How Population Decline Will Crash the Economy

Summary:

• The main driver of economic growth is population growth. Population growth means more incomes, consumers, workers, and an ability to repay debts.
• Recent historical economic growth has been contingent on birth rates in nations with moderate to high levels of economic activity. This will be displayed by observing the historical rate of global population growth minus countries that have outsized TFR and undersized consumption/GDP.
• Declines in population growth and aging of populations have been masked by exponential increases in leverage and government spending as well as stimulative central bank policy. These manipulations have temporarily allowed aggregate demand to remain at high levels despite having a slower addition of new workers and consumers in the economy. This will be inferred by national debt to GDP ratios, financial index valuations, savings rates, and corporate/household debt levels. 
• Since the recent peak of population growth in the 1980s, central banks have responded to the subsequent decrease in population growth with ever stronger stimulus. Central banks and governments are not cognizant that the causes of crises since the 1980s have been largely demographic, but they respond with stimulus and borrowing to underconsumption shocks that have those roots: no more growth in workers and consumers, and a rising number of dependents. Financialization represents squeezing increasing demand out of a decreasing working population.

Global Depopulation is Being Masked by Outlier Nations and Population Aging 

The global population quadrupled during the 20th century, but it will not even double in the 21st century. Nominally, the world population is accurately understood to be growing. Today’s population growth is different than the population growth of the past, however. Total world population past, present, and projected is shown in the chart below. In relationship to the global economy, today’s population growth can no longer be understood to be a rapid acceleration in the number of consumers and workers.

The key demographic for global growth is not raw world population, but population aged 15-49. This population represents working and childbearing age people. This demographic is the primary income earning, consuming, and childbearing portion of the global population

To focus more specifically on what the income earning, consuming, and childbearing age cohort of the future will look like, the next graph displays people aged 15-49 as a share of global population past and present.

From 1950 to 2015 the global working age population grew over 300%. From 2020 to 2065 it will not even grow by 25%. The situation of this core demographic is not even this optimistic when the country of origin of this future cohort is broken down according to fertility rates and global consumption. A huge portion of this future 15-49 population growth is coming from countries that have very outsized (>4) fertility rates (TFR), and low economic activity (energy consumption, GDP).

A heatmap of global TFR shows the disparity in fertility rates across nations worldwide. A huge portion of future population growth represented in the 15-49 statistic is represented by a small number of nations, which also have markedly low economic activity.

For the purposes of narrowing down the relationship between fertility rates and economic growth, the nations that are markedly high in fertility but low in economic activity will be termed “outlier nations” and not included in consumer/worker population growth related data sets. For now, the countries being labeled “outlier nations” are African nations, Afghanistan, and Yemen. While comprising a large share of future population growth, these nations collectively consume less than 4% of global energy and have a similarly small GDP contribution. This data set will be fine tuned over time and likely come to include Bolivia and several Asian nations.

As I will display below, factoring out high TFR, low activity countries that  represent a very low share of global consumption, sheds much more light on the demographic future of economic growth.

The sum of blue and orange lines represent total world 15-49 population. While the raw 15-49 population is merely plateauing, the core demographic that is highest in incomes and consumption will peak within the next 10 years and decline from then on.

From 1950 to 2015 there has been a near tripling in working age population in countries with moderate to high consumption. From 2020 to 2065 this population will likely decrease almost 10%. During the 1950-2065 time window, the global working age population share of outlier nations will increase from roughly 1/7 of the global to 1/3. These nations are highly unlikely to fill the gap in global demand left by more developed nations.

More Workers and Consumers = Growth 

A growing number of workers entails more incomes and higher levels of demand across the economy. The global post WW2 baby boom preceded the largest expansion of economic growth in recent history. World population broadly quadrupled during the 20th century, acting as a massive tailwind to the global economy and the key 15-49 working age demographic nearly tripled from 1950-2015.

Since 1950, gross world product has showed a remarkable correlation to the annual growth rate of population among non outlier nations. 20-30 years after the peak population growth rate in the baby boom, there was an acceleration in global growth as baby boomers entered the workforce. Since then, global growth has slowed alongside population growth.

