Conclusion: While the supporters of Krugman's Kryptonite suggest “QE will work in the U.S. because our demographics are not as bad as Japan’s”, we learn that reflexivity is pervasive in demographic and economic trends. With the mean marriage age in the U.S. climbing, we would expect birth rates to decline going forward and, with it, the average age in the United States to increase.
The key takeaway from our 4Q10 Key Macro Theme Krugman’s Kryptonite is that quantitative easing in the U.S. won’t end well. We show that using the data form historical case studies, including the U.S. in the 1970’s and early 2000’s, and everyone’s favorite punching bag, Japan (email if you’d like a copy of the presentation).
Regarding Japan specifically, the main pushback we get regarding Japan’s failed monetary policy is that demographic headwinds have been a key cause of slow growth there and that the U.S. is in much better shape demographically. While certainly true to a large extent, we offer the following charts as a preview of where the U.S. could be headed given the outlook for slow growth due to consumer deleveraging and burgeoning public debt past the Rubicon of 90% Debt/GDP. The key takeaway here is that confidence, much more so than cheap money brought on by QE, breeds investment and consumer spending.
As we see from the chart below, the economic malaise associated with Japan over the previous two decades has contributed to a material ramp in the mean age of first marriage and mean age in first childbirth. While we are not saying that slow growth is the only driver of Japan’s reluctance to get married, have kids, etc., we are keen to highlight it as a contributing factor in such large decisions. Do consumers lever up to buy houses or get married without a sense of financial stability? Yes, but certainly not at the rate they would otherwise. Akin to financial markets, reflexivity is pervasive in demographic and economic trends. Confidence and financial stability are key contributors to demographics and growth and vice versa.
Along these same lines, a domestic demographic trend we spotted recently is the age at which young people are getting married has trending upward over the last decade. As the chart below shows, never-married singles in the 25-34 demographic now outnumber married persons by a margin of 46% to 45%. The percentage of never married individuals within the U.S. population has grown over 1,000bps in less than ten years!
Currently in the United States, unemployment rates for younger adults are well below the rest of the population as well. As of the September 2010 employment report, unemployment for those 20 - 24 years of age was 14.6% and unemployment for those 25 - 29 years of age was 10.6%. Both of these are above the national unemployment rate of 9.5%, by 11.6% and 53.7% respectively. Since employment and financial stability are key to consumer and personal confidence, these statistics suggest to us that mean age of marriage may not be declining anytime soon.
As Josh Steiner (our Managing Director of Financials) has show in his previous work, household formation domestically has gone negative for the first time in history, which can be interpreted in one of two ways: 1) a mere coincidence or 2) people are getting married at older ages, so household formation growth is slowing. For the sake of not jumping to conclusions, we submit the answer is somewhere in between.
Of course this is one demographic trend in a slew of many that can be interpreted in a variety of ways. What we are attempting to do here, however, is offer an admittedly crude rebuttal to the consensus belief that “QE will work in the U.S. because our demographics are not as bad as Japan’s”. While we aren’t’ being contrarian here for the sake of being contrarian, we are very much happy to take the other side of this overcrowded trade.
Just like in Japan, QE in the United States won’t end well without true, underlying consumer demand – which cheap money and government stimulus are no substitute for (see chart below). It’s not at all ironic that mortgage rates are at/near all-time lows domestically, yet MBA Mortgage Purchase Applications are at low levels not seen since 1996. Someone once referred to this as “pushing on a string”…