SHI 11.16.22 – Shrinkonomics

SHI 11.9.22 — Be Happy You You Didn’t Buy This.
November 9, 2022
SHI 11.23.22 – They Need Me In the Kitchen!
November 23, 2022

 

Economics and demographics are joined at the hip.

 

They always have been.   It’s impossible to clearly understand one without understanding the other.   Perhaps more accurately, it is the macro growth or shrinkage of populations that directly impacts underlying long-run local and global economics.   People matter.  And, once again, more accurately, it’s the growth or shrinkage that matters. 

 

 

The ‘population bomb’ is a dud.” 

 

The book titled “The Population Bomb” was published in 1968 — almost 50 years ago.   It was a book centered around demographics and population growth.  

Ironically, the premise of this best seller was really a rip-off of thoughts and ideas of Thomas Robert Malthus, an 18th and 19th century economist.   In a paper Malthus published in 1798 titled “An Essay on the Principal of Population,” Malthus observed that improvements in food production techniques led to increased food production — but this outcome only temporarily improved the well-being of people and society.   Because increased food abundance, per Malthus, leads to population growth, which in turn, brings society back to where they started — more food was produced, but per-capita food supplies were unchanged.  Malthus predicted this cycle of improvement, increase, and population growth would eventually cause overpopulation and mass starvation.   In the years to follow, this prediction and conundrum became known as the “Malthusian trap.”

About 150 years later, Ehrlich’s book “The Population Bomb” essentially predicted the same thing.   Looking at this factual graph, it’s easy to understand the fears of both authors:

 

 

But as it turns out, Malthusian theories and population explosion concerns have both proven inaccurate.   The bomb was a dud and fizzled out.   Somewhat.   Somewhat, because populations do continue to increase.  In fact, according to the International Monetary Fund (IMF), yesterday, on November 15th, the world’s population eclipsed 8 billion people.  That’s right.  It happened yesterday.  Did you notice?   I find it ironic that almost the exact same time the globe’s population crosses the 8 billion people milestone, that FTX inexplicably had $8 billion disappear.   Think about it:   8 billion people … $8 billion vanished.     

 

At the same time.   Coincidence?   

 

It makes one wonder!   But I digress.  I certainly didn’t notice when we crossed the population milestone.  I don’t know about you … but I can barely count to 1,000,000,000 let alone 8 billion! 🙂

The IMF is not a demographic institution.   As the word ‘monetary’ suggests, they are a financial and economic organization.   But they understand the powerful relationship between demographics and economics.   They understand that big population shifts in either direction could prove cataclysmic over time.   That’s right:   in either direction.  Malthus clearly demonstrates what might happen if global population growth continued it’s exponential increase.   But what would happen if the opposite came to pass?   What would happen if half of all people instantly vanished from the face of the earth with the snap of fingers?   Well, we know the answer to that one!   Fortunately it was precisely this outcome that was the plot line of Avengers:  Infinity War and the sequel, Avengers Endgame!   So we have our answer!   Thank god for those economic paragons in Hollywood!  🙂

 

Welcome to this week’s Steak House Index update.

 

  If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/


Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.  

But is the US economy expanding or contracting?

Expanding.    At the end of Q3, 2022, in ‘current-dollar’ terms, US annual economic output rose to $25.66 trillion.   So far this year, America’s current-dollar GDP has increased at an annualized rate exceeding 7.1%.   The world’s annual GDP rose to about $95 trillion at the end of 2021.   America’s GDP remains around 25% of all global GDP.  Collectively, the US, the euro zone, and China still generate about 70% of the global economic output.  These are the 3 big, global players.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.


Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.


 

The Blog:

 

Did you happen to see the Avenger movies I mentioned above?   I thought they were quite good.  Plot line aside — SPOILER ALERT! — at the end of the first movie, the ‘villian’ has the ability to make half the human population of the world (actually, the entire universe) disappear with the snap of his fingers.  Snap.  Done.   Those “disappeared” are seemingly selected at random … and like dust blowing away in the wind, they simply disappear.   We don’t know where … they are just gone. 

The second movie begins here.   Half the people in the world are gone.   And those that remain, obviously, are quite despondent.    Imagine if on November 15th, as the world reached the 8 billion people milestone, those fingers snapped and 4 billion people simply vanished.   Beyond the human tragedy issue, how would the global economy be impacted?    What would happen?   What did the movie show? 

Well, actually, they didn’t go there.   For some reason, the economic impact of the disappearance was ignored in the film.   Why?  That’s easy:  There are no economic paragons in Hollywood.   Not a one.   I can’t imagine an economist has ever been invited to a Hollywood studio, let alone to work on a script.   After all, movies are supposed to be fun and entertaining!   A room filled with economists is where fun goes to die.   🙂

But the question remains:   What would happen to the global economy if 8 billion people became 4 billion with a finger snap?   Within weeks — perhaps a month at the longest — humanity would find itself back in the Stone Age.  

That’s because all human systems operate with humans.  If half the population disappeared overnight, all human systems would subsequently fail.   Consider the economic disruption caused by the few million — maybe 2% at most — who left the labor force post-Covid.   The number was small … but the economic impact has been huge.  

 

Imagine if that 2% instead were 50%.  