Pictured here is the total historic population growth rate for non outlier nations. While in 1965 it peaked at just over 2%, it has declined since then to under 1%. Gross word product has declined in lock step with population growth rates.

How Rising Leverage Hides Depopulation: Secular Stagnation as the Canary in the Coal Mine

Since the relative peak of global growth in the 80s, expansion has continually slowed. The post 80s era has brought with it record levels of leverage, intended to ameliorate the problem of decreasing natural demand growth.

Secular stagnation, the slowdown of growth and inflation in developed countries, results from the decline of birth rates and subsequent inability of the economy to maintain adequate aggregate demand levels, even with stimulus. While secular stagnation is recognized by mainstream economists, the depth of the demographic nature of the issue is not understood.

For example in 2013, Paul Krugman wrote that in the aftermath of the financial crisis, countries experimented with austerity. Rather than engage in austerity, he argued, a potential fix to secular stagnation could be to engage in massive fiscal and monetary stimulus, ignoring that that is the exact policy that has been undertaken since the 1980s, with no increase in core economic growth. Instead,  central bank expansion has merely led to the inflation of financial asset bubbles with no change in the growth trend.

Continual aggregate demand shocks are inevitable as an ever shrinking workforce struggles to exceed the levels of consumption of previous generations. Economists have, since the onset of secular stagnation, bemoaned intractably low levels of inflation. Depopulation is clearly a deflationary trend, as low levels of inflation result from a shrinking/slowing growth rate of working age adults.

This new low inflation regime brings economies continuously to the precipice of deflationary financial crises, and diminishes the ability of central banks to monetize record debt loads. The charts below show the relationship between falling population growth and inflation rates since the 1980s. 2009 was the first year in over 50 years to have deflation, and 2015 came very close as well without being in recession condition.

The main tools used since the 1980s to raise demand levels are: interest rate suppression by cuts in the FFR, from 20% to near 0%, and an exponential increase in government spending. Interest rate cuts increase spending by making it marginally less desirable to save money in a now lower yielding bank account, by lowering the cost associated with borrowing money to spend, and by making investments more affordable. The low interest rate economy has cut savings rates from 12% in 1980 to 6% today, as more demand is squeezed out of a shrinking working population.

Even with an ever falling borrowing cost shown by the FFR, federal debt has increased exponentially and stagnation has worsened. While GDP growth has remained slow, stock valuations have exploded alongside federal debt. This situation has been perfect for investors: low volatility, high annual returns, and a “Fed put” protecting accounts, but real economic output has remained very weak.

The chart below shows the fall in fertility rates alongside the FFR. World non outlier TFR growth has been calculated in 5 year intervals to make it scale-able to the rest of the chart.

The falloff in population growth necessitates exponentially rising leverage and government spending as a means of keeping aggregate demand levels high with a shrinking working and consumer cohort. Since the 1980s, debt across every level of the economy has successively increased, with no deleveraging.

Global debt to GDP was relatively stable from 1951-1980, while the world core working population was growing. By the 1980s when the baby boomer generation had entered the workplace as the last remnants of high global population growth, there was no longer a tailwind comprised of a future workers and consumers to push aggregate demand higher, and substituted consumption via debt became the solution.

Secular stagnation is the canary in the coal mine for future precipitous drops in economic growth. While stimulus has not managed to break countries out of stagnation, one can only imagine how much less growth would have occurred were the economy to reflect natural demand via population growth. Even worse, one can hardly imagine the situation when governments and central banks are unable to prop up aggregate demand further.

Conclusion

The macro population cycle that brought tremendous growth and steady inflation in the 20th century is coming to an end for the first time ever. No more significant growth is projected in the global working and consuming population for at least 50 years, and within 10 years, it will begin declining for the first time ever. Even the mere slowdown of growth in population has already left the economy on the edge of deflation, with economic output slowing uniformly worldwide. Policymakers have been only able to delay economic implications of the coming rollover of the population cycle, but the early effects are already visible.