According to conventional economic wisdom, growth is the increase in the capacity and production of goods and services, compared from one period to another. This view deems that the greater the growth in capacity and utilization of that capacity, the greater the economic growth. Strangely, what this school of thought fails to account for is the basis of the US consumer economy...the quantity of growth among the US population (aka, consumers)? Or how a population growing ever more slowly can consume a capacity that (thanks primarily to innovation, technology, and ever cheaper and greater debt) is allowing for ever greater production?
The chart below shows three variables from 1790 to present;
- Columns are US debt to GDP
- Black line is annual total US population growth (%)
- Yellow line is annual under 65yr/old US population growth (%)
Given the US is a nation of immigrants, the US has had a naturally high rate of population growth due to this net inflow of immigrants. However, annual population growth has consistently decelerated from an annual growth rate of 3.1% in 1790 to just 0.6% in 2017 (an 80% deceleration, with all growth now dependent on immigration). The substitution of more and cheaper debt (likewise corporately and personally) to maintain an unnaturally high rate of economic growth while population growth decelerated is plain. Also noteworthy is the abandonment of the Bretton Woods agreement in 1971 and the simultaneous shift from net exporter to net importer at progressively higher levels. ***BTW, the sharp waterfall in population growth in 1918 was tied to the global H1N1 influenza pandemic. However, gauging potential growth by the under 65yr/old population (yellow line in above chart), the organic basis of growth has nearly ceased (a 95% deceleration). Why is the lack of under 65yr/old growth important? Only this population is capable of childbirth, this population makes up 90%+ of the workforce, and this population (at its peak in earnings from 45 to 55yrs/old) earns and spends double the average 75+yr/old. It is the under 65 population that utilizes credit while 65+yr/olds are credit-averse (for good reason). This is the segment that traditionally drives the economy but is now absent... and ever more and cheaper debt is the sad substitute.
The decelerating population and real wage growth coupled with accelerating trade deficits correlate nicely with the Federal Reserve interest rate cycles since 1981 (chart below tracks the duration in years and % rate from initiation of rate cuts to rate hike completion). Each cycle has taken the cost of credit lower for longer and the subsequent rate hikes have been slower and shallower. The implementation of ZIRP, the duration of ZIRP, and the most timid of rate hikes in the most recent cycle speaks to the ongoing deceleration of the growth among consumers alongside the truly dubious state of the American economy. And the chart below is a peek at just the hiking portion of each cycle since 1955. Gauging the strength of each "recovery" from peak accommodation (in the most recent cycle, peak QE of $85 billion a month until January 2014). Since 1955 by the duration, pace, and total increase of the rate hikes... the most recent period is clearly nothing like any of its predecessors and questions the premise underlying the current recovery.
Concurrent to the implementation of the longer, lower, and slower workout from ZIRP...the Fed essentially sold $0.7 trillion in short duration debt and took on $4.4 trillion in mid and long-term Treasury and MBS debt, the federal government drove deficit spending as a % of GDP to unprecedented post-war levels, resulting in a massive increase in federal debt outstanding and debt to GDP. While the federal deficit (as a % of GDP) has presently been significantly reduced... the Fed's selling of its assets simultaneous to hiking rates with minimal deficit spending is far more than the tenuous post-GFC cobbled system can handle. Of course, Mr. Trump is doing everything in his power to rekindle deficit spending but even this will likely not be enough to avoid the next slowdown.