing older. Birth rates are declining but the reality will be somewhere between the medium and low estimates, however flat, declining births will be the order of the day.
It is generally accepted that the world’s populations will continue to grow and by inference that economic growth will follow automatically. However we need to look behind the headlines at the statistics of demographics and observe that not all the growth in headcount includes economically active people. In fact the bulk of the increase in populations includes a high proportion of non-economic people such as those who are becoming older over time and living longer.
The annual change of the 0-64 year old global population peaked at 85 million a year in 1988. Since then, annual population growth among the under 65 year old sector has fallen 33%, whilst under 65 year old population growth among the 35 OECD nations plus China, Brazil, & Russia has collapsed by 95% from peak growth in 1972 to just 1.6 million in 2016.
The rest of the world’s 0-64 year old population growth, primarily in Africa, has likewise peaked but is now just beginning its deceleration. But the OECD, China, Russia, Brazil total combined population will grow by nearly 16 million; the growth will be almost entirely among the 65+ year old people living longer than their predecessors. From 2018 onward, all population growth among these nations will be the 65+ year old people.
Because it is common to believe that population changes are only estimates and projections that may or may not take place in the future we should consider that total births for five year periods for the combined OECD nations plus China, Russia, & Brazil. The total numbers of births peaked from 1965 to 1970 at nearly 265 million births but has been steadily declining ever since and are now down to 183 million or an average of 37 million per year.
The UN medium estimate for births from 2015-2050 looks rather optimistic, nevertheless regardless of the larger total population, these nations continue to produce fewer children and that means less consumers and less economic growth.
As a reminder economic growth depends on a consumer base, which in the western world, represents 70% of GDP. Therefore if the coming generations are fewer then economic growth will be lower.
The OECD and others as a group collectively consume over 70% of all global oil, an even greater percent of imports, and generally are the centre of global consumer growth. This is the population with all the earnings, savings and access to credit and they will be shrinking significantly for decades to come. There will be fewer of them and appreciation in real wages has long been stagnant which is not likely to support higher consumption.
65+ year olds consume at about 70% of the rate they did during their peak working years. By the time they are 75+ years old their consumption drops to about 50% to 60% of what it was during peak working years. They are credit averse, preparing for or receiving fixed incomes, and napping is one of their favourite activities and it doesn’t cost a thing.
To be continued next Saturday
A Liquidity Trap is when people hold cash instead of spending it, so when the Fed prints even more money or lowers interest rates, spending still stays put. This Liquidity Trap is actually a Debt Trap, people can’t afford what they owe much less take on more monthly payments. The prior printing and loaning has driven almost everything into a Price Bubble. The Fed held rates near zero for the eight years of Hussein Obama (D) but then raised rates nine times after Trump’s (R) election. The inevitable US Economic Slow Down hit at the end of 2017, causing layoffs and a Recession Spiral that could become a crash. The root problem is that cash since 1971 is fiat & debt (not a limited amount of currency/money backed by a rather fixed amount of a hard asset like gold). Central Banks can now print fiat (unbacked paper) at will; the Fed prints/creates cash out of thin air to loan and then feast on the fees and interest; they control the printing press and the money spiggott. They have the means and incentive to inflate bubbles until they burst; and the unlimited cash to then buy deflated property, which can then be later sold at a huge profit. TPTB are Pump and Dump Economy Flippers. They fatten the Sheeple and then they shear them (and slaughter some). TPTB and Fed have a NWO Agenda and play politics. They are trying to convince the Useful Idiots this slowdown is because of Trump’s Tariffs, when the truth is TPTB purposely caused this Recession to torpedo Trump’s reelection in Nov2020. They also control the MSM & Social Media and are censoring Conservatives who expose their schemes, TPTB are using the MSM to incite Liberals to violence, and probably Chaos. Trump wants to get out of the Recession to avoid a crash & violence. He wants to stimulate spending and growth (that is why he signed the Damn Busting Budget), is fighting to end TPTB and China’s exploitation of our Economy (China has been working hard to replace the USA as the global power), and Trump wants Fair Trade (not rip-off Americans trade) and to MAGA. I think similar battles are taking place in England, France, Germany, Italy, Spain etc as the 90% of Deplorables fight Globalization (TPTB self enrichment program). We The People’s freedoms and survival are reaching a turning point, a climax.
Thank you Robert for an excellent run-down on our overall problem – you make it very clear and simple to understand. We are all going to be sheared once again!