Sunday, July 30, 2017

The "Big Squeeze" Explained Through the Japanese Lens...and the World is Fast Following

In 1995, the Japanese core population (15-64yr/olds) began declining.  As a consequence of the declining consumptive demand from 1995 to 2015, the Japanese central bank (the BoJ) continually lowered interest rates to incent consumers, Japanese corporations, and the Japanese government to utilize ever more debt without the increasing pain of servicing that debt.  Because of this, Japanese federal debt rose from 90% to almost 250% to maintain the façade of "growth"...and this is how a declining population avoided the economic declines which would otherwise have occurred.  They built bridges to nowhere, repaved the nation, and built infrastructure for a population that was set to begin rapidly declining (ultimately needing far less infrastructure to support it).  The Bank of Japan also began buying the nations bonds with money from nothing.

However, by 2012, with depopulation really accelerating, the Bank of Japan went all on it's QE scheme to print money from thin air to buy any and all financial assets and essentially throw them into a bottomless pit never to be seen again.  The removal of these assets plus the new money put into circulation via this transaction has created an ongoing squeeze with its intent to perpetually push asset prices higher.

The chart below shows the annual change in the Japanese core population (15-64yr/olds, blue shaded area) vs. annual GDP change (orange columns) and the Bank of Japan balance sheet as a % of GDP (red line).

In the face of a collapsing population, Japan first tried massive debt spending until that was no longer feasible and since 2012 has resorted to printing "digital money" to essentially reduce the outstanding pool of assets thus driving up the remaining assets values (aka, the "big squeeze").  The chart below shows the Bank of Japan assets vs. the Japanese property value index.  Simply put, it's a pretty neat magic trick to make property values rise in the face of depopulation and outright declining rental and purchasing demand.
Some suggest this is a bridge or a temporary stop gap until growth returns.  The chart below shows the Japanese fertility rate bottomed in 2005 and has been rising since, now up to 1.5 children per childbearing age female.  However, for a population to have a simple break even population (absent immigration), a 2.1 birthrate would be necessary.
But Tokyo, the largest metropolitan center in the world, in spite of very negative fertility rates, still has a growing population.  It is pulling in the young adults from the rest of the nation in search of opportunity.  This emigration means the remaining 70% of Japan is seeing far higher depopulation (particularly among young adults) than commonly understood (chart below).

As for the linkage of the annual declines (depopulation) of the adult working age population to employment...the chart below highlights total employment peaked in 1996, the same year Japan's adult population began depopulating.

So, now the Japanese population is depopulating slightly less fast but in truth, this is an absolute distraction from the real issue...

The simple idiocy of Japan's "plan" is shown in the chart below.  Since the peak of the mid 1970's, Japan's collapsing child bearing population (15-40yr/olds) has fallen by 22% and births among them declined by 50%.  We also know that by 2030, the childbearing population will be less than 29 million (since it's just a matter of moving the existing population of young forward and existing child bearing population out)...and the UN medium and low estimates suggest by 2050 the childbearing population will be a maximum of 25 million and minimum of 20 million.  These represent a 55% to 65% decline in the childbearing population and a 55% to 75% decline in births by 2050.

The rate of the decline in the birthrate (the multiplier) is decelerating, however, this is essentially meaningless vs. the collapsing number of those capable of having children (the basis the multiplier is calculated against).  It is clear Japan is economically collapsing and the deeds of the Bank of Japan are entirely a rear guard action.

Please reconsider the first chart and determine how the Bank of Japan printing "money" ad nauseum to ultimately buy every asset it deems necessary to maintain prices will work out?  But Japan is simply the advanced scout which nearly the entire world is following into depopulation...and central bank schemes to maintain and lift asset values in the face of declining global consumptive demand.

For those that don't understand the true global nature this represents, check the chart below of the global child bearing population (excluding Africa...why Excluding Africa makes sense HERE).  We have peaked...and the rate of the decline is the only real question although the central bank response has already been made plain.

Below, the long declining quantity of global births (excluding Africa).

This declining quantity of consumers (not to mention the declining quality of their capability to consume) is why central banks will never truly stop QE (in one form or another) and why asset prices will not cease rising due to the ongoing policy of the "big squeeze".  Central banks believe they have the right to choose the winners (asset holders) and the losers (everybody else).  Economic activity will slow, consumption will decline, and central bankers will continue their façade of a market unless and/or until they are removed from power.

Finally, the chart below shows the annual change in the under 65yr/old population of the 35 OECD nations plus China, Russia, Brazil vs. the primary central banks balance sheets.  As population growth is turning to outright declines, will there be any asset that central bankers won't ultimately buy?

Bonus Chart below - America's much advertised population advantage hasn't turned out to be the advantage the Census and UN projected just a decade ago.  The Census has been collapsing it's estimates for population growth (entirely among the under 45yr/old population) and these numbers are still too high (details HERE).

Finally, the impact of rising federal debt, on a per capita basis against the quantity of employees among the US 25-54yr/old population, and their median household income with which to service that debt (chart below).