The deflationary headwinds are strong and broad

If you take a look (below, first chart) at the participation rate by itself, you can see the 2020 peak was in February. Since the pandemic struck, the participation rate’s “recovery” has barely made it halfway back to the level it was at prior to the pandemic. It has now stalled and is looking like it wants to rollover to the downside. Yet, the falling unemployment rate is the one that grabs the media’s attention, creating the false narrative that things are better than reality. The unemployment rate can be a very misleading number. Just ask the Fed. They viewed the low unemployment rate as a “tight” labor market back in 2018 despite the participation rate saying otherwise. This “tight” labor market was a main factor in the Fed’s decision to raise rates twice at the end of 2018, because they thought the tightness in the labor market would create runaway inflation.

Aging demographics are a major piece of the overall deflationary situation in the US. If we look (below), the labor force participation rate is plotted alongside the working age population on a year-over-year basis. As we can see the peak for both happened just prior to 2000. About 17% of the US population is over the age of 65 and that percentage is only going to increase over the next few decades. An aging demographic is a major deflationary force for an economy. Typically, spending peaks in the middle age years for most people, because they are raising a family. As they get older, they often downsize and spend less. Less spending by consumers is negative for growth. If you look at the 2nd chart, you see the positive relationship between consumer spending and real GDP. Like the participation rate and age demographics, consumer spending and real GDP on a year-over-year basis have been on a decline for the last 20 years. This has all been occurring on a large scale, as you can see by the steady decline in the participation rate, age demographics, consumer spending, and real GDP over the last 20 years.

And then there’s the issue of debt deflation.

There are two types of debt. One of them actually adds value to the economy if handled in the right way, so you might call this a “good” form of debt. However, there’s another type of debt (or credit) which hurts the economy.

Self-liquidating credit is credit that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan generates the financial return that makes repayment possible. It adds value to the economy.

Non-self-liquidating credit is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income… Such lending is almost always counterproductive; it adds costs to the economy, not value.

Total global debt has risen dramatically this year and [is expected] to exceed an eyewatering $277 trillion by the end of 2020, [which] will equate to around 365% of global Gross Domestic Product, up from 320% at the end of 2019.

[The] increase in private sector debt is not healthy, selfliquidating debt which, for example, would come from borrowing to invest in a new factory, the debt being paid off via the increased production. No, this is unhealthy, non-selfliquidating debt which is being added and the same is true for U.S. households’ binge on mortgage debt.

It’s important to know about this big surge of non-self-liquidating debt in the global financial system because it strongly suggests that the eventual deflation of this debt will be devastating.