 

Imagine:  4 billion people.  Gone.  Instantly.   Immediately thereafter, nothing would work properly.   Food production and distribution would be immediately disrupted.   Utilities would have inadequate staff to keep the lights on.   Oil companies, oil distilleries, and oil distribution would all face immediate labor shortages, causing global fuel disruptions.   Grocery store shelves would empty quickly.   And you thought the toilet paper hording was bad during the pandemic?   You ain’t seen nuttin’ yet!

Literally every aspect of our daily lives would be adversely impacted.  Except traffic on the freeways.  That might improve.  But, on the other hand, if half the drivers disappeared while driving the freeways, their cars — now driverless — most likely crashed into others, ultimately clogging all the freeways.  No, traffic would not improve. 

Think about your stock market investments for a moment.  Pick a company.    How about Walmart?   Perhaps you own Walmart — symbol WMT — in your 401-K or IRA?   Probably.  If not directly, they you probably own it in an index find.   At present, WMT has a market cap over $400 billion

So, Walmart:  They sell stuff, right?   A lot of stuff in fact.   So, imagine with the snap of fingers, half their customers vanished.   Their revenues would immediately fall 50%.   What previously was a profitable enterprise is now a massive cash drain.   2021 revenues were almost $560 billion.   Half would be $280 billion.   If their revenue instantly fell by $280 billion, their 2021 ‘profit’ of about $13.5 billion would be dwarfed and overwhelmed.   In the snap of fingers, they would incur massive losses.  Almost as quickly, Walmart would cease to operate.   And finally, soon thereafter, the company would be insolvent and bankrupt.  This scenario would play out across every company, in every country, across the globe.  Simultaneously. 

You get the picture.  So now let’s move from the fantasy of the silver screen to real life.   Other than the work shortages stemming from the pandemic, are there any other real world examples we can see?   It turns out there are.   Consider this from a recent IMF paper:

 

“A mere five decades ago, some observers were predicting that the human population was too big and would soon strip the world of resources, leading to mass starvation, collapse of the global economy, and a host of other ills. But the doomsday scenario of mass overpopulation did not materialize. Rather, for the first time in modern history, the world’s population is expected to virtually stop growing by the end of this century, owing in large part to falling global fertility rates.

Japan’s unique population, fertility, and immigration history make it a leading exemplar of this trend. The impact of an aging and shrinking population is already visible in everything from economic and financial performance to the shape of cities and public policy priorities (such as the long-term solvency of public pension, health care, and long-term care systems).

With demographics having such a clear and accelerating impact, Japan is the test kitchen for “shrinkonomics”—a laboratory from which other countries are beginning to draw lessons.”

 

Interesting.   Shrinkonomics.   It’s a real thing — not just an imaginary figment from Hollywood.  So what’s happening in Japan … and why does this matter? 

Because the same pattern is unfolding in most other developed nations across the globe.  And thus, Japan’s experience is potentially indicative of our future here in the US.   For example, consider what happened with Japan’s labor force.   Japan’s “labor force participation” rate peaked in 1991 at 70% — for those between ages 15 and 64.   Over the next 30 years, their potential labor force declined to just 59% of that age cohort.   Why?   A whole bunch more folks “aged out” of the labor force than joined in.   Too many retirees … and not enough babies. 

The IMF article continues with this comment:

 

“A more elderly and reduced population—which means relatively more retirees, a smaller labor force, and a shrinking labor-based tax pool—also points to the challenge of financing social security frameworks. As the population ages, public expenditure on health care, long-term care, and pensions naturally rises. But in a shrinkonomics context, in which the active, taxpaying labor force is in decline, financing this rise in public spending can be problematic. Japan’s challenges are particularly severe, given that the entire baby-boom population is passing the 75-year milestone in just three years (starting in 2022 and ending in 2025) and the country’s public debt as a share of GDP is already the highest in the world.”

 

The only silver lining is that this trend is slow-moving.   But it is very real.   In Japan … in the EU … and here in the US. 

Remember, almost 70% of all economic activity in the US is the result of consumer spending.  Thru that lens, it’s easy to see that as the number of consumers shrinks, so does consumption.  And so does corporate revenues and US GDP.   Is shrinkonomics the de facto future we face here in the US and other developed nations?  We can’t be sure.   We’re definitely trending in that direction … but as always, the future could be different than we expect. 

What can you do about this today?   Well, beyond the obvious of parenting more babies, consider the issues inherent in shrinkonomics when making today’s investment decisions.  An expanding customer base drives greater revenue.   Generally, more revenue translates into increased profitability.  The opposite is true, too.  Do all you can to invest your hard-earned 401-K funds in the stock of companies with the potential to expand against this challenging backdrop.

Phew.  I need a glass of wine.  To the steakhouses?

 

 

Interesting.   Reservation availability moved around on the grid, but this week’s SHI10 is almost identical to last weeks.  Take a look:

 

 

 

Reservation demand remains strong this week.  Shrinkonomics aside, today at least, demand at our opulent eateries remains strong. 

To the fears of melting glaciers, rising sea levels, and climate change, we can now add the anxiety of shrinkonomics.    See?   This is why no one invites economists to parties.   They are total downers. 

<:>  Terry Liebman

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