Demographic Winter

The Sounding Line: Population Growth Matters

Confounding many predictions, decades of Zero Interest Rate Policy (ZIRP), proportionally much more QE than the US, much more debt, and a declining labor pool, have not led to runaway inflation in Japan. To the contrary, since November 1998, Japan has experienced 1.1% CPI inflation, not per year but over the entire period. Yes, real experienced inflation has almost certainly increased by more than this, but the broader point still holds.

There has proven to be no correlation between 20 years of ZIRP and CPI in Japan. Even right now, with CPI inflation running at 7% in the US, CPI inflation in highly trade dependent Japan is clocking in at just 0.6%. For reasons that we’ve discussed for years here at The Sounding Line, QE and ZIRP don’t cause increases in official inflation measures like CPI (though they do increase real world inflation).

This was one of the charts in the post:

This is the way the world ends

This is the way the world ends

This is the way the world ends

Not with a bang but a whimper.

On macro analysis, I agree with all the above. The economy is structurally poised for deflation. Since 2008, the world has been trapped in a disinflationary environment. Japan's stock market peaked in the 1990s, parts of Europe in the 2000s, China in 2008. All of those peaks came within the proximity of the peak labor force. China's entry-level workforce began declining early in the prior decade. Now the U.S. workforce is in decline. The stock market has corrected off a trendline from 1929 and 2000 lending some support for the idea that a major bear market could have started. Could this go on for decades? It did in Japan for three decades already...

Financial markets tend to go out with bangs though, not whimpers. Politics is also different in each country. Policies such as pandemic lockdowns revealed the corruption and incompetence at all levels of government, including public schools, hospitals and the central bank. Will the public submit to the financial prison built for it, or will they revolt? 

Looking at a yen ready to crumble, one also has to entertain the possibility of disequilibrium shocks or "the end game." A decade ago, more than a few macro traders were looking to the yen as a top candidate for collapse because of its QE policies, high debt and demographic winter. My question is, will crude oil disturb the equilibrium and kick off this move? Assuming crude doesn't fall, in which case the pattern of the past 14 years can repeat again, can the global financial system absorb higher inflation? Or will inflation and rate increases set off a self-fulfilling collapse in the "demographic winter" currencies, with the oldest and more indebted sliding ahead of the younger and less indebted?

Today, markets are self-absorbed, focused handful of technology stocks propping up the Nasdaq and S&P 500. Focused entirely on what a bunch of egg-headed morons at the Federal Reserve say about interest rates. Two entire generations of investors haven't experienced a secular inflation cycle. The closest they came was the commodities bull market in the 2000s, but that wasn't enough to reverse the bull market in bonds. Not only are they ignorant, or cannot conceive events like a central bank hiking rates into inflation, but many market participants have negative intelligence. They believe things about inflation that are 180 degrees opposite to reality. Even after seeing the Nasdaq pummeled, they cannot imagine this trend could continue for an entire decade. 

The West has turned into a disinformation environment similar to the former Soviet Union. Everything is considered a plot. Constantly one hears "they won't let that happen" or "they can't let that happen," even from the opponents of central banking. There is a belief in centralized planning and centralized power similar to how the old Soviet economy or modern Chinese economy are analyzed. I don't take issue with conspiratorial thinking, only in the idea that the plotters are omnipotent. As if what they want is what they get.

Markets are controlled, but it seems that much of the market believes markets are the thing, instead of the harnessing of Nature, of the Invisible Hand. When markets are functional, they can still convey information in distorted situations such as monopoly pricing. When they are dysfunctional, they become agents of misdirection. It isn't the seen that will sink the market in the end, but the unseen. No government can overcome market forces in the end because they are forces of Nature, unless we included mass murder and lockdowns as "overcome" because governments can always make the situation worse. If we're scoring on success though, at some point reality intrudes. The bill for bad policy comes due in some form, via a channel that even the most adept government cannot control. 

There's no getting around demographic winter. Automation can offset the decline in labor, but it cannot offset missing consumer demand from consumers who were never born. Importing an underclass also doesn't work because it accelerates the currency endgame. Papering it over with debt "works" because demographic winter is disinflationary. Whatever inflation is produced funnels into financial assets, homes, cryptocurrency, art and NFTs. Commodity and consumer inflation is kryptonite for this world. 

Do you get the sense that the "people in charge" understand that rising crude oil, that rising inflation is an existential threat to them? Left to its own devices, the economy would remain trapped in disinflation/deflation, with the Fed doing round after round of QE for another decade. Yet there is talk of a reset, of implementing bone-headed policies that destroy energy, and food supply chains and transportation networks. Politicians and bureaucrats wrecked these supply chains over the past 2 years, do any of them seem panicked over how badly they screwed up? I don't see it. Barring an immediate political shift, risk of a politically-triggered collapse remains elevated so long as crude oil remains in an uptrend.