The Tale of Two America’s…Urban Rise, Rural Demise, Rationale to Hyper-Monetize
The Tale of Two America’s…Urban Rise, Rural Demise, Rationale to Hyper-Monetize by Chris Hamilton – Economica
America is in the midst of an ongoing and accelerating shift in demographics and population growth. These trends, long in place, are at a tipping point that are simultaneously driving urban economic growth (plus associated asset bubbles) and rural economic declines (plus associated asset collapses). The spin up and spin down are mutually interconnected, the result of movement in a zero sum game. But for select regions (and rural America in general), there is a surging quantity of sellers and a dwindling quantity and quality of buyers that will result in the primary asset of most Americans, their home, transitioning from an asset to an outright liability.
Many will point to record stock market valuations as an indicator of positive economic and/or business activity to refute my claims. Instead, I argue it is the Federal Reserve and federal government policies, in place as a quasi “life support” for the negatively affected regions and rural America at large, that are driving the asset valuation explosions of equities (chart below, representing all stocks publicly traded in the US) and urban housing. I will outline why the situation in the affected regions will only get worse and thus the Fed believes its hands are tied. Why any amount of normalization will only induce localized collapses across much of the nation. The total market capitalization ($ value) of the Wilshire has nearly doubled the acknowledged “bubbles” of 2000 and 2008 and is likely to continue rising further, precisely due to the worsening issues I detail below.
So Where’s The “Fire”?
Due to slowing illegal immigration, record low birth rates, and young adult migration…depopulation is under way for large portions of the US (and likewise for most other advanced nations) resulting in large imbalances of economic activity across the nation. Central banks have no real answer for these issues but none the less have determined their course to mitigate (or exacerbate?) the impacts. These entwined issues are driving the Federal Reserve’s interest rate and monetary policies to delay the resultant economic dislocations and property value collapses in affected regions. But thanks to Japan’s more advanced crisis (a quick synopsis of the crisis and reaction HERE), the Bank of Japan’s full game plan (which will almost surely ultimately be the Fed’s plan) for dealing with this crisis has already been revealed. Hyper-monetization.
Hyper-monetization is the outright trade of newly created digital fiat for existing assets. This simple process of perpetually reducing the quantity of assets outstanding and simultaneously increasing the supply of money available to chase the remaining assets is the plan. Hyper-monetization explains why continued unchecked appreciation of “bubbly” urban real estate is a really good bet, why financial assets will continue rising, why bond yields will continue declining…but also why the overall economic situation will only deteriorate further and faster across much of America.
Despite the Fed’s recently announced plan to begin reducing it’s balance sheet, the ongoing impacts of demographic and population trends will force the Fed to quickly backtrack and re-institute some form of quantitative easing. Though the causes of the crisis are simple, the outcomes differ radically based upon ones geographic location. The crisis lays out as follows:
- Select regions (particularly the MW, NE, deep South, Intermountain West and more generally rural America) have suffered a long decline in goods producing employment (manufacturing, agriculture, mining, forestry, fishing) as the US economy has shifted toward providing services among both the private and government sectors.
- This shift to service jobs has favored select urban areas creating self sustaining local hubs of economic activity and growth.
- The disparity of growing job opportunities in select urban areas (vs. continued declining rural opportunities) have and continue to draw migration from slowing rural areas (particularly recent high school and/or college graduates).
- Due to a flat child bearing population with record low birth rates coupled with large declines in illegal immigration, US population growth has significantly slowed. In particular, the under 65yr/old population has essentially ceased growing vs. continued swelling of the 65+yr/old population (living far longer than their predecessors).
- In a zero sum game of little to no population growth, one areas growth is another area’s demise. The rural to urban migration is resulting in growing young urban populations creating self sustaining local cycles of economic activity (ie., rising rental and housing demand, rising construction to meet the demand, rising retail demand, and general rising economic activity, etc., etc.).
- Likewise, the young adult emigration away from the MW, NE, deep South regions, and rural areas in general is creating widespread depopulation among these locations under 65yr/old populations. This depopulation is creating it’s own accelerating negative economic spirals.
- On the contrary, over 65yr/old population growth is disproportionately larger in rural areas than urban areas.
- The areas of some of the greatest underfunding and underperforming pensions (MW, NE, rural America) are exactly those areas least economically capable to further raise taxes to fulfill pension obligations. However, significant state and local property tax and income tax increases are to be expected further undermining property values.
- This cycle (depopulation, declining economic activity and job opportunity, declining tax bases, rising tax rates) is creating a death spiral for the majority of Americas’ communities…and simultaneously driving young adults into the cities at an accelerating pace.
- The dichotomy will likely maintain and further elevate the growing islands of urban economic activity surrounded by oceans of decelerating economic activity, property values, and further accelerate rural emigration.
- At the heart of this dichotomy is residential real estate.
- Urban residential property values have been pushed to record highs by extremely low mortgage rates, record high financial asset valuations, and continuing population growth.
- Meanwhile, the situation for the rest of America is a declining quantity and quality of potential buyers/renters vs. surging quantities of potential sellers. The only remaining support, those record low mortgage rates, are under attack as the Fed is raising rates and suggesting it will begin “normalizing” its balance sheet. If these hikes and balance sheet normalization result in rising mortgage rates (which they have not to this point), the impact across the ex-urban portions of the nation already in depopulation will likely be the next great financial crisis.
In brief, six states are currently in outright depopulation. Another sixteen states are experiencing declining under 65yr/old populations only offset by surging 65+yr/old populations, and somewhere between 2/3rds and 3/4ths of all counties in America are likewise suffering one or the other. That is 44% of states and up to 75% of all counties suffering some form of depopulation with all the negative economic spiral of ramifications. The negative feedback loop in effect, as follows: